Overview of Iowa Retirement Tax FriendlinessIowa exempts all Social Security income from income taxes and provides a deduction on other types of retirement income. It is one of the few states with an inheritance tax. Iowa property taxes are also higher than average.
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| Wages are taxed at normal rates, and your marginal state tax rate is %. |
- Our Tax Expert
Jennifer Mansfield, CPA Tax
Jennifer Mansfield, CPA, JD/LLM-Tax, is a Certified Public Accountant with more than 30 years of experience providing tax advice. SmartAsset’s tax expert has a degree in Accounting and Business/Management from the University of Wyoming, as well as both a Masters in Tax Laws and a Juris Doctorate from Georgetown University Law Center. Jennifer has mostly worked in public accounting firms, including Ernst & Young and Deloitte. She is passionate about helping provide people and businesses with valuable accounting and tax advice to allow them to prosper financially. Jennifer lives in Arizona and was recently named to the Greater Tucson Leadership Program.
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Iowa Retirement Taxes
While Iowa has no turquoise waters or white-sand beaches, it still offers plenty for seniors who are in or approaching retirement. Cities like Des Moines and Cedar Rapids offer culture and fine dining, while smaller towns like Ames and Dubuque have quiet streets and a low cost of living. But what about the Hawkeye State’s tax environment?
Iowa exempts all Social Security income from income taxes and provides a deduction on other types of retirement income. However, it is one of the few states with an inheritance tax. Its property taxes are also higher than average. Below, we’ll tackle common questions about retirement taxes in Iowa.
Is Iowa tax-friendly for retirees?
Iowa is moderately tax-friendly. Social Security benefits are exempt from the Iowa state income tax. Other forms of retirement income are taxed, but seniors are eligible for a deduction of up to $6,000 on that income. Property taxes in Iowa are above average. The state sales tax rate is 6%. Iowa has its own tax on inheritances, with rates ranging from 5% to 15%.
Is Social Security taxable in Iowa?
No. Social Security benefits are not taxed in Iowa.
Are other forms of retirement income taxable in Iowa?
Yes. Income from a 401(k) or an IRA and any type of pension income are subject to the Iowa income tax. However, anyone 55 and older is eligible for a deduction of up to $6,000 (per filer) for the total of all retirement income (excluding Social Security income).
If you withdraw $5,000 annually from an IRA, you will not pay any state income taxes on your retirement income in Iowa as the deduction will cover the full $5,000. If, in addition to that, you also receive $5,000 from a pension, then you will pay taxes on the $4,000 in income that exceeds the deduction. The table below shows income tax rates and brackets in Iowa.
How high are property taxes in Iowa?
Moderately high. The average effective property tax rate in the Hawkeye State is 1.50%, which ranks as the 14th highest in the U.S.
While rates are relatively high, property taxes paid are below average. That’s because home values in Iowa are fairly low. Overall, average housing costs in Iowa are equal to the national average.
What is the Iowa homestead credit?
The homestead credit is a form of property tax relief available to all Iowa homeowners who occupy their property as a permanent residence. It is a subtraction of $4,850 from assessed value. Depending on your local tax rate, that could equal savings of $100 to $200.
How high are sales taxes in Iowa?
Close to average. The state sales tax rate is 6%. All but six counties collect an additional local option sales tax of 1% (though some cities within those counties have voted to collect the local option tax). So in practice the statewide rate is 7%. That is slightly higher than the national average. Seniors in Iowa benefit from sales tax exemptions on food, prescription drugs and some types of non-prescription medication.
What other Iowa taxes should I be concerned about?
Iowa has an inheritance tax. The tax does not apply to lineal descendants (children, grandchildren, great-grandchildren, etc.) but does apply to other types of relatives. Siblings who receive an inheritance will face rates ranging from 5% to 10%. Nieces, nephews, aunts, uncles, cousins and all unrelated relatives face rates between 10% and 15%. All inheritance greater than $100,000 faces the top rate.
Two important notes on the inheritance tax. The first is that estates with a net value of less than $25,000 are not subject to the tax. The second is that, while Iowa does not have a gift tax, gifts made within the three years prior to the decedent’s death may be subject to the inheritance tax.
Most Tax Friendly Places for Retirees
SmartAsset’s interactive map highlights the places in the country with tax policies that are most favorable to retirees. Zoom between states and the national map to see the most tax-friendly places in each area of the country.
Methodology Our study aims to find the areas with the most tax-friendly policies for retirees. To do that we looked at how the tax policies of each city would impact a retiree with a $50,000 income. Our hypothetical retiree is getting $15,000 from Social Security benefits, $10,000 from a private pension, $15,000 from retirement savings like a 401(k) or IRA and $10,000 in wages.
To calculate the expected income tax this person would pay in each location we applied deductions and exemptions. This included the standard deduction, personal exemption and deductions for each specific type of retirement income. We then calculated how much this person would pay in income tax at the federal, state, county and local levels.
We calculated the effective property tax rate by dividing median property tax paid by median home value for each city.
In order to determine sales tax burden we estimated that 35% of take-home (after-tax) pay is spent on taxable goods. We multiplied the average sales tax rate for a city by the household income less income tax. This product is then multiplied by 35% to estimate the sales tax paid.
For fuel taxes, we first distributed statewide vehicle miles traveled down to the city level using the number of vehicles in each county. We then calculated miles driven per capita in each city. Using the nationwide average fuel economy, we calculated the average gallons of gas used per capita in each city and multiplied that by the fuel tax.
For each city we determined whether or not Social Security income was taxable.
Finally, we created an overall index weighted to best capture the taxes that most affect retirees. We gave a 4x weighting to income tax, 3x weighting to property tax rate, a 2x weighting to sales tax and 1x weighting to fuel tax.
Sources: Internal Revenue Service, Social Security Administration, state websites, local government websites, US Census Bureau 2016 American Community Survey, Avalara, American Petroleum Institute, GasBuddy, UMTRI, Federal Highway Administration
