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2013 Iowa 1040 Expanded Instructions
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A nonresident or part-year resident of Iowa must complete the IA 1040 in the same way an Iowa resident does, by reporting the individual’s total net income, including income earned outside Iowa.  In addition, the taxpayer is allowed adjustments to income, a federal tax deduction, and standard or itemized deductions on the same basis as if the taxpayer were a resident of Iowa.

The nonresident / part-year resident then completes a Schedule IA 126.  On the IA 126, only Iowa income is reported and a percentage of Iowa income to total income is determined.  The taxpayer receives a credit against the initial tax liability based on the percentage of income from outside Iowa.  Therefore, the result of this credit is that only Iowa-source income is taxed.

Although non-Iowa income is used to calculate the initial tax liability at the appropriate tax rate, the non-Iowa income itself is not subject to tax.  By using this method, Iowa taxes nonresidents’ / part-year residents’ Iowa-source income at the same rate it taxes Iowa residents.  Iowa, like most states and the federal government, uses a graduated tax rate system based on level of income

So, a nonresident of Iowa with all-source income of $250,000 and $10,000 of Iowa income, will use the same tax rate as an Iowa resident with $250,000 of income to calculate their initial tax liability, rather than using the same tax rate as an Iowa resident with $10,000 of total income.