Federal Deductibility Information

What is Federal Deductibility?
Currently, Iowa is one of three states in the nation to permit tax filers to deduct all tax payments made to the federal government in calculating their state income tax liability. For example, if an individual makes $50,000 and pays $15,000 in federal taxes, their base income for state tax purposes is $35,000.

Why Federal Deductibility is important
For many taxpayers, the amount of tax payments made to the federal government is the only – or largest – deduction available to them. For example, middle income taxpayers who do not own a home or have children cannot utilize income tax deductions and credits available to others; such as mortgage interest, property taxes and the child and dependent tax credits.

Why HSB 284 is bad for Iowa taxpayers

  1. An issue of Fairness:

    Double taxation (tax on a tax): eliminating federal deductibility will allow the state to tax income never realized by taxpayers (i.e. $15,000 example above).

    Winners and losers: Under the bill 692,713 or 50.9% of Iowa taxpayers will see no change in their tax liability or see their tax liability increase in tax year 2009. The bill increases taxes on some Iowans to pay for a tax cut for other Iowans.

    • 450,292 or 33.1% of all taxpayers will see a tax increase.
    • 242,421 or 17.8 % of taxpayers will see no change in their tax liability.
    • 667,314 or 49% of taxpayers will receive a tax cut.

    40% of the individuals (180,300) whose taxes will increase under the bill make less than $40,000 per year.

    69% of the individuals (314,885) whose taxes will increase under the bill make less than $70,000 per year.

    12,470 individuals who make more than $200,000 will receive a tax cut under the bill.

    (Click here for a breakdown of winners and losers and their corresponding tax increases and decreases).

    If you were to combine the total tax liability of the winners, losers and individuals that would see no change the average of the largest tax cut an individual would receive equals less than $63 or .17 cents per day.

    * Corporations continue to have the ability to deduct 50% of their federal taxes paid from their state income tax.

  2. 2011 tax increase:

    On December 31, 2010, or tax year 2011, the federal tax cuts of 2001 & 2003 will expire increasing federal taxes on Iowans by approximately $160 million to $180 million. Nothing in HSB 284 requires this additional revenue to go towards tax relief, or prevents the legislature from using this revenue for additional spending.

  3. Negative impact on small businesses, farmers and local economies:

    The majority of Iowa businesses and farmers income is taxed at the individual rate. If their tax liability increases, they will either eliminate jobs or pass the added expense to the consumer to absorb the cost. Once again, Democrats re making it harder to be an employer in Iowa.

  4. Retroactive applicability:

    Many businesses in Iowa have made decisions based off the assumption they would have the ability to deduct their federal income taxes to calculate their base income for state tax purposes. Reaching back and changing the rules in the middle of the tax year undermines those planning decisions.

  5. No protection for taxpayers from future changes

    Nothing in the bill prohibits the legislature from going in and changing the tax brackets in future years. This leaves taxpayers vulnerable.

For a Bill Analysis of HSB 284 click here.

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  • Debra Apodaca

    I am writing you in total disgust regarding house bill 284. It seems that everyday there is a new tax on people who strive to improve their lives. This starts in school. As a child your job is to go to school and get the best education you can. You empower yourself. Then off to college you go. Hopefully gaining the education you needed to succeed. High school is a preparation for college. The better you do in high school the more likely you will succeed in college, therefore the ability to provide for yourself. First of all, if more parents were involved in their children and education and knew where they were and what they were doing there would be less failure and crime. For those who took the direction of going to school only to get themselves in trouble, fail classes or just quit school, we now have to take on their responsibility to themselves? They then get the jobs and housing that they strived for. My husband grew up in poverty. He wanted more for himself. He excelled in school, sports and college. He went to dental school and graduated. He took out the student loans that we paid back. We currently have a dental practice in West Des Moines. WE TOOK THE RISK! We opened our dental practice in 1995. We took out the loan, signed the rental agreement and covered our business with insurance and the other necessities to run a business. We started out with the necessities. As our business grew we hired more employees. We provide them with health and dental insurance, a retirement plan, uniform allowance, we pay them well and try to make a great work environment. We also do our part in charity. We donate to schools, libraries for reading programs, we are involved in Head Start to provide free dental treatment to children to get them ready for school. We take time out of our schedule to help organizations with dental treatment for the low income. We pay our help to volunteer! We also give back to The University of Iowa, ARL and different organizations. NOW IOWA WANTS MORE TAX! It was our goal to hire another dentist for our location, which means more employees. We had plans to open a practice in a smaller community, which again we will take the RISK. Small businesses provide a majority of the jobs in Iowa. At this point we are considering cutting hours and the charity we provide. You keep taking from people who work hard to succeed and take the risk. It’s hard to tell your children it’s ok not to succeed. and to depend on others and the government. As for higher education, We planned on our 2 children going to college, we saved from the time they were babies. We invested in the 529 Iowa savings plan only to see our investments dwindle. So, we are now paying out of our pocket for college. We don’t live in a mansion. It’s a modest home. We don’t have toys, and spend money foolishly. We don’t live out of our means. We budget! See it’s the preparation, planning and risk as to what you get out of life. Do not pass the 284 federal tax deductibility.

    Sincerely,

    Debra Apodaca

  • Paul VanderKley

    As our representatives to the State Legislature, I would ask that you be vigilant in opposing further tax increases, in whatever form they are presented. Like many individuals and families challenged by the economic times, the State must begin to define how do more with less. This is hard, but so what? We can do it, but we need your ingenuity and your creativity to begin to think differently, in order to achieve different results. The status-quo will not do. Please dedicate your efforts to protect the working citizens of Iowa from the further tax increases. And then lets start working on plans to lower the tax rates!

Dansette