Senate File 2402 - Introduced SENATE FILE 2402 BY SMITH A BILL FOR An Act providing for an exclusion from the individual 1 income tax for certain amounts of governmental pension 2 or retirement pay related to periods of employment not 3 covered by the federal Social Security Act, and including 4 applicability provisions. 5 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 6 TLSB 5693XS (2) 87 mm/jh

S.F. 2402 Section 1. Section 422.7, Code 2018, is amended by adding 1 the following new subsection: 2 NEW SUBSECTION . 13A. a. Subtract, to the extent included, 3 the total amount of governmental pension or retirement pay 4 received by a taxpayer or the qualified beneficiary of a 5 taxpayer from a public retirement system to the extent the 6 governmental pension or retirement pay relates to a period 7 of public employment that was not covered under Tit. II of 8 the federal Social Security Act and for which social security 9 retirement contributions with respect to wages under the 10 federal Insurance Contributions Act were not made, not to 11 exceed an amount which the taxpayer would have received during 12 the tax year as federal social security retirement benefits for 13 that same period of public employment had the employment been 14 covered under Tit. II of the federal Social Security Act and 15 had social security retirement contributions with respect to 16 wages been made under the federal Insurance Contributions Act. 17 b. The exclusion of amounts of governmental pension or 18 retirement pay under this subsection is in addition to any 19 exclusion provided under subsection 31. 20 c. The director of revenue shall adopt rules pursuant to 21 chapter 17A to administer this subsection, including but not 22 limited to rules for determining the amount of social security 23 benefits a taxpayer or the qualified beneficiary would have 24 received during a tax year. 25 Sec. 2. APPLICABILITY. This Act applies to tax years 26 beginning on or after January 1, 2019. 27 EXPLANATION 28 The inclusion of this explanation does not constitute agreement with 29 the explanation’s substance by the members of the general assembly. 30 BACKGROUND. Certain public employers do not participate in 31 the federal old-age, survivors, and disability benefits program 32 under Tit. II of the federal Social Security Act (social 33 security retirement). Thus, employees of that public employer 34 are not subject to the mandatory wage contributions related 35 -1- LSB 5693XS (2) 87 mm/jh 1/ 2

S.F. 2402 to social security retirement under the federal Insurance 1 Contributions Act (FICA social security tax) and do not receive 2 social security retirement benefits with respect to that period 3 of public employment. Iowa excludes social security retirement 4 benefits from taxation under the individual income tax. 5 BILL CHANGES. This bill provides an exclusion from the 6 individual income tax for governmental pension or retirement 7 pay received by a taxpayer or the qualified beneficiary of 8 a taxpayer from a public retirement system to the extent it 9 relates to a period of public employment that was not covered 10 by social security retirement and for which FICA social 11 security tax was not collected and paid. The exclusion cannot 12 exceed an amount equal to the social security retirement 13 benefits the taxpayer would have received during the tax year 14 with respect to that period of public employment had the 15 employment been covered by social security retirement and had 16 FICA social security tax been collected and paid. 17 The bill provides that this exclusion is in addition to the 18 general pension exclusion in Code section 422.7(31). 19 By operation of law, this excluded retirement income will 20 be included in the calculation of net income for purposes of 21 determining the income tax return filing threshold, and for 22 purposes of the alternate tax calculation in Code section 23 422.5, in the same manner as social security retirement 24 benefits are. 25 The bill requires the director of the department of revenue 26 to adopt rules to administer the exemption, including rules for 27 determining the amount of social security benefits a taxpayer 28 or the qualified beneficiary would have received during a tax 29 year. 30 The bill applies to tax years beginning on or after January 31 1, 2019. 32 -2- LSB 5693XS (2) 87 mm/jh 2/ 2