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21. PENSION/RETIREMENT INCOME EXCLUSION.

If you or your spouse receive a pension, an annuity, a self-employed retirement plan, deferred compensation, IRA distribution or other retirement plan benefits, you may be eligible to exclude from Iowa income tax part or all of the retirement income that is taxable on your federal return. The Roth conversion income, included in net income, is eligible for this exclusion. Social Security benefits are not included.

The exclusion can be up to $6,000 for individuals who file status 1, 5 or 6 and up to $12,000 for married taxpayers who file status 2, 3 or 4. (If, for example, an individual has $5,000 in pension/retirement income, the exclusion will be the actual $5,000, not the maximum of $6,000.)

To take this exclusion you or your spouse must meet one of the following conditions:

  1. 55 years of age or older on December 31, 2008, or
  2. disabled, or
  3. a surviving spouse or a survivor having an insurable interest in an individual who would have qualified for the exclusion in 2008 on the basis of age or disability.

A survivor other than the surviving spouse is considered to have an "insurable interest" if the survivor is a son, daughter, mother or father of the annuitant or pensioner.

Married Separate Filers: If both spouses have pension income, whether both or only one meet the eligibility requirements, the exclusion of up to $12,000 is prorated between them in the ratio that each spouse’s pension relates to the total pension received by both spouses.

(Examples of how to prorate)

EXAMPLE

The husband has a taxable pension of $35,000.
The wife has a taxable pension of $15,000.

Total of husband and wife: 35,000+15,000 = 50,000

Husband's percent of total income: 35,000 divided by 50,000 = 70%

Husband's portion of the exclusion: Multiply $12,000 (the maximum exclusion) by 70% = $8,400. The wife’s portion is $12,000 – $8,400 = $3,600.

If only one spouse has pension income, that spouse would take the entire exclusion of up to $12,000. The spouse who has no pension income would receive no exclusion, even if that spouse is the only one who meets the eligibility requirements.

This information is based on Rule 40.47.

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