Senate Study Bill 1186 - Introduced SENATE FILE _____ BY (PROPOSED COMMITTEE ON WAYS AND MEANS BILL BY CHAIRPERSON FEENSTRA) A BILL FOR An Act providing an exemption from the computation of the 1 individual income tax of certain amounts of retirement 2 income and including retroactive applicability provisions. 3 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 4 TLSB 2330XC (2) 88 jm/jh

S.F. _____ Section 1. Section 422.5, subsection 3, paragraph a, Code 1 2019, is amended to read as follows: 2 a. The tax shall not be imposed on a resident or nonresident 3 whose net income, as defined in section 422.7 , is thirteen 4 thousand five hundred dollars or less in the case of married 5 persons filing jointly or filing separately on a combined 6 return, heads of household, and surviving spouses or nine 7 thousand dollars or less in the case of all other persons; 8 but in the event that the payment of tax under this division 9 would reduce the net income to less than thirteen thousand five 10 hundred dollars or nine thousand dollars as applicable, then 11 the tax shall be reduced to that amount which would result 12 in allowing the taxpayer to retain a net income of thirteen 13 thousand five hundred dollars or nine thousand dollars as 14 applicable. The preceding sentence does not apply to estates 15 or trusts. For the purpose of this subsection , the entire net 16 income, including any part of the net income not allocated 17 to Iowa, shall be taken into account. For purposes of this 18 subsection , net income includes all amounts of pensions or 19 other retirement income, except for military retirement pay 20 excluded under section 422.7, subsection 31A , paragraph “a” , 21 or section 422.7, subsection 31B , paragraph “a” , received from 22 any source which is not taxable under this division as a result 23 of the government pension exclusions in section 422.7 , or any 24 other state law. If the combined net income of a husband and 25 wife exceeds thirteen thousand five hundred dollars, neither 26 of them shall receive the benefit of this subsection , and it 27 is immaterial whether they file a joint return or separate 28 returns. However, if a husband and wife file separate returns 29 and have a combined net income of thirteen thousand five 30 hundred dollars or less, neither spouse shall receive the 31 benefit of this paragraph, if one spouse has a net operating 32 loss and elects to carry back or carry forward the loss as 33 provided in section 422.9, subsection 3 . A person who is 34 claimed as a dependent by another person as defined in section 35 -1- LSB 2330XC (2) 88 jm/jh 1/ 7

S.F. _____ 422.12 shall not receive the benefit of this subsection if 1 the person claiming the dependent has net income exceeding 2 thirteen thousand five hundred dollars or nine thousand dollars 3 as applicable or the person claiming the dependent and the 4 person’s spouse have combined net income exceeding thirteen 5 thousand five hundred dollars or nine thousand dollars as 6 applicable. 7 Sec. 2. Section 422.5, subsection 3, Code 2019, is amended 8 by adding the following new paragraph: 9 NEW PARAGRAPH . c. (1) For purposes of this subsection, 10 net income includes all amounts of pensions or other retirement 11 income, except for military retirement pay excluded under 12 section 422.7, subsection 31A, paragraph “a” , or section 422.7, 13 subsection 31B, paragraph “a” , and except for retirement income 14 excluded under section 422.7, subsection 31C, received from any 15 source which is not taxable under this division as a result 16 of the government pension exclusions in section 422.7, or any 17 other state law. 18 (2) This paragraph “c” is repealed January 1, 2023. 19 Sec. 3. Section 422.5, subsection 3B, paragraph a, Code 20 2019, is amended to read as follows: 21 a. The tax shall not be imposed on a resident or nonresident 22 who is at least sixty-five years old on December 31 of 23 the tax year and whose net income, as defined in section 24 422.7 , is thirty-two thousand dollars or less in the case 25 of married persons filing jointly or filing separately on a 26 combined return, heads of household, and surviving spouses or 27 twenty-four thousand dollars or less in the case of all other 28 persons; but in the event that the payment of tax under this 29 division would reduce the net income to less than thirty-two 30 thousand dollars or twenty-four thousand dollars as applicable, 31 then the tax shall be reduced to that amount which would result 32 in allowing the taxpayer to retain a net income of thirty-two 33 thousand dollars or twenty-four thousand dollars as applicable. 34 The preceding sentence does not apply to estates or trusts. 35 -2- LSB 2330XC (2) 88 jm/jh 2/ 7

S.F. _____ For the purpose of this subsection , the entire net income, 1 including any part of the net income not allocated to Iowa, 2 shall be taken into account. For purposes of this subsection , 3 net income includes all amounts of pensions or other retirement 4 income, except for military retirement pay excluded under 5 section 422.7, subsection 31A , paragraph “a” , or section 422.7, 6 subsection 31B , paragraph “a” , received from any source which is 7 not taxable under this division as a result of the government 8 pension exclusions in section 422.7 , or any other state law. 9 If the combined net income of a husband and wife exceeds 10 thirty-two thousand dollars, neither of them shall receive the 11 benefit of this subsection , and it is immaterial whether they 12 file a joint return or separate returns. However, if a husband 13 and wife file separate returns and have a combined net income 14 of thirty-two thousand dollars or less, neither spouse shall 15 receive the benefit of this paragraph, if one spouse has a net 16 operating loss and elects to carry back or carry forward the 17 loss as provided in section 422.9, subsection 3 . A person 18 who is claimed as a dependent by another person as defined in 19 section 422.12 shall not receive the benefit of this subsection 20 if the person claiming the dependent has net income exceeding 21 thirty-two thousand dollars or twenty-four thousand dollars 22 as applicable or the person claiming the dependent and the 23 person’s spouse have combined net income exceeding thirty-two 24 thousand dollars or twenty-four thousand dollars as applicable. 25 Sec. 4. Section 422.5, subsection 3B, Code 2019, is amended 26 by adding the following new paragraph: 27 NEW PARAGRAPH . d. (1) For purposes of this subsection, 28 net income includes all amounts of pensions or other retirement 29 income, except for military retirement pay excluded under 30 section 422.7, subsection 31A, paragraph “a” , or section 422.7, 31 subsection 31B, paragraph “a” , and except for retirement income 32 excluded under section 422.7, subsection 31C, received from any 33 source which is not taxable under this division as a result 34 of the government pension exclusions in section 422.7, or any 35 -3- LSB 2330XC (2) 88 jm/jh 3/ 7

S.F. _____ other state law. 1 (2) This paragraph “d” is repealed January 1, 2023. 2 Sec. 5. Section 422.7, subsection 31, Code 2019, is amended 3 to read as follows: 4 31. a. For a person who is disabled, or is fifty-five 5 years of age or older, or is the surviving spouse of an 6 individual or a survivor having an insurable interest in an 7 individual who would have qualified for the exemption under 8 this subsection for the tax year, subtract, to the extent 9 included, the total amount of a governmental or other pension 10 or retirement pay, including , but not limited to , defined 11 benefit or defined contribution plans, annuities, individual 12 retirement accounts, plans maintained or contributed to by an 13 employer, or maintained or contributed to by a self-employed 14 person as an employer, and deferred compensation plans or any 15 earnings attributable to the deferred compensation plans, up 16 to a maximum of six thousand dollars for a person, other than a 17 husband or wife, who files a separate state income tax return 18 and up to a maximum of twelve thousand dollars for a husband 19 and wife who file a joint state income tax return. However, a 20 surviving spouse who is not disabled or fifty-five years of age 21 or older can only exclude the amount of pension or retirement 22 pay received as a result of the death of the other spouse. A 23 husband and wife filing separate state income tax returns or 24 separately on a combined state return are allowed a combined 25 maximum exclusion under this subsection of up to twelve 26 thousand dollars. The twelve thousand dollar exclusion shall 27 be allocated to the husband or wife in the proportion that each 28 spouse’s respective pension and retirement pay received bears 29 to total combined pension and retirement pay received. 30 b. This subsection is repealed January 1, 2023. 31 Sec. 6. Section 422.7, subsection 31A, Code 2019, is amended 32 by adding the following new paragraph: 33 NEW PARAGRAPH . c. This subsection is repealed January 1, 34 2023. 35 -4- LSB 2330XC (2) 88 jm/jh 4/ 7

S.F. _____ Sec. 7. Section 422.7, subsection 31B, Code 2019, is amended 1 by adding the following new paragraph: 2 NEW PARAGRAPH . c. This subsection is repealed January 1, 3 2023. 4 Sec. 8. Section 422.7, Code 2019, is amended by adding the 5 following new subsection: 6 NEW SUBSECTION . 31C. a. (1) For tax years beginning 7 in the 2019 calendar year, subtract, to the extent included, 8 twenty percent of retirement income received by a taxpayer 9 remaining after the subtractions in subsections 31, 31A, and 10 31B. 11 (2) For tax years beginning in the 2020 calendar year, 12 subtract, to the extent included, forty percent of retirement 13 income received by a taxpayer remaining after the subtractions 14 in subsections 31, 31A, and 31B. 15 (3) For tax years beginning in the 2021 calendar year, 16 subtract, to the extent included, sixty percent of retirement 17 income received by a taxpayer remaining after the subtractions 18 in subsections 31, 31A, and 31B. 19 (4) For tax years beginning in the 2022 calendar year, 20 subtract, to the extent included, eighty percent of retirement 21 income received by a taxpayer remaining after the subtractions 22 in subsections 31, 31A, and 31B. 23 (5) For tax years beginning on or after January 1, 2023, 24 subtract, to the extent included, retirement income received 25 by a taxpayer. 26 b. For purposes of this subsection, “retirement income” 27 means a governmental or other pension or retirement pay, 28 including but not limited to defined benefit or defined 29 contribution plans, annuities, individual retirement accounts, 30 plans maintained or contributed to by an employer, or 31 maintained or contributed to by a self-employed person as an 32 employer, and deferred compensation plans or any earnings 33 attributable to the deferred compensation plans. 34 Sec. 9. RETROACTIVE APPLICABILITY. This Act applies 35 -5- LSB 2330XC (2) 88 jm/jh 5/ 7

S.F. _____ retroactively to January 1, 2019, for tax years beginning on 1 or after that date. 2 EXPLANATION 3 The inclusion of this explanation does not constitute agreement with 4 the explanation’s substance by the members of the general assembly. 5 This bill relates to the exclusion of retirement income from 6 the computation of net income for purposes of the individual 7 income tax. 8 Under current law, a taxpayer may exclude all retirement 9 pay, including certain survivor benefits, received from the 10 federal government for military service performed in the armed 11 forces, the armed forces military reserve, or national guard. 12 In addition, a taxpayer who is disabled, who is at least 55 13 years of age, or who is the surviving spouse or other specified 14 survivor of that qualifying taxpayer, may exclude a maximum 15 of $6,000 of other retirement income ($12,000 for married 16 couples). 17 The bill phases in over a five-year period the complete 18 exclusion from the individual income tax of a taxpayer’s 19 retirement income remaining after the two exclusions referenced 20 above. The percentage of this retirement income that is 21 excluded for tax years beginning in 2019, 2020, 2021, and 22 2022, is 20 percent, 40 percent, 60 percent, and 80 percent, 23 respectively. For tax years beginning in 2023 or later, 100 24 percent of a taxpayer’s retirement income will be excluded from 25 the individual income tax. 26 The bill also excludes this retirement income from the 27 calculation of net income for purposes of determining whether 28 or not a taxpayer’s net income exceeds the amount at which the 29 individual income tax will not be imposed pursuant to Code 30 section 422.5(3) or Code section 422.5(3B), and for which an 31 individual income tax return is not required to be filed, and 32 for purposes of calculating the alternate tax in Code section 33 422.5, and further provides that any retirement income excluded 34 from the individual income tax will not be added back to these 35 -6- LSB 2330XC (2) 88 jm/jh 6/ 7

S.F. _____ calculations for tax years beginning in 2023 or later. 1 The bill defines “retirement income” for purposes of the 2 exclusion. 3 The bill applies retroactively to January 1, 2019, for tax 4 years beginning on or after that date. 5 -7- LSB 2330XC (2) 88 jm/jh 7/ 7