Iowa Retirement Tax Friendliness

Iowa Retirement Taxes

While Iowa has no turquoise waters or white-sand beaches, it still offers plenty for seniors who are in or approaching retirement. Cities like Des Moines and Cedar Rapids offer culture and fine dining, while smaller towns like Ames and Dubuque have quiet streets and a low cost of living. But what about the Hawkeye State’s tax environment?

Iowa exempts all Social Security income from income taxes and provides a deduction on other types of retirement income. However, it is one of the few states with an inheritance tax. Its property taxes are also higher than average.

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Is Iowa tax-friendly for retirees?

Iowa is tax-friendly. Social Security benefits are exempt from the Iowa state income tax. For tax year 2022 (which you file in 2023), other forms of retirement income are taxed, but seniors are eligible for a deduction of up to $6,000 on that income, or $12,000 if they file jointly. However, for tax year 2023 (which you will file in 2024), Iowans age 55 and older will be exempt from paying state taxes on retirement income. 

Additionally, taxpayers 55 and older who do a Roth conversion may also qualify for a retirement income exemption. And those under age 55 may also get a tax break if they inherited a retirement plan from someone else. For more details, check the Iowa state website. 

Retirees should keep in mind that property taxes in Iowa come in above the national average. The state sales tax rate is 6%, and average local rates up the total to 6.94%. Iowa has its own tax on inheritances, with rates ranging from 5% to 15%.

Is Social Security taxable in Iowa?

No, Social Security benefits are not taxed in Iowa.

Are other forms of retirement income taxable in Iowa?

Income from a 401(k) or IRA and any type of pension income are subject to the Iowa income tax. However, anyone 55 and older is exempt from paying state taxes on this retirement income. And, as noted above, beneficiaries of inherited retirement plans may also qualify for a tax break.

How high are property taxes in Iowa?

The average effective property tax rate in the Hawkeye State is 1.50%. But while rates are relatively high, property taxes paid are barely above average. That’s because home values in Iowa are quite a bit lower than the national median.

What is the Iowa homestead credit?

The homestead credit is a form of property tax relief available to all Iowa homeowners who occupy their property as a permanent residence. It is a subtraction of $4,850 from assessed value.

How high are sales taxes in Iowa?

The state sales tax rate in Iowa is 6%, which is about average. All but six counties collect an additional local sales tax. So in practice, the average statewide rate is slightly higher at 6.94%. Residents of Iowa benefit from sales tax exemptions on food, prescription drugs and some types of non-prescription medication.

What other Iowa taxes should I be concerned about?

Iowa does have a state inheritance tax. However, the law is scheduled to be fully repealed by Jan. 1, 2025. Tax rates will gradually decrease annually until then.

The Iowa inheritance tax does not apply to lineal descendants (children, grandchildren, great-grandchildren, etc.), but does apply to other types of relatives. Siblings who receive an inheritance will face rates ranging from 3% to 6%. Nieces, nephews, aunts, uncles, cousins and all unrelated relatives face rates between 6% and 9%. Any amount greater than $100,000 faces the highest rate.

There are two important considerations in relation to this inheritance tax. The first is that estates with a net value of less than $25,000 are not subject to the tax. The second is that, while Iowa does not have a gift tax, gifts made within the three years prior to the decedent’s death may be subject to the inheritance tax.