Iowa SF 505, signed into law on May 9, 2017, authorizes tax-preferred “First-Time Homebuyer Savings Accounts” (FTHSA). These new accounts will be available beginning in tax year 2018.
The benefit of the new law is that account holders may exclude from their Iowa adjusted gross income (AGI) yearly deposits into FTHSAs in amounts up to $2,000 a year. Married taxpayers who file a joint return may exclude up to $4,000 a year if that money is deposited into a joint account. These exclusion amounts will be adjusted yearly for inflation. Yearly interest earned on these accounts is also excluded from Iowa income. Individual account holders may not exclude from income more than $20,000 in FTHSA deposits during their lives. Although there are limits to the amount of deposits that may be excluded from an account holder’s income, there is no limit to the amount of non-tax-preferred deposits he or she may make to an FTHSA.
Account holders who establish an FTHSA must designate a sole beneficiary who qualifies as a first-time homebuyer, both when the account is opened and when the money in the account is used. Account holders may name themselves or someone else as the beneficiary. They may also change the designated beneficiary at any time. An individual can be the designated beneficiary of multiple accounts. Likewise, account holders may establish accounts for more than one designated beneficiary. FTHSAs must be interest-bearing savings accounts established with an Iowa financial institution, including a state or federally chartered bank, a savings and loan institution, a credit union, or a trust company.
Iowa residents qualify as first- time homebuyers if they have not owned, individually or jointly, a single-family or multifamily residence for the prior three years. A beneficiary must meet this test both when named as the beneficiary and when applying the money toward a qualifying purchase.
Funds in an FTHSA may be withdrawn at any time. However, to avoid penalties to the account holder, withdrawals must be used by the first-time homebuyer named as the beneficiary to purchase a single family residence in Iowa. This purchase must be made ninety days or more after the date the account holder first opens the FTHSA.
If money in an FTHSA is withdrawn for a nonqualified purpose or if the money is not used to purchase a home within 10 years of the date the account was established, the account holder must include the withdrawal amount in his or her Iowa income. Funds not used within 10 years are deemed automatically withdrawn. The account holder will also be assessed a tax penalty equal to 10 percent of the withdrawal amount unless the withdrawal occurs because of the death of the account holder or because of a garnishment, levy, or other court order.
The law instructs the Iowa Department of Revenue to adopt rules to implement FTHSA procedures.
We will keep you posted.
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