Overview of Iowa Retirement Tax Friendliness
Iowa exempts all Social Security income from income taxes and provides a deduction on other types of retirement income. It is also one of the few states with an inheritance tax. Iowa property taxes are also higher than average.
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Annual Social Security Income
Annual Retirement Account Income
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Annual Income from Private Pension
Annual Income from Public Pension
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|Social Security income is taxed.|
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|Wages are taxed at normal rates, and your marginal state tax rate is %.|
- Our Expert
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.
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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, or $12,000 if they file jointly.
Additionally, property taxes in Iowa come in above the national average. The state sales tax rate is 6%, and average local rates up the total to 6.94%. 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?
Income from a 401(k) or 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).
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.
Income Tax Brackets
|Iowa Taxable Income||Rate|
|$0 - $1,743||0.33%|
|$1,743 - $3,486||0.67%|
|$3,486 - $6,972||2.25%|
|$6,972 - $15,687||4.14%|
|$15,687 - $26,145||5.63%|
|$26,145 - $34,860||5.96%|
|$34,860 - $52,290||6.25%|
|$52,290 - $78,435||7.44%|
How high are property taxes in Iowa?
The average effective property tax rate in the Hawkeye State is 1.50%. But while rates are relatively high, property taxes paid are barely above average. That’s because home values in Iowa are quite a bit lower than the national median.
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.
How high are sales taxes in Iowa?
The state sales tax rate in Iowa is 6%, which is about average. All but six counties collect an additional local sales tax. So in practice, the average statewide rate is slightly higher at 6.94%. Residents of 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 does have a state inheritance tax. However, the law is scheduled to be fully repealed by Jan. 1, 2025. Tax rates will gradually decrease annually until then.
The Iowa inheritance 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 3% to 6%. Nieces, nephews, aunts, uncles, cousins and all unrelated relatives face rates between 6% and 9%. Any amount greater than $100,000 faces the highest rate.
There are two important considerations in relation to this 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.