Military Retirement Benefits Exclusion from Iowa Income Tax

Legislation Enacted

Governor Branstad signed Senate File 303 on May 26, 2014, which provides for the exclusion of military retirement benefits from Iowa individual income tax retroactive to the tax year beginning on or after January 1, 2014. 

The exclusion also applies to military survivor benefits received under 10 U.S.C. 1447.  The exemption is available for both residents and nonresidents of Iowa.  

The exemption is in addition to the general $6,000/$12,000 pension exclusion available for Iowa individual income tax for taxpayers 55 years of age or older.  

For example, if a married individual age 65 receives $20,000 in military retirement pay and $25,000 in pension income from John Deere, that individual will be able to exclude $32,000 ($20,000 plus $12,000) of pension income on their Iowa income tax return.

Retroactive to January 1, 2014

Because the change is retroactive to January 1, 2014, individuals receiving military retirement benefits may immediately change or eliminate the amount of Iowa tax being withheld on their military pension. 

How to Change Military Pension Withholding

Form IA W-4P, Withholding Certificate for Pension or Annuity Payments should be completed and sent to the following address:

Defense Finance and Accounting Service (DFAS)
US Military Retirement Pay
P.O. Box 7130
London, KY  40742-7130

DFAS can also be contacted toll free at 1-800-321-1080

Filing Threshold and Alternative Tax Calculation

In addition, the military retirement pay, unlike other pension income, is not included in the calculation of the filing threshold to determine if a taxpayer has to file an Iowa income tax return, and it is not included in the calculation of the alternate tax for those taxpayers with income just above the filing threshold.  

The current filing threshold for Iowa individual income tax is $9,000 for single taxpayers under age 65, $13,500 for married taxpayers, head of households, or surviving spouses under age 65, $24,000 for single taxpayers age 65 or older, or $32,000 for married taxpayers, head of households, and surviving spouses age 65 or older.