Coupling with Federal Tax Provisions
The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 passed by Congress in December 2010 contains a number of tax provisions that will be allowed for federal tax purposes for the 2010 tax year. Effective with the enactment of Senate File 512 on April 12, 2011, Iowa tax provisions are coupled with federal provisions retroactive to January 1, 2010 in the areas listed below.
For Individual Income Tax Filers Only:
- Deduction of Educator Expenses
- Tuition and Fees Deduction for Higher Education
- Election to Deduct State Sales/Use Tax as an Itemized Deduction in lieu of State Income Tax
- Earned Income Tax Credit (EITC)
- Tax Free Distribution from an IRA to Certain Charities for Individuals 70½ and Older
For Individual Income Tax Filers as well as Corporate Income Tax (including S Corporations) filing, Partnership, Fiduciary, and Franchise Tax:
- Section 179 Asset Expensing
- Alternative Simplified Research Credit
- Deduction Related to Small Business Health Insurance Credit
- Start-up Expenditures
Please see Tax Year 2010 Income Tax Changes for Iowa Taxpayers for additional details.
Value of Health Care Coverage for Nonqualified Dependents
The federal health care bill passed by Congress in 2010 provided for health care coverage for nonqualified tax dependents through age 26. This federal legislation also provided that the value of this health care coverage is not subject to federal income tax.
Prior to the passage of the federal legislation, Iowa provided for health care coverage for nonqualified dependents through age 24. In addition, Iowa Code §422.7(29A) provided that the value of health care coverage for a nonqualified dependent was not subject to Iowa income tax. A deduction could be claimed on the Iowa income tax return for the value of this coverage that was included in federal income.
The Department has determined that Iowa Code §422.7(29A) provides that the value of health care coverage provided for a nonqualified dependent ages 25 and 26 is not subject to Iowa income tax. This will result in the same treatment of health care coverage for nonqualified dependents for both federal and Iowa income tax purposes. In addition, to the extent the value of health insurance for nonqualified dependents up to age 25 was included as income on the federal return, an adjustment should be made on line 24 of the IA 1040.
The federal deduction for the first $2,400 in unemployment compensation was eliminated for tax year 2010. The instructions for line 12 of the Iowa 1040 include the phrase “a. Add back any amount of unemployment compensation excluded on your federal return.” This phrase was included prior to the federal decision to eliminate this deduction; therefore, the reference to a federal exclusion of unemployment compensation in the line 12 instructions should be disregarded.
New Motor Vehicle Taxes
Prior to April 12, 2011, the online version of the Iowa Schedule A included on line 6 the phrase “DO NOT INCLUDE new motor vehicle taxes deducted on federal Schedule A, line 7”. The Iowa Schedule A in the printed IA 1040 booklet contains the phrase “DO NOT INCLUDE new motor vehicle taxes deducted on federal Schedule A, line 7, or as indicated on federal 1040, line 40b.” These references were included on the Iowa Schedule A prior to the federal decision to eliminate this deduction; therefore, all such references on line 6 of the Iowa Schedule A should be disregarded.
Making Work Pay Credit
The federal Making Work Pay Credit should be entered on line 33 of the IA 1040 to the extent the credit reduced the federal income tax liability on the federal return filed during 2010. It is treated in the same manner as the federal Earned Income Credit and federal Additional Child Care Credit.
EXAMPLE: Individual A filed a 2009 federal income tax return reporting a tax liability of $2,000. Individual A had $1,800 of federal income tax withheld and a Making Work Pay Credit of $400. Individual A can deduct $1,800 as a federal income tax deduction on the Iowa return for 2009 and $200 as a federal tax deduction on the Iowa return for 2010, since the federal tax deduction is limited to the extent it reduced the federal income tax liability.
The refund of the Making Work Pay Credit of $200 in this example should not be entered on line 27 of the IA 1040 for 2010.
Small Business Health Insurance Credit
For federal tax purposes, taxpayers claiming this credit must reduce the deduction for health insurance premiums by the amount of the credit. Since the deduction is disallowed for federal tax purposes, neither will it be allowed as a deduction for Iowa purposes and no adjustment can be made on the Iowa return.