Iowa Administrative Code › Agency 701 - Revenue Department › Title I - Administration › Chapter 40 - Determination of Net Income › Rule 701-40.47 - Partial Exclusion of Pensions and Other Retirement Benefits for Disabled Individuals, Individuals Who Are 55 Years of Age or Older, Surviving Spouses, and Survivors

Current through Register Vol. 47, No. 3, July 24, 2024
For tax years beginning on or after January 1, 1995, an
				  individual who is disabled, is 55 years of age or older, is a surviving spouse,
				  or is a survivor with an insurable interest in an individual who would have
				  qualified for the exclusion is eligible for a partial exclusion of retirement
				  benefits received in the tax year. For tax years beginning on or after January
				  1, 2001, the partial exclusion of retirement benefits received in the tax year
				  is increased up to a maximum of $6,000 for a person other than a husband or
				  wife who files a separate state return and up to a maximum of $12,000 for a
				  husband and wife who file a joint Iowa return. For tax years beginning on or
				  after January 1, 1998, the partial exclusion of retirement benefits received in
				  the tax year was increased up to a maximum of $5,000 for a person, other than a
				  husband or wife who files a separate state income tax return, and up to a
				  maximum of $10,000 for a husband and wife who file a joint state income tax
				  return. A husband and wife filing separate state income tax returns or
				  separately on a combined state return are allowed a combined exclusion of
				  retirement benefits of up to a maximum of $10,000 for tax years beginning in
				  1998, 1999 and 2000 and a combined exclusion of up to a maximum of $12,000 for
				  tax years beginning on or after January 1, 2001. The $10,000 or $12,000
				  exclusion shall be allocated to the husband and wife in the proportion that
				  each spouse's respective pension and retirement benefits received bear to the
				  total combined pension and retirement benefits received by both spouses. See
				  rule
				  701-4080.
				  (422) for the exclusion of military retirement pay for tax years beginning on
				  or after January 1, 2014.
Example 1. A married couple elected to file separately on the
				  combined return form. Both spouses were 55 years of age or older. The wife
				  received $95,000 in retirement benefits and the husband received $5,000 in
				  retirement benefits. Since the wife received 95 percent of the retirement
				  benefits, she would be entitled to 95 percent of the $10,000 retirement income
				  exclusion or a retirement income exclusion of $9,500. The husband would be
				  entitled to 5 percent of the $10,000 retirement income exclusion or an
				  exclusion of $500.
Example 2. A married couple elected to file separately on the
				  combined return form. Both spouses were 55 years of age or older. The husband
				  had $15,000 in retirement benefits from a pension. The wife received no
				  retirement benefits. In this situation, the husband can use the entire $10,000
				  retirement income exclusion to exclude $10,000 of his pension benefits since
				  the spouse did not use any of the $10,000 retirement income exclusion for the
				  tax year.
Example 3. A married couple elected to file separately on the
				  combined return form. One spouse was 52 years of age and received a pension
				  income of $20,000. The other spouse was 55 years of age and received no pension
				  income. Since the spouse receiving the pension income was not 55 years of age,
				  no exclusion is allowed on the Iowa return.
Example 4. A married couple elected to file separately on the
				  combined return form. One spouse was 52 years of age and received a pension
				  income of $10,000. The other spouse was 55 years of age and received a pension
				  income of $8,000. Since only one spouse receiving the pension income was 55
				  years of age, an exclusion of $8,000 is allowed on the Iowa return. The
				  exclusion of $8,000 is allowed since a married couple is allowed a combined
				  exclusion of up to $12,000.
For tax years beginning on or after January 1, 1995, but
				  prior to January 1, 1998, the retirement income exclusion was up to $3,000 for
				  single individuals, up to $3,000 for each married person filing a separate Iowa
				  return, up to $3,000 for each married person filing separately on the combined
				  return form, and up to $6,000 for married taxpayers filing joint Iowa returns.
				  For example, a married couple elected to file separately on the combined return
				  form and both spouses were 55 years of age or older. One spouse had $2,000 in
				  pension income that could be excluded, since the pension income was $3,000 or
				  less. The other spouse had $6,000 in pension income and could exclude $3,000 of
				  that income due to the retirement income exclusion. This second spouse could
				  not exclude an additional $1,000 of the up to $3,000 retirement income
				  exclusion that was not used by the other spouse.
"Insurable interest" is a term used in life insurance which
				  also applies to this rule and is defined to be "such an interest in the life of
				  the person insured, arising from the relations of the party obtaining the
				  insurance, either as credit of or surety for the assured, or from the ties of
				  blood or marriage to him, as would justify areasonable expectation of advantage
				  or benefit from the continuance of his life."Warnock v. Davis, 104 U.S. 775,
				  779, 26 L.Ed. 924;Connecticut Mut. Life Ins. Co. v. Luchs, 2 S.Ct. 949, 952,
				  108 U.S. 498, 27 L.Ed. 800; Appeal of Corson, 6 A. 213, 215, 113 Pa. 438, 57
				  Am. Rep. 479;Adams' Adm 'r v. Reed, Ky., 36 S.W. 568, 570;Trinity College v.
				  Travelers' Co., 18 S.E. 175, 176, 113 N.C. 244, 22 L.R.A. 291;Opitz v. Karel,
				  95 N.W. 948, 951, 118 Wis. 527, 62 L.R.A. 982. It is not necessary that the
				  expectation of advantage or profit should always be capable of pecuniary
				  estimation, for a parent has an insurable interest in the life of his child,
				  and a child in the life of his parent, a husband in the life of his wife, and a
				  wife in the life of her husband. The natural affection in cases of this kind is
				  considered as more powerful, as operating the more efficaciously, to protect
				  the life of the insured than any other consideration, but in all cases there
				  must be a reasonable ground, founded on relations to each other, either
				  pecuniary or of blood or affinity, to expect some benefit or advantage from the
				  continuance of the life of the assured.Warnock v. Davis, 104 U.S. 775, 26 L.Ed.
				  924; Appeal of Corson, 6 A. 213, 215, 113 Pa. 438, 57 Am. Rep. 479; Connecticut
				  Mut. Life Ins. Co. v. Luchs, 2 S.Ct. 949, 952, 108 U.S. 498, 27 L.Ed.
				  800.
For purposes of this rule, the term "insurable interest" will
				  be considered to apply to a beneficiary receiving retirement benefits due to
				  the death of a pensioner or annuitant under the same circumstances as if the
				  beneficiary were receiving life insurance benefits as a result of the death of
				  the pensioner or annuitant.
For purposes of this rule, the term "survivor" is a person
				  other than the surviving spouse of an annuitant or pensioner who is receiving
				  the annuity or pension benefits because the person was a beneficiary of the
				  pensioner or annuitant at the time of death of the pensioner or annuitant. In
				  addition, in order for this person to qualify for the partial exclusion of
				  pensions or retirement benefits, this survivor must have had an insurable
				  interest in the pensioner or annuitant at the time of death of the annuitant or
				  pensioner.
A survivor other than the surviving spouse will be considered
				  to have an insurable interest in the pensioner or annuitant if the survivor is
				  a son, daughter, mother, or father of the annuitant or pensioner. The
				  relationship of these individuals to the pensioner or annuitant is considered
				  to be so close that no separate pecuniary or monetary interest between the
				  pensioner or annuitant and any of these relatives must be established.
A survivor may include relatives of the pensioner or
				  annuitant other than those relatives that were mentioned above. However, before
				  any of these relatives can be considered to be a survivor for purposes of this
				  rule, the relative must have had some pecuniary interest in the continuation of
				  the life of the pensioner or annuitant. That is, the relative must establish a
				  relationship with the pensioner or annuitant that shows there was a reasonable
				  expectation of an advantage or benefit which the person would have received
				  with the continuance of the life of the pensioner or annuitant.
The fact that a niece of the pensioner or annuitant was named
				  beneficiary of an uncle's pension where the uncle had no closer relatives does
				  not in itself establish that the niece had an insurable interest in the pension
				  benefits, if the niece was not receiving monetary benefits or the niece did not
				  have some special relationship to the uncle at the time of the uncle's
				  death.
If a grandson was receiving college tuition regularly from
				  his grandfather and received the grandfather's pension as a beneficiary of the
				  grandfather after the grandfather's death, the grandson would be deemed to have
				  an insurable interest in the benefits and would be eligible for the partial
				  retirement benefit exclusion.
A person who is not related to the pensioner or annuitant,
				  such as a partner in a business or a creditor, may have an insurable interest
				  in the pensioner or annuitant. However, the burden of proof is on a nonrelated
				  person to show that the person had an insurable interest in the pensioner or
				  the annuitant at the time of death of the pensioner or annuitant.
There are numerous court cases which deal with whether a
				  person had established an insurable interest in the life of an individual that
				  was insured. These cases may be used as a guideline to determine whether or not
				  a person receiving a pension or annuity due to the death of an annuitant or
				  pensioner had an insurable interest in the annuitant or pensioner at the time
				  of death of the pensioner or annuitant. Thus, if a person would have met
				  criteria for an insurable interest for purposes of an interest in a person's
				  life insurance policy, the person would also be considered to be qualified for
				  an insurable interest in a pensioner or annuitant.
Retirement benefits subject to the retirement income
				  exclusion include, but are not limited to: benefits from defined benefit or
				  defined contribution pension and annuity plans, benefits from annuities,
				  incomes from individual retirement accounts, benefits from pension or annuity
				  plans contributed by an employer or maintained or contributed by a
				  self-employed person and benefits and earnings from deferred compensation
				  plans. However, the exclusion does not apply to social security benefits. A
				  surviving spouse who is not disabled or is not 55 years of age or older can
				  only exclude retirement benefits received as a result of the death of the other
				  spouse and on the basis that the deceased spouse would have been eligible for
				  the exclusion in the tax year. In order for a survivor other than the surviving
				  spouse to qualify for the partial exclusion of retirement benefits, the
				  survivor must have received the retirement benefits as a result of the death of
				  a pensioner or annuitant who would have qualified for the exclusion in the tax
				  year on the basis of age or disability. In addition, the survivor other than
				  the surviving spouse would have had to have an insurable interest in the
				  pensioner or annuitant at the time of the death of the pensioner or
				  annuitant.
For purposes of this rule, a disabled individual is a person
				  who is receiving benefits as a result of retirement from employment or
				  self-employment due to disability. In addition, a person is considered to be a
				  disabled individual if the individual is determined to be disabled in
				  accordance with criteria established by the Social Security Administration or
				  other federal or state governmental agency.
Note that the pension or other retirement benefits that are
				  excluded from taxation for certain individuals are to be considered as a part
				  of net income for purposes of determining whether or not a particular
				  individual's income is low enough to exempt that taxpayer from tax. In
				  addition, the pension or other retirement benefits that are excluded from
				  taxation for certain individuals are to be considered as a part of net income
				  for the alternative tax computation, which is available to all taxpayers except
				  those taxpayers filing as single individuals.
Finally, the pension or other retirement benefits are to be
				  considered as a part of net income for individuals using the single filing
				  status whose tax liabilities are limited so the liabilities cannot reduce the
				  person's net income plus exempt benefits below $9,000, or below $18,000 for
				  taxpayers 65 years of age or older for the 2007 and 2008 tax years, or below
				  $24,000 for taxpayers 65 years of age or older for the 2009 and subsequent tax
				  years.
This rule is intended to implement Iowa Code sections
				  4225.
				  and
				  4227..