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WHAT'S NEW?

2005 LEGISLATIVE UPDATE

The Iowa Legislature has enacted legislation, House File 186, to update Iowa's tax laws to incorporate changes made by Congress to the federal Internal Revenue Code in 2003, 2004 and January 2005. Previously, Iowa law had only updated references to the Internal Revenue Code through January 1, 2003. Based on the passage of House File 186, references to the Internal Revenue Code are now updated through January 31, 2005. This includes the provisions of the following legislation:

* Jobs and Growth Tax Relief Reconciliation Act of 2003

* Military Family Tax Relief Act of 2003

* Medicare Prescription Drug, Improvement and Modernization Act of 2003

* Working Families Tax Relief Act of 2004

* American Jobs Creation Act of 2004

* Tsunami Relief Charitable Contribution Act of 2005

Due to the passage of House File 186, the following adjustments are allowed for Iowa tax purposes:

* A deduction is allowed for contributions to health savings accounts starting in 2004

* Members of the National Guard and armed forces military reserve can deduct unreimbursed travel expenses to the same extent that is allowed for federal purposes for 2003 and subsequent years. This deduction for Iowa was previously limited to $1,500

* Teachers are allowed a deduction up to $250 for out-of-pocket classroom expenses for 2004 and 2005

* Manufacturers are allowed a deduction relating to income from domestic production activities starting in 2005 * The increase in section 179 expensing is allowed for 2006 and 2007 * Taxpayers can claim an itemized deduction for contributions made in January 2005 for relief of victims of the Indian Ocean tsunami on the 2004 Iowa return if these contributions were deducted on the 2004 federal return.

A specific provision of House File 186 addressed the issue of itemized deductions for state sales tax. As part of the American Jobs Creation Act of 2004, individuals have the option of claiming an itemized deduction of state sales and use tax or state income tax paid for the 2004 and 2005 tax year on the Federal 1040. For Iowa purposes, the itemized deduction for state sales and use tax paid is used only if a taxpayer claimed an itemized deduction for state sales and use tax on the federal return. If a taxpayer claimed state income taxes as an itemized deduction on the federal return, or claimed the standard deduction on the federal return, then the taxpayer cannot claim an itemized deduction on the Iowa return for state sales and use tax paid.

While Iowa is now coupled with the Internal Revenue Code through January 31, 2005, Iowa continues to decouple with the 30% "bonus depreciation" for assets acquired after September 10, 2001, but before May 6, 2003.

Adjusted gross income (AGI) for tax year 2004:

Iowa Itemized Deduction Worksheet 41-104: Federal adjusted gross income (AGI) for 2004 has changed to $142,700 ($71,350 when claiming married filing separately for Federal purposes). Those whose income exceeds the above amounts may not be not be able to deduct all of their itemized deductions and must complete the department's worksheet 41-104.

Checkoff: A fourth checkoff has been added -- Firefighters Checkoff. See line 59.

Federal bonus depreciation and/or increased Section 179 expensing

The Iowa Legislature addressed bonus depreciation in a special session held in September 2004. The following files are relevant to bonus depreciation and the IA 1040:

FICA payments for tax year 2004 in excess of $5,449.80 for Social Security tax for each person and credit for Federal tax paid on fuel can be deducted as a Federal tax payment on line 33.

Interest rate for tax year 2005: 6% yearly; 0.5% per month

Iowa Educational Savings Plan Trust: The deductible amount for tax year 2004 cannot exceed $2,290 per beneficiary. See line 24.

Military

Power of Attorney Form

The Federal Power of Attorney form is now accepted by the Iowa Department of Revenue. You must write a statement on the Federal form that indicates you are submitting it for use with State of Iowa forms. The statement needs to be initialed by the taxpayer.

Sales Tax and Schedule A

The American Jobs Creation Act of 2004 allows individuals the option of claiming an itemized deduction of state income tax paid or state sales and use tax paid for the 2004 and 2005 tax year only for federal tax purposes.

For Iowa purposes, the itemized deduction for state sales and use tax paid is allowed only if the taxpayer claimed an itemized deduction for state sales and use tax paid on the federal return. If a taxpayer claimed state income taxes as an itemized deduction on the federal return, or claimed the standard deduction on the federal return, the taxpayer cannot claim an itemized deduction for state sales and use tax paid on the Iowa return. In addition, if taxpayer claims the itemized deduction for state sales and use tax paid on the federal return, taxpayer cannot claim an itemized deduction for the school district surtax and EMS surtax on the Iowa return.

Standard Deduction for tax year 2004:

Filing Status 1: $1,580
Filing Status 3 & 4: $1,580 for each spouse
Filing Status 2, 5 or 6: $3,880

Voter Registration Card

This card will no longer be inserted in the Iowa 1040 Tax Booklet. However, a link to the Secretary of State's Voter Registration Web page is available on our Web site.

WebFile

Iowa's WebFile program is no longer available. In its place, Iowa is offering the e-file option known as Free File Alliance. See our Web site for further information.