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(Effective Tax Year 2005)
Active-duty military service pay is taxable only by the state in which the armed forces service member is a legal resident, which is usually the state of residence at the time he/she enters the service. In general, income of an Iowa resident in military service is taxable to the same extent as it is taxable for Federal purposes, even if the Iowa resident is stationed outside of Iowa or outside of the United States.
WHEN MUST A MILITARY PERSON FILE AN IOWA INCOME TAX RETURN?
If a military person is an Iowa resident, he or she must file an Iowa individual income tax return if:
School District Surtax: For tax years beginning on or after January 1, 2005, the school district surtax is applicable for resident members of the armed forces of the United States living in an Iowa school district, even if the member is not physically present in Iowa on the last day of the tax year. (42.1)
Each person has one and only one state of residence. A person may be a resident of a state even though he or she does not actually live in the state.
A military person does not lose “home state” residency simply by being absent from the state while in the military. (from Section 574 of the Soldiers and Sailors Civil Relief Act)
When is a military person an Iowa resident?
A military person is an Iowa resident if:
A person remains an Iowa resident until positive action is taken to establish residency in another state.
Establishing residency in another state
To establish residency in another state, a military person must first complete form DD2058, State of Legal Residence Certificate, which is available from the payroll officer of the Military Office of Personnel. This alone does not establish residency. A combination of the actions listed below is required to establish legal residence in another state.
If steps are not taken to change residency, a military person remains a resident of Iowa and is subject to Iowa income tax laws.
The director of the Iowa Department of Revenue may require an individual to provide proof that residency has been established in another state.
Residency of spouses of military personnel
A spouse of an Iowa-resident military person is not considered a resident of Iowa simply by marriage. If, however, the spouse was an Iowa resident when they married, the spouse is an Iowa resident until other action is taken to establish residency in another state.
If the spouse is an Iowa resident and has Iowa-source income, it may be beneficial to use filing status 3 (married filing separately on the combined return form).
Filing status 3 or 4 (married filing separately on the combined return or married filing separate returns) may be used by nonresident spouses with no Iowa-source incomes.
Nonresidents/part-year residents stationed in Iowa
Military persons who are not residents of Iowa are required to file Iowa income tax returns if their all-source income meets the above requirements and their Iowa-source income is $1,000 or more.
Nonresident Military Income
Beginning with tax year 2003, the following apply for Iowa as a result of Federal legislation. PLEASE NOTE: Nonresident service members can file amended returns for years prior to 2004 that are still within the statute of limitations for refund.
The nonresident military taxpayer does not include military pay on line 1 of the IA1040 and also does not report it as Iowa income on the IA126. The net result is a reduction of the tax rate on any other Iowa-source income.
In general, this applies only to active duty military and does not include the National Guard or reserve personnel.
Exceptions may exist if nonresident military are under active duty orders under a specific federal section -- 502(f) of Title 32 of the United States Code.
All income, excluding military pay, is included on the Iowa income tax return (IA 1040) and tax is initially calculated on all-source income. Once this is done, the nonresident or part-year resident turns to another Iowa form, the IA 126 Nonresident and Part-Year Resident Schedule. Only Iowa-source income is included on this form and will not include military pay when calculating the credit. That credit is entered on the IA 1040 and is designed to minimize the taxation of income by Iowa and the other state.
Nonresidents and part-year residents must file both the IA 1040 and the IA 126 with a complete copy of the federal return. They cannot use the IA 1040 A short form.
WHAT INCOME IS SUBJECT TO IOWA TAX? (40.5)
Military pay to Iowa residents is taxable to Iowa to the same extent it is taxable on the Federal level regardless of where the person is stationed when it is received.
Other income earned by an Iowa resident stationed in or out of Iowa is also taxable to Iowa to the same extent it is taxable on the Federal level. If any of that income is correctly taxed by another state, then Iowa allows an out-of-state tax credit on the IA 1040. This credit is calculated on the IA 130 form, which must be attached to the IA 1040 with a copy of the other state's return.
WHAT INCOME IS NOT SUBJECT TO IOWA TAX?
Combat zone pay
Income excluded by the Federal government is also excluded for Iowa income tax purposes. For example, combat zone pay is excluded on the Iowa return because it is excluded for Federal income tax purposes.
The Federal Military Family Tax Relief Act of 2003 provides for a number of tax breaks related to military personnel. Iowa follows the Federal treatment of the military adjustments to gross income.
The Internal Revenue Service Web site is your best source of qualifying combat zones and tax breaks related to military personnel.
Operation Iraqi Freedom, Operation Noble Eagle, or Operation Enduring Freedom (40.61)
There is an income tax exemption for active duty pay received by a person in the National Guard or armed forces military reserve for service performed on or after January 1, 2003, pursuant to military orders for Operation Iraqi Freedom, Operation Noble Eagle, or Operation Enduring Freedom. The individual needs only to be called to active duty under the appropriate orders to qualify for the exemption of active duty pay. The individual does not have to be serving overseas to be eligible for the exemption, but can be serving in Iowa or elsewhere in the United States under the appropriate military orders and qualify for the exemption for active duty pay.
Note that if a person in the National Guard or military reserve was called to active duty pursuant to military orders for an operation or purpose other than the operations specified above, the active duty pay is not exempt from Iowa income tax. (40.61)
Include all income on line 1 with other W-2, 1099, or W-G income. Qualifying military income is then deducted on line 24. If you file a paper return, attach a copy of your orders. If you file electronically, keep a copy of your orders with your tax records in case the department requests them at a later date.
Persian Gulf Conflict and/or Bosnia-Herzegovina Peacekeeping (40.40, 40.51)
There is an income tax exemption for active-duty pay received by a person in the National Guard or armed forces military reserve for services performed on or after August 2, 1990, pursuant to military orders related to the Persian Gulf Conflict and/or for services performed on or after November 21, 1995, pursuant to military orders related to peacekeeping in Bosnia-Herzegovina.
Military Student Loan Exemption (40.63)
Military student loan repayments included in federal adjusted gross income are exempt from Iowa income tax if the following criteria are met.
This exemption may be taken by persons in the:
The individual must be on active duty at the time of the loan repayment.
Include the loan repayment amount in line 1 and deduct it in line 24. (40.63)
Exclusion of Distributions from Retirement Plans by National Guard members and members of military reserve forces of the United States (40.58)
If a National Guard member or member of the military reserve is called to active state or Federal duty and makes a withdrawal from a qualified retirement account of the member, the amount of the withdrawal is not subject to Iowa income tax or state tax penalty. If this income is reported as taxable pension income on line 9 of the Iowa return, enter that amount on line 24 of the Iowa 1040.
FORGIVENESS OF TAX: (39.11)
Iowa income tax is forgiven if:
Single status: Iowa income tax is forgiven for the tax year in which the individual was killed or was missing and presumed dead and for the tax year prior to the year of death.
Married / year of death: If the deceased was married at the time of death, all tax is forgiven for the year of death if the filing status is joint or married filing separately on the combined return for that tax year.
Married / prior year: All tax is forgiven if the deceased was married at the time of death and a joint return or a married filing separate return was filed for the year prior to death. Please note that if the deceased had filed using the married filing separately on the combine return status, only the state income tax attributable to the deceased will be forgiven. Prior-year returns cannot be amended to change the filing status. (39.11)
RETURN DUE DATE AND EXTENSIONS (39.12, 39.14)
The usual filing deadline for Iowa income tax returns is April 30. If 90 percent of the tax due is paid by that time, the deadline is extended to October 31. No extension form is available or required.
Qualifying individuals are granted extensions under certain circumstances for filing returns and for other acts related to the department. These are listed below.
Who qualifies for an extension?
“ Other acts related to the department” includes:
In general, the additional time period for filing state returns and performing other acts is 180 days after the person leaves the combat zone or hazardous duty area.
IRS MILITARY WEB PAGE:
For further information about Federal provisions, go to the Internal Revenue Service Web site at www.irs.gov