Senate File 576 - Introduced SENATE FILE 576 BY COMMITTEE ON WAYS AND MEANS (SUCCESSOR TO SSB 1250) A BILL FOR An Act authorizing future tax contingencies, reducing the 1 state inheritance tax rates and providing for the future 2 repeal of the state inheritance tax and state qualified 3 use inheritance tax, and including effective date and 4 retroactive applicability provisions. 5 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 6 TLSB 2794SV (1) 89 jm/jh

S.F. 576 DIVISION I 1 FUTURE TAX CHANGES 2 Section 1. 2018 Iowa Acts, chapter 1161, section 133, is 3 amended by striking the section and inserting in lieu thereof 4 the following: 5 SEC. 133. EFFECTIVE DATE. This division of this Act takes 6 effect January 1, 2023. 7 DIVISION II 8 INHERITANCE TAX 9 Sec. 2. Section 450.10, Code 2021, is amended by adding the 10 following new subsection: 11 NEW SUBSECTION . 7. a. In lieu of each rate of tax imposed 12 in subsections 1 through 4, for property passing from the 13 estate of a decedent dying on or after January 1, 2021, but 14 before January 1, 2022, there shall be imposed a rate of tax 15 equal to the applicable tax rate in subsections 1 through 4, 16 reduced by twenty-five percent, and rounded to the nearest 17 one-hundredth of one percent. 18 b. In lieu of each rate of tax imposed in subsections 1 19 through 4, for property passing from the estate of a decedent 20 dying on or after January 1, 2022, but before January 1, 2023, 21 there shall be imposed a rate of tax equal to the applicable 22 tax rate in subsections 1 through 4, reduced by fifty percent, 23 and rounded to the nearest one-hundredth of one percent. 24 c. In lieu of each rate of tax imposed in subsections 1 25 through 4, for property passing from the estate of a decedent 26 dying on or after January 1, 2023, but before January 1, 2024, 27 there shall be imposed a rate of tax equal to the applicable 28 tax rate in subsections 1 through 4, reduced by seventy-five 29 percent, and rounded to the nearest one-hundredth of one 30 percent. 31 Sec. 3. NEW SECTION . 450.98 Tax repealed. 32 Effective January 1, 2024, this chapter shall not apply to 33 property of estates of decedents dying on or after January 1, 34 2024. The inheritance tax shall not be imposed under this 35 -1- LSB 2794SV (1) 89 jm/jh 1/ 6

S.F. 576 chapter in the event the decedent dies on or after January 1, 1 2024, and, to this extent, this chapter is repealed. 2 Sec. 4. NEW SECTION . 450B.8 Tax repealed. 3 Effective January 1, 2024, this chapter shall not apply to 4 property of estates of decedents dying on or after January 1, 5 2024. The qualified use inheritance tax shall not be imposed 6 under this chapter in the event the decedent dies on or after 7 January 1, 2024, and, to this extent, this chapter is repealed. 8 Sec. 5. CODE EDITOR DIRECTIVE. The Code editor is directed 9 to remove chapters 450 and 450B from the Code and correct 10 appropriate references to chapters 450 and 450B and appropriate 11 references to the inheritance tax and qualified use inheritance 12 tax effective January 1, 2034. 13 Sec. 6. EFFECTIVE DATE. This division of this Act, being 14 deemed of immediate importance, takes effect upon enactment. 15 Sec. 7. APPLICABILITY. This division of this Act applies 16 retroactively to the estates of decedents dying on or after 17 January 1, 2021. 18 EXPLANATION 19 The inclusion of this explanation does not constitute agreement with 20 the explanation’s substance by the members of the general assembly. 21 This bill authorizes future tax contingencies and 22 proportionally reduces over a three-year period the rates of 23 tax applicable to the state inheritance tax, beginning with 24 estates of decedents dying on or after January 1, 2021, and 25 repeals the state inheritance tax beginning with estates of 26 decedents dying on or after January 1, 2024. 27 DIVISION I —— FUTURE TAX CHANGES. The bill amends 2018 Iowa 28 Acts, chapter 1161, section 133 (trigger), by striking the two 29 conditions necessary for the trigger to occur, and specifies 30 the provisions in 2018 Iowa Acts, chapter 1161, sections 31 99-132, take effect January 1, 2023. 32 Currently, the two conditions are necessary for the trigger 33 to occur include net general fund revenues for the fiscal year 34 ending June 30, 2022, equaling or exceeding $8.3146 billion, 35 -2- LSB 2794SV (1) 89 jm/jh 2/ 6

S.F. 576 and also equaling or exceeding 104 percent of the net general 1 fund revenues for the fiscal year ending June 30, 2021. If 2 these two conditions are not satisfied, current law institutes 3 the changes for tax years beginning on or after the January 1 4 following the first fiscal year for which the two conditions 5 do occur. By striking the “trigger”, the bill sets in motion 6 numerous tax changes for tax years beginning on or after 7 January 1, 2023, described below. 8 INDIVIDUAL INCOME TAX. The tax changes include reducing the 9 number of individual income tax brackets from nine to four, and 10 modifying the taxable income amounts and tax rates as follows: 11 Income over: But not over: Tax Rate: 12 1) $0 $6,000 4.40% 13 2) $6,000 $30,000 4.82% 14 3) $30,000 $75,000 5.70% 15 4) $75,000 6.50% 16 For a married couple filing a joint return, the taxable 17 income amounts in each bracket above are doubled. Also, the 18 taxable income amounts in each bracket above will be indexed to 19 inflation and increased in future tax years, beginning in the 20 tax year following the 2023 tax year. 21 INDIVIDUAL INCOME TAX CALCULATION. Under current law, the 22 starting point for computing the Iowa individual income tax is 23 federal adjusted gross income before the net operating loss 24 deduction, which is generally a taxpayer’s gross income minus 25 several deductions. From that point, Iowa requires several 26 adjustments and then provides taxpayers with a deduction 27 for federal income taxes paid, and the option to deduct a 28 standard deduction or itemized deductions. The bill changes 29 the starting point for computing the individual income tax 30 to federal taxable income, which includes all deductions and 31 adjustments taken at the federal level in computing tax, 32 including a standard deduction or itemized deductions, and the 33 qualified business income deduction allowed for certain income 34 earned from a pass-through entity. Because the starting point 35 -3- LSB 2794SV (1) 89 jm/jh 3/ 6

S.F. 576 changes to federal taxable income, and federal law does not 1 provide for the filing status of married filing separately 2 on a combined return, the bill repeals that filing status 3 option for Iowa tax purposes. Because net operating loss is 4 no longer calculated at the state level, the bill requires a 5 taxpayer to add back any federal net operating loss deduction 6 carried over from a taxable year beginning prior to the 2023 7 tax year, but allows taxpayers to deduct any remaining Iowa net 8 operating loss from a prior taxable year. The bill repeals the 9 individual alternative minimum tax (AMT), allows an individual 10 to claim any remaining AMT credit against the individual’s 11 regular tax liability for the 2023 tax year, and then repeals 12 the AMT credit in the tax year following the 2023 tax year. 13 The bill repeals most Iowa-specific deductions, exemptions, 14 and adjustments currently available when computing net income 15 and taxable income under Iowa law, including the Iowa optional 16 standard deduction and all itemized deductions, and the ability 17 to deduct federal income taxes, except for a one-year phase 18 out in the 2023 tax year for taxes paid, or refunds received, 19 that relate to a prior year. The bill maintains the add-back 20 for income from securities that are federally exempt but not 21 state-exempt, and for bonus depreciation amounts. The bill 22 maintains the general pension exclusion and the deduction 23 for income from federal securities. The bill maintains the 24 deduction for contributions to the Iowa 529 plan, the Iowa ABLE 25 plan, a first-time homebuyer savings account, and an individual 26 development account. The bill also maintains the deductions 27 for military pension income, military active duty pay, social 28 security retirement benefits, certain payments received for 29 providing unskilled in-home health care, certain amounts 30 received from the veterans trust fund, victim compensation 31 awards, biodiesel production refunds, certain wages paid 32 to individuals with disabilities or individuals previously 33 convicted of a felony, certain organ donations, and Segal 34 AmeriCorps education award payments. The bill modifies the 35 -4- LSB 2794SV (1) 89 jm/jh 4/ 6

S.F. 576 existing deduction for health insurance payments in Code 1 section 422.7(29) to make the deduction only applicable to 2 taxpayers who are at least 65 years old and who have net 3 income below $100,000. The bill also modifies the existing 4 capital gain deduction in Code section 422.7(21) to restrict 5 the deduction to the sale of real property used in farming 6 businesses by permitting the taxpayer to take the deduction 7 if either of the following apply: the taxpayer materially 8 participated in the farming business for at least 10 years and 9 held the real property for at least 10 years; or the taxpayer 10 sold the real property to a relative. The bill expands the 11 definition of “relative” to include an entity in which a 12 relative of the taxpayer has a legal or equitable interest in 13 the entity as an owner, member, partner, or beneficiary. The 14 bill provides a new deduction for any income of an employee 15 resulting from the payment by an employer, whether paid to 16 the employee or a lender, of principal or interest on the 17 employee’s qualified education loan. The bill also modifies 18 the calculation of net income for purposes of the alternate 19 tax calculation in Code section 422.5(3) and (3B), and the tax 20 return filing thresholds in Code section 422.13, to require 21 that any amount of itemized deduction, standard deduction, 22 personal exemption deduction, or qualified business income 23 deduction that was allowed in computing federal taxable income 24 shall be added back. 25 CORPORATE INCOME TAX AND FRANCHISE TAX CALCULATION. Under 26 current law, the starting point for calculating the corporate 27 income tax and franchise tax is federal taxable income before 28 the net operating loss deduction, because net operating loss is 29 calculated at the state level. The bill repeals the separate 30 calculation of net operating loss at the state level. As a 31 result, the bill requires taxpayers to add back any federal 32 net operating loss deduction carried over from a taxable year 33 beginning prior to the trigger year, but allows taxpayers to 34 deduct any remaining Iowa net operating loss from a prior 35 -5- LSB 2794SV (1) 89 jm/jh 5/ 6

S.F. 576 taxable year. The bill also repeals most Iowa-specific 1 deductions, exemptions, and adjustments currently available 2 when computing net income and taxable income under Iowa law. 3 The bill maintains the add-back for income from securities 4 that are federally exempt but not state exempt, and for bonus 5 depreciation amounts. The bill maintains the deductions for 6 income from federal securities, for foreign dividend and 7 subpart F income, for certain wages paid to individuals with 8 disabilities or individuals previously convicted of a felony, 9 and for biodiesel production refunds. 10 DIVISION II —— INHERITANCE TAX. For decedents dying on or 11 after January 1, 2021, but before January 1, 2022, the rates 12 of tax applicable to the state inheritance tax are reduced 25 13 percent. For decedents dying on or after January 1, 2022, but 14 before January 1, 2023, the rates of tax applicable to the 15 state inheritance tax are reduced 50 percent. For decedents 16 dying on or after January 1, 2023, but before January 1, 2024, 17 the rates of tax applicable to the state inheritance tax are 18 reduced 75 percent. 19 The bill then repeals the state inheritance tax and the state 20 qualified use inheritance tax effective January 1, 2024, for 21 property of estates of decedents dying on or after January 1, 22 2024. Inheritance tax will not be imposed on any property in 23 the event of the death of an individual on or after January 1, 24 2024. The bill directs the Code editor to remove Code chapters 25 450 (inheritance tax) and 450B (qualified use inheritance tax) 26 from the Code effective January 1, 2034. 27 The division takes effect upon enactment and applies 28 retroactively to the estates of decedents dying on or after 29 January 1, 2021. 30 -6- LSB 2794SV (1) 89 jm/jh 6/ 6