21. PENSION / RETIREMENT INCOME EXCLUSION.
Effective for tax years beginning on or after 1-1-2010, a change to Iowa Administrative Rule 701-40.47 may impact how the pension/retirement income exclusion is determined for married individuals.
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 the pensioner or retirement income recipient must meet one of the following conditions:
- 55 years of age or older on December 31, 2010, or
- disabled, or
- a surviving spouse or a survivor having an insurable interest in
an individual who has qualified for the exclusion in 2010 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.
Prior to the change to Rule 40.47, if either spouse was eligible for the exclusion, both spouses could potentially take the exclusion on Line 21. Even a spouse who did not qualify on their own might have been able to take the exclusion if the other spouse was eligible.
Beginning with tax year 2010, only the pension income of the spouse who meets the eligibility requirements can be shown on Line 21. Please see the examples below for further guidance.
EXAMPLE 1: A married couple elected to file separately on the combined return form. One spouse was 52 years of age and received a pension income of $20,000. The other spouse was 55 years of age and received no pension income. Since the spouse receiving the pension income was not 55 years of age, no exclusion is allowed on the Iowa return.
EXAMPLE 2: A married couple elected to file separately on the combined return form. One spouse was 52 years of age and received a pension income of $10,000. The other spouse was 55 years of age and received a pension income of $8,000. Since only one spouse receiving the pension income was 55 years of age, an exclusion of $8,000 is allowed on the Iowa return. The exclusion of $8,000 is allowed since a married couple is allowed a combined exclusion of up to $12,000.
EXAMPLE 3: A married couple elected to file a joint return. One spouse was 52 years of age and received a pension income of $10,000. The other spouse was 55 years of age and received a pension income of $5,000. Since only one spouse receiving the pension income was 55 years of age, an exclusion of $5,000 is allowed on the Iowa return
EXAMPLE 4: A spouse dies during the year at the age of 60 without receiving any pension income. The surviving spouse is not disabled, is 50 years old, and receives a pension from a previous employer. The surviving spouse is not eligible for any pension exclusion. Since the surviving spouse is the only one receiving the pension income, the eligibility of the deceased spouse doesn't allow the survivor to take the exclusion.
Had the pension income been attributable to the deceased spouse, then the surviving spouse could take the exclusion.
EXAMPLE 5: A 54-year old single filer receives $5,000 pension income of a deceased parent. The deceased parent would have qualified for the pension exclusion. The 54-year old also receives pension income of his own in the amount of $10,000. The 54-year old can take the pension exclusion in the amount of $5,000 based upon his insurable interest in the parent who would have qualified.
EXAMPLE 6: Same facts as example 5, except the 54-year old is married and the amount of the parent's pension income received is $15,000. The 54-year old's spouse does not meet the pension exclusion requirements either. The allowable pension exclusion is $12,000.
Married Separate Filers:
If both spouses have pension income, and both meet the eligibility requirements, the exclusion of up to $12,000 is prorated between them in the ratio that each spouse's pension income relates to the total pension income received by both spouses. If only one spouse has pension income and meets the eligibility requirements, that spouse takes the entire exclusion of up to $12,000. The spouse who has no pension income receives no exclusion.
(Examples of how to prorate)