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May 8, 2024
2024-0932

Iowa law implements a flat personal income tax and increases the Targeted Jobs Withholding Credit effective January 1, 2025

On May 1, 2024, Iowa Governor Kim Reynolds approved SF 2442, which, effective January 1, 2025, collapses the personal income tax brackets from three to a single tax rate of 3.8%. Alternative tax computation methods apply to a married person filing jointly, head of household or surviving spouse.

HF 2317, enacted in 2022, would have gradually reduced the personal income tax over four years until it reached 3.9% in 2026. SF 2442 accelerates to 2025 the lowest income tax rate and reduces it from 3.9% to 3.8%. (See Tax Alert 2022-0545.)

The law also extends the state's Targeted Jobs Withholding Credit (TJWC) and increases the qualifying investment for businesses to participate.

Supplemental wages

Effective January 1, 2025, if federal income tax is withheld using the federal supplemental rate of withholding, Iowa supplemental wages paid separately from regular wages are subject to an Iowa withholding rate of 3.8%.

Targeted Jobs Withholding Credit

Iowa's TJWC is a pilot program that allows a reduction in the employer's income tax withholding liability as an economic incentive to grow and expand targeted businesses. The employer's withholding diversion is matched by a designated pilot city. (Iowa Economic Development.)

An employer qualifies for the TJWC if the employer:

  • Is located in Burlington, Council Bluffs, Fort Madison, Keokuk or Sioux City
  • Is relocating to Iowa from another state and creating jobs at or above the hourly wage threshold for the city, OR
  • Is an existing Iowa business creating or retaining 10 new jobs at or above the hourly wage threshold for the city, OR
  • Is an existing Iowa business making a qualifying investment of $500,000 (under SF 2442, $1 million effective July 1, 2024) within a pilot city

Effective July 1, 2023 through June 30, 2024, the hourly wage thresholds are:

    • Burlington: $25.05
    • Council Bluffs: $26.35
    • Fort Madison: $26.17
    • Keokuk: $26.17
    • Sioux City: $24.96

Under SF 2442, this pilot program expires after June 30, 2027 (previously June 30, 2024).

Ernst & Young LLP insights

Governor Reynolds stated in a press release that "every Iowa taxpayer will experience significantly lower rates starting next year, and collectively, all the tax cuts we've enacted since 2018 will save Iowans more than $23.5 billion over a decade."

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Contact Information

For additional information concerning this Alert, please contact:

Workforce Tax Services - Employment Tax Advisory Services

Published by NTD’s Tax Technical Knowledge Services group; Jennifer A Brittenham, legal editor
 

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