What’s new in Iowa for 2026: the federal law arrives, the rate stays put

The biggest Iowa tax change of 2026 was written in Washington, not Des Moines. The IA 1040 starts from federal taxable income, line 15 of Form 1040, and Iowa Code 422.3 defines the Internal Revenue Code as the code “as amended,” so every deduction Congress created in the One Big Beautiful Bill Act of July 2025 lands on the Iowa return without a vote: no tax on tips, no tax on overtime, the $6,000 senior deduction, car-loan interest, the larger standard deduction, the $40,000 SALT cap, 100% bonus depreciation. Each one saves another 3.8 cents on the dollar. The rate itself did not move. It is 3.8% on everything for the second year, the Department of Revenue confirmed it on October 21, 2025, and the 2026 General Assembly passed no individual income tax bill at all. What Iowa did change is at the edges: estimated payments are now required only at $1,000 of expected tax, interest on late payments is 10%, the 529 deduction indexed up to $6,100, and the homestead credit became a homestead exemption.

If you filed an Iowa return last year, this year’s will look the same. The differences hide in the arithmetic behind line 2, and for a tipped worker, an hourly employee with overtime, or anyone 65 or older, the Iowa refund will be larger than last year’s for reasons that never appear on the Iowa form.

The federal law, item by item

Iowa is one of a minority of states whose return begins after the federal deductions rather than before them. That one fact decides every row in this table. A deduction taken on the way to federal taxable income reduces Iowa taxable income by the same amount; a federal credit does not, because credits reduce federal tax, not the income Iowa starts with.

The Department’s withholding guidance, issued December 31, 2025 and reported in early January 2026, states that Iowa “will conform to federal provisions on no taxes on tips, overtime, and qualified car loan interest” and to the senior deduction. The 2026 session enacted no decoupling from any individual provision. The 2026 IA 1040 instructions were not published at this writing; the row for bonus depreciation should be confirmed against them.

The IA W-4 cannot see tips or overtime

The federal law was signed after the 2025 Iowa legislative session ended, and the Department said the 2026 IA W-4 “was not able to be modified to allow for new deductions.” Iowa law has no allowance for tips, overtime or car-loan interest, so the employer withholds Iowa tax on those dollars all year as if they were ordinary wages. The money is not lost. It comes back when the return is filed, as a larger refund than the worker has seen before. The Department put it mildly: 2026 refunds “may be a little higher than usual.”

Seniors are the exception. The 2026 withholding formula and IA W-4 were revised for the senior deduction, and a worker 65 or older who wants the saving in each paycheck rather than in April can file a new IA W-4 with the employer. A retiree on a pension does not need to: pension income is exempt from age 55 and most pensioners certify exemption on the IA W-4P.

What Iowa itself changed

The rate: 3.8%, confirmed. Senate File 2442 of 2024 made Iowa’s tax flat at 3.8% a year early, for 2025; House File 2317 of 2022 had scheduled 3.9% for 2026. On October 21, 2025 the Department announced 3.8% again for 2026. There are no brackets, and the only “exemptions” are the $40 credits per taxpayer and dependent and $20 more at 65 or blind, none of which moved.

Estimated payments: the threshold is $1,000. For tax years beginning on or after January 1, 2026, estimated payments are required only when the Iowa tax expected on income not subject to withholding is $1,000 or more. The old threshold was $200, low enough to catch a retiree with a few thousand dollars of interest. The dates are unchanged: April 30, June 30, September 30 and January 31. The 2026 IA 1040ES instructions carry the new figure.

Interest: 10% a year. Iowa sets its interest rate each fall at the average prime rate rounded to a whole percent, plus two points. For 2026 that is 10.0% annually, 0.8% a month, charged from April 30 on any unpaid balance, extension or not.

529 deduction: $6,100. The deduction for contributions to ISave 529 (formerly College Savings Iowa) or IAdvisor 529 is indexed and rises from $5,800 for 2025 to $6,100 per beneficiary per taxpayer for 2026, according to the Treasurer of State’s plan site; the Department’s own 2026 page had not been updated at this writing. A couple with two children can deduct up to $24,400 on Schedule 1 line 14, and contributions made through April 30, 2027 can be counted for 2026.

Sports betting withholding. Senate File 605 of 2025 requires Iowa withholding on sports wagering winnings whenever federal tax is withheld, effective January 1, 2026. The state tax shows in the state boxes of the W-2G and is claimed on IA 1040 line 28 like any other withholding.

No individual income tax bill passed in 2026. The session’s revenue work was on the property tax side. The 2026 revenue bill moved roughly $350 million (verify) from the Taxpayer Relief Fund to cover the cost of conforming to the federal law, which is how a state absorbs a federal tax cut without changing its own rate.

Property tax: the homestead credit becomes an exemption

Senate File 2472, signed May 18, 2026, replaced the homestead tax credit, which had been worth the tax on $4,850 of value, with a homestead tax exemption of 10% of the home’s taxable value, no less than $5,500 and no more than $20,000, the maximum indexed from assessment year 2027. It is retroactive to assessment year 2026, so it first appears on the bills payable in September 2027 and March 2028. Anyone already receiving the homestead credit does not need to refile. The disabled veteran homestead credit continues unchanged.

Homeowners 65 or older keep the separate 65+ homestead exemption of $6,500 of taxable value, applied for once with the county assessor on form 54-028 by July 1. The same bill raises the maximum elderly and disabled property tax credit from $1,000 to $1,500 (verify first claim year) and caps most local property tax revenue growth at 2% a year. None of this is on the income tax return; Iowa for retirees walks through the county claims.

Amendment 1: approved

On November 3, 2026 voters approved Amendment 1, from Senate Joint Resolution 11, 56% to 44%. It adds an Article XIII to the Iowa Constitution. Any bill that raises the individual or corporate income tax rate, or creates a new state tax on income, now needs “the affirmative votes of at least two-thirds of the members elected to each house” of the General Assembly. Local-option taxes are exempt. The amendment changes no rate, no credit and no figure on the 2026 return. It makes the 3.8% rate harder to raise and does nothing to lower it. The count is unofficial until the state canvass.

Still true for 2026

• Retirement income is exempt from age 55, with no cap, on Schedule 1 line 7; Social Security at any age on line 5.
• Capital gains, dividends and interest are taxed at the same 3.8% as wages. A gain taxed at 0% federally still costs 3.8% here.
• The school district surtax, 0% to 20% of the Iowa tax by the district you lived in on December 31, is the only local income tax; the 2026 list arrives with the 2026 forms.
• Iowa has no inheritance tax for deaths on or after January 1, 2025, no estate tax and no gift tax.