Two (More) Iowa Tax Changes You Need to Know

May 28 2024 | Back to Blog List

It was another big year for tax reform here in our home state of Iowa, with the legislature and Gov. Kim Reynolds accelerating our move toward a flat individual income tax rate and increasing incentives toward saving for education for residents.

Taken together, these changes will make it easier for our clients to save for the future, which is something we wholeheartedly support here at Cedar Point Capital Partners.

It also continues Iowa's march toward becoming one of the nation’s most tax-friendly states, which is great news for investors and savers in the state.

Here's a quick tour of the latest tax law changes here in Iowa, and what they could mean for your financial strategy.

Flat tax takes a step closer

Iowa was already in line to transition its graduated-rate income tax structure to a flat income tax effective 2026, thanks to 2022's tax reform bills. Senate File 2442 moves that change up a year, to tax year 2025. It also reduces the new flat income tax rate by 0.1%, to 3.8%.

When the latest tax cuts are implemented, Iowa will have the sixth-lowest income tax rate among the 41 states with an income tax, according to the Tax Foundation.

Regardless of your personal politics around taxation issues, one nice thing about a flat income tax is that it makes it easier to estimate your tax liability as your income changes. When coupled with other state-level changes, such as 2023's repeal of the alternative minimum tax (effective tax year 2024), Iowa residents are benefiting from more certainty in tax planning and financial decision-making. As always, we can help you explore and understand what these changes mean for your financial life plan.

Bigger deductions for Iowa 529 Plans, IAble Plans

We've written previously about 529 plans and why we're such big fans of their flexibility and usefulness, but a new tweak to Iowa's 529 plan rules make them even better as a savings vehicle.

The Iowa Legislature this year increased the tax deduction for contributions to Iowa's two 529 plans—College Savings Iowa and the IAdvisor 529 Plan—to $5,500 per beneficiary per taxpayer, up from $3,785 in tax year 2023. That same deduction change applies to contributions to IAble plans (Iowa Achieving a Better Life Experience), which are tax-advantaged savings accounts for individuals with disabilities.

This change adds up to a potentially sizable state tax benefit for taxpayers holding multiple Iowa 529 Plan accounts. Even better, the money saved can be used in a number of ways, from qualifying educational expenses to paying student loans to even funding a Roth IRA.

And while not technically a tax note, we were also pleased to see the Iowa State Treasurer announce a reduction in fees for College Savings Iowa account owners. Asset-based fees are now only 0.17%, or $1.70 per year for every $1,000 invested. There are also no sales commissions or advisor fees, and no fees charged for enrollment, account maintenance or withdrawals, making College Savings Iowa accounts an incredible savings tool for families.

If you haven't set one up yet for the child(ren) in your life, today's a great day to do so!

A few closing notes

We'd be remiss if we didn't mention one other item of note for our ag clients here in rural Iowa. The legislature enacted House File 2649, excluding net capital gains from the sale of specified livestock when held by the taxpayer for a stated period of time, and if the taxpayer receives more than 50% of their income from farming or ranching operations. That exclusion is retroactive to Jan. 1, 2023.

As fiduciary wealth management experts, it's our job to understand the tax implications of changes like these, and to guide your financial choices in a way that protects your future. Even though tax season is in the rear view for this year, it's never too early to get ready for those to come. Give us a call today and let's grow together.

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