Iowa Enacts Sweeping Tax Reform

The state of Iowa passed a sweeping tax law change that materially improves the state's tax-friendly environment. The new law includes a significant reduction in rates with the highest tax bracket for individual taxpayers to be reduced from 8.5% down to 3.9% and the corporate rate decreasing from 12% to 5.5%. The law includes a one-time exemption on the gain from company stock and eliminates inheritance tax. In addition, retirement income from pensions, IRAs, and annuities will be tax-free for retirees over age 55. An interesting provision is that qualifying retired farmers may also exclude certain farm rental income from taxable income as well. Social Security was already tax-exempt and the latest rounds of changes will mean many retirees will owe very little or no state income tax at all. Parts of Iowa's new tax law, including tax-exempt retirement income, will be effective January 1, 2023, while others like the rate change will be transitioned in gradually over the next four years. The tax relief will reduce state revenues by the time it is fully implemented in 2027, but it is estimated budget surpluses and growth in incomes will offset the reduction.

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Expiration of Child Tax Credits

This year the Child Tax Credit will revert back to the program before the American Rescue Plan expanded it in 2021. For 2022 the credit will be worth up to $2,000 per child, with the money to be distributed in the form of a single end of year tax credit. This will either reduce the size of the recipient’s tax bill or increase their tax refund.

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IRS Issues Inflation Adjustments for 2022

The annual inflation adjustments were issued by the IRS. Income thresholds for all tax brackets were adjusted upward and the standard deduction will increase by $400 for single and head of household filing statuses and $800 for married filing jointly. The income thresholds for making contributions to Traditional and Roth IRAs were adjusted upward, but the amount you may contribute for the year remains at $6,000 for people under age 50 and $7,000 for people over age 50. However, the amount allowed to be contributed to 401k plans increase from $19,500 to $20,500. The catch-up contribution for people over age 50 remains the same at $6,500 for a total of $27,000 in contributions for 2022.

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