Governor Branstad is set to sign Senate File 303, 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 Iowa residents and nonresidents. 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.
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. Form IA W-4P, Withholding Certificate for Pension or Annuity Payments (see link below), should be completed and sent to the following address: http://www.iowa.gov/tax/forms/1444020.pdf
Thanks to Jim McNulty at the Iowa Department of Revenue for bringing this to our attention.