Iowa Administrative Code › Agency 701 - Revenue Department › Title I - Administration › Chapter 41 - Determination of Taxable Income › Rule 701-41.3 - Federal Income Tax Deduction and Federal Refund

Current through Register Vol. 47, No. 3, July 24, 2024
Federal income taxes paid or accrued during the tax year are
				  a permissible deduction for Iowa income tax purposes, adjusted by any federal
				  refunds received or accrued during the tax year. Taxpayers who are not on an
				  accrual basis of accounting shall deduct their federal income taxes in the year
				  paid.
(1) Federal income tax
				deduction. The federal income tax deduction for cash basis taxpayers equals the
				sum of the following:
a. The entire amount of
				federal income tax withheld during the taxable year from compensation of the
				taxpayer. Where a husband and wife file separate returns or separately on a
				combined Iowa return, the actual federal income tax withheld from wages earned
				by either spouse or both spouses must be deducted by each in accordance with
				wage statement(s) and may not be prorated between the spouses.
b. Tax paid at any time during the taxable
				year on a filing of federal estimated tax or on any amendment to such filing.
				Where a husband and wife file separate Iowa returns or separately on a combined
				Iowa return, the federal estimated tax payments made in the tax year shall be
				prorated between the spouses by the ratio of each spouse's income not subject
				to withholding to the total income not subject to withholding of both spouses,
				including the federal estimated tax payment made in January of the tax year
				which was made for the prior tax year. If an estimated tax payment or portion
				of the payment is made for self-employment tax, then the spouse who has earned
				the self-employment income shall report the amount of estimated tax designated
				as self-employment tax. The federal tax deduction for the tax year does not
				include the self-employment tax paid through the federal estimated payments
				made in the tax year. In addition, the federal tax deduction does not include
				the additional .9 percent Medicare tax computed under Section 3101(b)(2) of the
				Internal Revenue Code for tax years beginning on or after January 1, 2013.
				However, one-half of the self-employment tax paid in the tax year is deductible
				in computing federal adjusted gross income pursuant to Section 164(f) of the
				Internal Revenue Code, so this self-employment tax is also deductible in
				computing net income. If an estimated tax payment or portion of the payment is
				made for the federal net investment income tax computed under Section 1411 of
				the Internal Revenue Code for tax years beginning on or after January 1, 2013,
				see paragraph 41.3(1)"f" on how the federal net income tax should be prorated
				between spouses.
c. Any additional
				federal tax on a prior federal return paid during the taxable year. Where a
				husband and wife file separately or separately on a combined Iowa return,
				additional federal tax paid shall be prorated between the spouses by the ratio
				of net income reported by each spouse to total net income of both spouses in
				the year for which the additional federal tax was paid. If additional federal
				tax paid includes federal self-employment tax, then that amount of
				self-employment tax shall be deducted by the spouse who earned the
				self-employment income. Any federal tax paid for a tax year in which an Iowa
				individual income tax return was not required to be filed is not allowed as a
				deduction in the year the federal taxes were paid. If additional federal tax
				paid includes the federal net investment income tax computed under Section 1411
				of the Internal Revenue Code for tax years beginning on or after January 1,
				2013, see paragraph 41.3(1)"f" on how the federal net income tax should be
				prorated between spouses.
Example 1. Individual A earned $8,500 in income for the 2004
				  tax year and paid $200 in federal tax with the filing of the federal return in
				  2005. Individual A was not required to file an Iowa return for 2004 because the
				  Iowa net income was under $9,000. Individual A cannot claim a deduction for the
				  $200 in federal tax paid on the 2005 Iowa return because an Iowa return was not
				  required to be filed for the 2004 tax year.
EXAMPLE 2. Individual B moved into Iowa on January 1, 2005,
				  and filed an initial Iowa individual income tax return for the 2005 tax year.
				  Individual B paid $1,000 in additional federal income tax with the filing of
				  the 2004 federal income tax return in 2005. Individual B cannot claim a
				  deduction for the $1,000 in federal tax paid on the 2005 Iowa return because an
				  Iowa return was not filed for the 2004 tax year.
d. The earned income credit computed under
				Section 32 of the Internal Revenue Code and the additional child tax credit
				computed under Section 24(d) of the Internal Revenue Code, to the extent that
				these credits reduce the federal income tax liability on the prior federal
				return filed during the taxable year. Where a husband and wife file separately
				or separately on a combined Iowa return, the earned income credit and the
				additional child tax credit shall be prorated between the spouses by the ratio
				of net income reported by each spouse to total net income of both spouses in
				the year for which these credits were claimed.
Example: Individual A filed a 2003 federal income tax return
				  reporting a tax liability of $2,000. Individual A had $500 of federal income
				  tax withheld and $2,500 of earned income credit. Individual A can deduct $5 00
				  as a federal income tax deduction on the Iowa return for 2003 and $ 1,5 00 as a
				  federal tax deduction on the Iowa return for 2004, since the federal tax
				  deduction is limited to the extent it reduced the federal income tax
				  liability.
e. The motor
				vehicle fuel tax credit computed under Section 34 of the Internal Revenue Code
				for the taxable year. Where a husband and wife file separately or separately on
				a combined Iowa return, the motor vehicle fuel tax credit shall be prorated
				between the spouses by the ratio of net income reported by each spouse to total
				net income of both spouses in the year for which these credits were claimed.
Example: Individual B filed a 2003 federal income tax return
				  reporting a tax liability of $1,500. Individual B paid $1,000 in federal
				  estimated tax during 2003 and claimed a $400 motor vehicle fuel tax credit on
				  the 2003 federal return. Individual B can deduct $1,400 as a federal income tax
				  deduction on the Iowa return for 2003.
f. For tax years beginning on or after
				January 1,2013, the federal net investment income tax, also known as the
				unearned income Medicare contribution tax, computed under Section 1411 of the
				Internal Revenue Code. The federal net investment income tax is computed on the
				lesser of net investment income for the tax year or the excess of the modified
				adjusted gross income for the tax year over a threshold amount.
Where a married couple file separate returns or separately on
				  a combined Iowa return, the federal net investment income tax, if computed on
				  net investment income, shall be prorated between the spouses by the ratio of
				  net investment income reported by each spouse to total net investment income of
				  both spouses in the year for which the federal net investment income tax was
				  paid. Where a married couple file separate returns or separately on a combined
				  Iowa return, the federal net investment income tax, if computed on the excess
				  of modified adjusted gross income over a threshold amount, shall be prorated
				  between the spouses by the ratio of net income reported by each spouse to total
				  net income of both spouses in the year for which the federal net investment
				  income tax was paid.