HF 464 (LSB 2182YH (3) 88)

HOUSE FILE 464

BY  BOSSMAN

A BILL FOR

An Act providing for the establishment of recreation savings accounts and a related individual income tax exemption, and including applicability provisions.
BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA:

    Section 1.  Section 422.7, Code 2019, is amended by adding the following new subsection:
   NEW SUBSECTION.  48.  a.  Subtract the sum of the following amounts:
   (1)  The amount of contributions made by an account holder during the tax year to the account holder’s recreation savings accounts, not to exceed two thousand dollars per year.
   (2)  To the extent included, income from interest received from the account holder’s recreation savings accounts.
   b.  Add, to the extent previously deducted under paragraph “a”, the amount withdrawn during the tax year from an account holder’s recreation savings account for purposes other than the payment or reimbursement of the designated beneficiary’s eligible recreation costs. For purposes of this paragraph, the transfer of amounts between different recreation savings accounts of the same account holder by a person other than the account holder shall not cause such transfer to be considered a withdrawal.
   c.  For any amount considered a withdrawal required to be added to net income pursuant to paragraph “b”, the account holder shall be assessed a penalty equal to ten percent of the amount of the withdrawal. The penalty shall not apply to withdrawals made by reason of the death of the account holder, or to withdrawals made pursuant to a garnishment, level, or other order, including but not limited to an order in bankruptcy code, 11 U.S.C. §101 et seq.
   d.  For purposes of this subsection, “account holder”, “designated beneficiary”, “eligible recreation costs”, and “recreation savings account” mean the same as defined in section 541C.2.
    Sec. 2.  NEW SECTION.  541C.1  Short title.
   This chapter may be cited as the “Iowa Recreation Savings Account Act”.
    Sec. 3.  NEW SECTION.  541C.2  Definitions.
   As used in this chapter, unless the context otherwise requires:
   1.  “Account holder” means an individual who establishes, either individually or jointly with the individual’s spouse, a recreation savings account pursuant to section 541C.3.
   2.  “Department” means the department of revenue.
   3.  “Designated beneficiary” means an individual meeting the requirements of section 541C.3, subsection 2, and designated by an account holder as beneficiary of the account holder’s recreation savings account pursuant to section 541C.3, subsection 2.
   4.  a.  “Eligible recreation costs” means a cost, fee, tax, or payment incurred by, or charged or assigned to, a designated beneficiary for the purchase of any of the following:
   (1)  Sport or recreational equipment, as defined in section 423.3, subsection 68.
   (2)  Clothing worn in conjunction with sport, exercise, or recreation.
   (3)  Personal wellness services, including but not limited to a fitness club or gym membership, or consultation with a personal trainer.
   (4)  Organized or unorganized sports, lessons, programs, or other recreational activities.
   b.  “Eligible recreation costs” includes any cost, fee, tax, or payment as provided in paragraph “a”, which is made for the direct benefit of the designated beneficiary, the designated beneficiary’s spouse, or a dependent child of the designated beneficiary.
   5.  “Financial institution” means the same as defined in section 541B.2.
   6.  “Individual” means a natural person.
   7.  “Recreation savings account” means an account that meets the requirements of sections 541C.3 and 541C.4 and that was established for the purpose of paying or reimbursing a designated beneficiary’s eligible recreation costs.
   8.  “Resident” means the same as defined in section 422.4.
    Sec. 4.  NEW SECTION.  541C.3  Recreation savings account.
   1.  Establishment of account.
   a.  Beginning January 1, 2020, an individual may open an interest-bearing savings account with a financial institution and designate the entire account as a recreation savings account for the purpose of paying or reimbursing a designated beneficiary’s eligible recreation costs. The recreation savings account designation shall be made no later than April 30 of the year following the tax year during which the account is opened, on forms provided by the department.
   b.  A married couple electing to file a joint Iowa individual income tax return may establish a joint recreation savings account. Married taxpayers electing to file separate tax returns or separately on a combined tax return for Iowa tax purposes shall not establish or maintain a joint recreation savings account.
   c.  An individual may establish more than one recreation savings account, provided each account has a different designated beneficiary.
   2.  Designation of beneficiary.
   a.  The account holder shall designate one individual as beneficiary of the recreation savings account. The designation shall be made on forms provided by the department and no later than April 30 of the year following the tax year during which the account is opened. The account holder may change the designated beneficiary of the recreation savings account at any time.
   b.  The account holder and designated beneficiary of a recreation savings account may be the same individual.
   c.  An individual may be the designated beneficiary of more than one recreation savings account.
   d.  The designated beneficiary of a recreation savings account must be a resident.
    Sec. 5.  NEW SECTION.  541C.4  Account administration —— account holder responsibilities.
   1.  Account contributions.  Contributions to a recreation savings account may be made by any person in the form of cash. There is no limitation on the amount of contributions that may be made to or retained in a recreation savings account.
   2.  Account expenses.  The account holder shall not use funds held in a recreation savings account to pay expenses, if any, of administering the account, except that all fees and charges assessed by the financial institution may be deducted from the account by the financial institution where the account is held.
   3.  Required reports.  The account holder shall submit the following information to the department:
   a.  An annual report for the recreation savings account on forms furnished by the department. The report shall be included with the Iowa income tax return of the account holder.
   b.  A copy of the federal internal revenue service form 1099, or other similar federal internal revenue service income reporting form, if any, issued for the recreation savings account to the account holder by the financial institution where the account is held. The form shall be included with the Iowa income tax return of the account holder.
   c.  Upon a withdrawal of funds from a recreation savings account, a transaction report on forms furnished by the department.
   4.  Withdrawal of funds.  The account holder may withdraw funds from a recreation savings account at any time.
    Sec. 6.  NEW SECTION.  541C.5  Financial institution protections.
   Nothing in this chapter shall be construed to require a financial institution to do any of the following, or to be responsible or liable for any of the following:
   1.  Designate or label within the financial institution’s account contracts, systems, or in any other manner, an account as a recreation savings account.
   2.  Ascertain or verify the purpose of a withdrawal of funds from a recreation savings account, or track the destination or use of the withdrawn funds.
   3.  Allocate funds in a recreation savings account to a designated beneficiary or among joint account holders.
   4.  Report any information to the department or any other governmental agency.
   5.  Determine or ensure that an account satisfies the requirements to be a recreation savings account.
   6.  Determine or ensure that funds withdrawn from a recreation savings account are used for the payment or reimbursement of a designated beneficiary’s eligible recreation costs.
   7.  Report or remit taxes or penalties related to the ownership or use of a recreation savings account.
   8.  Include the name of a beneficiary in the title of a recreation savings account, or document the change of any beneficiary to a recreation savings account.
    Sec. 7.  NEW SECTION.  541C.6  Tax considerations.
   The state income tax treatment of a recreation savings account shall be as provided in section 422.7, subsection 48.
    Sec. 8.  NEW SECTION.  541C.7  Rules and forms.
   1.  The department shall adopt rules to implement and administer this chapter, including but not limited to rules that identify transactions which qualify as eligible recreation costs.
   2.  The department shall create and make available forms to be used in complying with this chapter, including but not limited to the following:
   a.  A form for designating an account as a recreation savings account pursuant to section 541C.3, subsection 1, paragraph “a”.
   b.  A form for designating an individual as beneficiary of a recreation savings account pursuant to section 541C.3, subsection 2, paragraph “a”.
   c.  A recreation savings account annual report as required in section 541C.4, subsection 3, paragraph “a”. The report shall require, at a minimum, a list of transactions occurring on the account during the tax year, and shall identify any supporting documentation to be included with the report or maintained by the taxpayer.
   d.  A transaction report as required in section 541C.4, subsection 3, paragraph “c”, which report shall require, at a minimum, information regarding the eligible recreation costs to which any withdrawn funds were applied, and information regarding the amount of funds remaining, if any, in a recreation savings account.
    Sec. 9.  APPLICABILITY.  The following provision of this Act applies to tax years beginning on or after January 1, 2020:
   The section of this Act enacting section 422.7, subsection 48.
EXPLANATION
The inclusion of this explanation does not constitute agreement with
the explanation’s substance by the members of the general assembly.
   This bill allows individuals, on or after January 1, 2020, to open an interest-bearing savings account with a state or federally chartered bank, savings and loan association, credit union, or trust company in this state and designate the account as a recreation savings account (account) for the purpose of financing eligible recreation costs. “Eligible recreation costs” is defined as a cost, fee, tax, or payment incurred by the beneficiary of the account (designated beneficiary) for the purchase of sport or recreational equipment, personal wellness services, or recreational activities for the benefit of the designated beneficiary’s immediate family. The account may be established individually, or jointly with a spouse if the married couple files a joint Iowa income tax return.
   To establish the account, the bill requires the account holder to submit certain forms to the department of revenue (department) designating the account as a recreation savings account, and identifying the designated beneficiary. These designation forms must be submitted no later than April 30 of the year following the tax year during which the account is opened. An individual may establish more than one account, provided each account has a different designated beneficiary. The account holder may change the designated beneficiary at any time, and may designate himself or herself as the designated beneficiary. In addition, an individual may be the designated beneficiary of more than one account. The designated beneficiary must be a resident of Iowa. 
   Contributions to an account may be made in the form of cash by any person and in any amount. There is no limitation on the amount that may be retained in an account. In addition, the account holder may withdraw funds from an account at any time. Account funds shall not be used to pay expenses, if any, of administering the account, except that fees and charges may be deducted from the account by the financial institution where the account is held. The bill requires an account holder to submit certain reports to the department, including an annual report for the account, a transaction report upon a withdrawal of funds from the account, and a copy of any federal Internal Revenue Service form 1099 or other similar income statement issued for the account. 
   The bill provides protection to financial institutions from being required to perform, and from being responsible or liable for, certain activities as described in the bill with respect to accounts. The bill requires the department to create forms required to be filed by account holders, and to adopt rules to implement and administer the bill, including but not limited to rules identifying transactions which qualify as “eligible recreation costs”.
   The bill provides two individual income tax incentives relating to the accounts. First, an account holder is allowed to deduct from the individual income tax the amount of contributions made during the year by the account holder to the account holder’s accounts, not to exceed $2,000 per year. Second, the bill exempts from the individual income tax any interest received from the account holder’s accounts.
   The bill requires an account holder to add to net income for purposes of calculating the individual income tax any amount of a nonqualified withdrawal from an account to the extent it was previously deducted as a contribution. Amounts transferred between different accounts of the same account holder by a person other than the account holder are not considered nonqualified withdrawals. Nonqualified withdrawals required to be added to net income are also subject to a penalty equal to 10 percent of the nonqualified withdrawal, unless the withdrawal was made by reason of the death of the account holder, or was made pursuant to a garnishment, levy, or other order, including an order in bankruptcy following a filing for protection under the federal bankruptcy code.
   The tax provisions of the bill apply to tax years beginning on or after January 1, 2020.