March 18, 2022
Iowa Gov. Kim Reynolds started the month of March by signing the most significant tax reform bill in the state’s history: It establishes a 3.9% flat income tax and eliminates state tax on retirement income, among other things.
In signing the bill, which drops the state’s tax rate from 8.98%, Reynolds says she wants to make Iowa more competitive and wants Iowans to keep more of their own dollars. Prior to this bill, Iowa had the sixth-highest income tax rate in the U.S.
Kristine Tidgren, director for the Center for Agricultural Law and Taxation at Iowa State University, says many farmers will see lower tax rates — but retired farmers will feel the biggest impact.
“Beginning in 2023, retired farmers of the age of 55 or older, who have farmed for at least 10 years, can generally elect an exemption of Iowa income from cash rent or farm crop shares for all the years the income is earned,” Tidgren says. “Or, they can take a lifetime election to exclude the net capital gains from the sale of their farmland.”
Details to come from IDR
Tidgren said the exact details will be worked out through rules developed by the Iowa Department of Revenue, but it looks like the law won’t apply to rental income if the land is in an LLC, trust, partnership or estate. “The deduction would apply to those who are considered individual farmers,” she adds.
State Sen. Annette Sweeney, vice chair of the Iowa Senate agriculture committee, says the bill will help keep retired farmers around to help young farmers get started. She says this could also help current farmers have more money to make improvements, upgrade equipment and boost local economies.
But remember, Sweeney adds, if a retired farmer takes one of these elections in 2023, then they cannot take the beginning farmer tax credit, which has given retired farmers an incentive to lease their land, equipment and/or buildings to beginning farmers.
According to Tidgren, if a farmer plans to sell the farm while they are still living, the capital gains exclusion is likely the best option — but again, only if the farm owner is age 55 or older and has participated in farming for 10 or more years. The capital gains exclusion also applies to a retired farmer’s sale of certain breeding and dairy livestock, but only if the farmer has materially participated in a farming business for five of the past eight years.
In a statement, Reynolds said, “This bill rewards work, takes care of our farmers and supports our retirees, all while protecting key state priorities. Iowans will reinvest these dollars in our economy, communities will prosper and families will rest a little easier. Once again, we’re putting our faith in Iowans, and they won’t let us down.”
The new tax rate will be fully enacted by 2026.
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