Senate File 37 - Introduced SENATE FILE 37 BY ZAUN A BILL FOR An Act relating to the exclusion of retirement income from the 1 computation of the individual income tax including providing 2 an exclusion for the federal civil service retirement 3 system, and phasing in an exclusion of other retirement 4 income, and including retroactive applicability provisions. 5 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 6 TLSB 1672XS (3) 89 jm/jh
S.F. 37 Section 1. Section 422.5, subsection 3, paragraph a, Code 1 2021, 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; but 8 in the event that the payment of tax under this subchapter 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” , or 21 section 422.7, subsection 31B , paragraph “a” , received from any 22 source which is not taxable under this subchapter 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 1672XS (3) 89 jm/jh 1/ 7
S.F. 37 422.12 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 2021, 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” , or retirement income excluded 14 under section 422.7, subsection 31C, and except for retirement 15 income excluded under section 422.7, subsection 31D, paragraph 16 “a” , received from any source which is not taxable under this 17 subchapter as a result of the government pension exclusions in 18 section 422.7, or any other state law. 19 (2) This paragraph “c” is repealed January 1, 2025. 20 Sec. 3. Section 422.5, subsection 3B, paragraph a, Code 21 2021, is amended to read as follows: 22 a. The tax shall not be imposed on a resident or nonresident 23 who is at least sixty-five years old on December 31 of 24 the tax year and whose net income, as defined in section 25 422.7 , is thirty-two thousand dollars or less in the case 26 of married persons filing jointly or filing separately on a 27 combined return, heads of household, and surviving spouses or 28 twenty-four thousand dollars or less in the case of all other 29 persons; but in the event that the payment of tax under this 30 subchapter would reduce the net income to less than thirty-two 31 thousand dollars or twenty-four thousand dollars as applicable, 32 then the tax shall be reduced to that amount which would result 33 in allowing the taxpayer to retain a net income of thirty-two 34 thousand dollars or twenty-four thousand dollars as applicable. 35 -2- LSB 1672XS (3) 89 jm/jh 2/ 7
S.F. 37 The preceding sentence does not apply to estates or trusts. 1 For the purpose of this subsection , the entire net income, 2 including any part of the net income not allocated to Iowa, 3 shall be taken into account. For purposes of this subsection , 4 net income includes all amounts of pensions or other retirement 5 income, except for military retirement pay excluded under 6 section 422.7, subsection 31A , paragraph “a” , or section 422.7, 7 subsection 31B , paragraph “a” , received from any source which is 8 not taxable under this subchapter as a result of the government 9 pension exclusions in section 422.7 , or any other state law. 10 If the combined net income of a husband and wife exceeds 11 thirty-two thousand dollars, neither of them shall receive the 12 benefit of this subsection , and it is immaterial whether they 13 file a joint return or separate returns. However, if a husband 14 and wife file separate returns and have a combined net income 15 of thirty-two thousand dollars or less, neither spouse shall 16 receive the benefit of this paragraph, if one spouse has a net 17 operating loss and elects to carry back or carry forward the 18 loss as provided in section 422.9, subsection 3 . A person 19 who is claimed as a dependent by another person as defined in 20 section 422.12 shall not receive the benefit of this subsection 21 if the person claiming the dependent has net income exceeding 22 thirty-two thousand dollars or twenty-four thousand dollars 23 as applicable or the person claiming the dependent and the 24 person’s spouse have combined net income exceeding thirty-two 25 thousand dollars or twenty-four thousand dollars as applicable. 26 Sec. 4. Section 422.5, subsection 3B, Code 2021, is amended 27 by adding the following new paragraph: 28 NEW PARAGRAPH . d. (1) For purposes of this subsection, 29 net income includes all amounts of pensions or other retirement 30 income, except for military retirement pay excluded under 31 section 422.7, subsection 31A, paragraph “a” , or retirement 32 income excluded under section 422.7, subsection 31B, paragraph 33 “a” , or retirement income excluded under section 422.7, 34 subsection 31C, and except for retirement income excluded under 35 -3- LSB 1672XS (3) 89 jm/jh 3/ 7
S.F. 37 section 422.7, subsection 31D, paragraph “a” , received from any 1 source which is not taxable under this subchapter as a result 2 of the government pension exclusions in section 422.7, or any 3 other state law. 4 (2) This paragraph “d” is repealed January 1, 2025. 5 Sec. 5. Section 422.7, subsection 31, Code 2021, is amended 6 to read as follows: 7 31. a. For a person who is disabled, or is fifty-five 8 years of age or older, or is the surviving spouse of an 9 individual or a survivor having an insurable interest in an 10 individual who would have qualified for the exemption under 11 this subsection for the tax year, subtract, to the extent 12 included, the total amount of a governmental or other pension 13 or retirement pay, including, but not limited to, defined 14 benefit or defined contribution plans, annuities, individual 15 retirement accounts, plans maintained or contributed to by an 16 employer, or maintained or contributed to by a self-employed 17 person as an employer, and deferred compensation plans or any 18 earnings attributable to the deferred compensation plans, up 19 to a maximum of six thousand dollars for a person, other than a 20 husband or wife, who files a separate state income tax return 21 and up to a maximum of twelve thousand dollars for a husband 22 and wife who file a joint state income tax return. However, a 23 surviving spouse who is not disabled or fifty-five years of age 24 or older can only exclude the amount of pension or retirement 25 pay received as a result of the death of the other spouse. A 26 husband and wife filing separate state income tax returns or 27 separately on a combined state return are allowed a combined 28 maximum exclusion under this subsection of up to twelve 29 thousand dollars. The twelve thousand dollar exclusion shall 30 be allocated to the husband or wife in the proportion that each 31 spouse’s respective pension and retirement pay received bears 32 to total combined pension and retirement pay received. 33 b. This subsection is repealed January 1, 2025. 34 Sec. 6. Section 422.7, subsection 31A, Code 2021, is amended 35 -4- LSB 1672XS (3) 89 jm/jh 4/ 7
S.F. 37 by adding the following new paragraph: 1 NEW PARAGRAPH . c. This subsection is repealed January 1, 2 2025. 3 Sec. 7. Section 422.7, subsection 31B, Code 2021, is amended 4 by adding the following new paragraph: 5 NEW PARAGRAPH . c. This subsection is repealed January 1, 6 2025. 7 Sec. 8. Section 422.7, Code 2021, is amended by adding the 8 following new subsections: 9 NEW SUBSECTION . 31C. a. Subtract, to the extent included, 10 retirement income received by a taxpayer from the federal civil 11 service retirement system. 12 b. Subtract, to the extent included, amounts received as 13 survivor benefits by a taxpayer from the federal civil service 14 system. 15 c. The exclusion of retirement income under this subsection 16 is in addition to any exclusion provided under subsection 31. 17 d. This subsection is repealed on January 1, 2025. 18 NEW SUBSECTION . 31D. a. (1) For tax years beginning 19 in the 2021 calendar year, subtract, to the extent included, 20 twenty percent of retirement income received by a taxpayer 21 remaining after the subtractions in subsections 31, 31A, 31B, 22 and 31C. 23 (2) For tax years beginning in the 2022 calendar year, 24 subtract, to the extent included, forty percent of retirement 25 income received by a taxpayer remaining after the subtractions 26 in subsections 31, 31A, 31B, and 31C. 27 (3) For tax years beginning in the 2023 calendar year, 28 subtract, to the extent included, sixty percent of retirement 29 income received by a taxpayer remaining after the subtractions 30 in subsections 31, 31A, 31B, and 31C. 31 (4) For tax years beginning in the 2024 calendar year, 32 subtract, to the extent included, eighty percent of retirement 33 income received by a taxpayer remaining after the subtractions 34 in subsections 31, 31A, 31B, and 31C. 35 -5- LSB 1672XS (3) 89 jm/jh 5/ 7
S.F. 37 (5) This paragraph “a” is repealed on January 1, 2025. 1 b. For tax years beginning on or after January 1, 2025, 2 subtract, to the extent included, retirement income received 3 by a taxpayer. 4 c. For purposes of this subsection, “retirement income” 5 means a governmental or other pension or retirement pay, 6 including but not limited to defined benefit or defined 7 contribution plans, annuities, individual retirement accounts, 8 plans maintained or contributed to by an employer, or 9 maintained or contributed to by a self-employed person as an 10 employer, and deferred compensation plans or any earnings 11 attributable to the deferred compensation plans. 12 Sec. 9. RETROACTIVE APPLICABILITY. This Act applies 13 retroactively to January 1, 2021, for tax years beginning on 14 or after that date. 15 EXPLANATION 16 The inclusion of this explanation does not constitute agreement with 17 the explanation’s substance by the members of the general assembly. 18 This bill relates to the exclusion of retirement income from 19 the computation of net income for purposes of the individual 20 income tax. 21 The bill excludes from the individual income tax all 22 retirement income received by an individual from the federal 23 civil service retirement system and survivor benefits received 24 from such system. 25 The bill phases in over a five-year period the complete 26 exclusion from the individual income tax of a taxpayer’s 27 retirement income remaining after the exclusions referenced 28 above. The percentage of this retirement income that is 29 excluded for tax years beginning in 2021, 2022, 2023, and 30 2024, is 20 percent, 40 percent, 60 percent, and 80 percent, 31 respectively. For tax years beginning in 2025 or later, 100 32 percent of a taxpayer’s retirement income will be excluded from 33 the individual income tax. 34 The bill also excludes this retirement income from the 35 -6- LSB 1672XS (3) 89 jm/jh 6/ 7
S.F. 37 calculation of net income for purposes of determining whether 1 or not a taxpayer’s net income exceeds the amount at which the 2 individual income tax will not be imposed pursuant to Code 3 section 422.5(3) or Code section 422.5(3B), and for which an 4 individual income tax return is not required to be filed, and 5 for purposes of calculating the alternate tax in Code section 6 422.5, and further provides that any retirement income excluded 7 from the individual income tax will not be added back to these 8 calculations for tax years beginning in 2025 or later. 9 The bill defines “retirement income” for purposes of the 10 exclusion. 11 Under current law, a taxpayer may exclude all retirement 12 pay, including certain survivor benefits, received from the 13 federal government for military service performed in the armed 14 forces, the armed forces military reserve, or national guard. 15 In addition, a taxpayer who is disabled, who is at least 55 16 years of age, or who is the surviving spouse or other specified 17 survivor of that qualifying taxpayer, may exclude a maximum 18 of $6,000 of other retirement income ($12,000 for married 19 couples). 20 The bill applies retroactively to January 1, 2021, for tax 21 years beginning on or after that date. 22 -7- LSB 1672XS (3) 89 jm/jh 7/ 7