Iowa Admin. Code r. 701-301.7

Current through Register Vol. 47, No. 11, December 11, 2024

Rule 701-301.7 - Tax on lump-sum distributions

For tax years beginning on or after January 1, 1982, Iowa Code section 422.5 provides that in addition to the tax computed on the taxable income, a tax shall also be imposed on the amount of a lump-sum distribution for which the taxpayer has elected under Section 402(e) of the Internal Revenue Code to be separately taxed for federal income tax purposes for the tax year. The rate of this tax is 25 percent of the separate federal tax imposed on the amount of the lump-sum distribution.

(1)Exemption amounts.

a.An exemption of $9,000 for single taxpayers and an exemption of $13,500 for all other taxpayers. To be eligible for the $9,000 or less exemption for single taxpayers and the $13,500 or less exemption for all other taxpayers as provided in Iowa Code section 422.5, subsection 3, the total amount of a lump-sum distribution subject to the separate federal tax must be included in the net income. If this net income (including the lump-sum distribution income) is less than $9,000 for single taxpayers and less than $13,500 for all other taxpayers, then no tax (other than Iowa minimum tax) is due. The Iowa tax on lump-sum distributions and the computed tax may be limited to the amount of income tax that exceeds $9,000 for single taxpayers and $13,500 for all other taxpayers (including the lump-sum distribution income).

EXAMPLE: If the net income of a single taxpayer including a lump-sum distribution was $9,030 and the computed tax and lump-sum tax was $50 after personal exemptions and out-of-state credit, the payment of $50 tax would reduce the income below $9,000; therefore, the amount of tax due is reduced to $30 in order for the taxpayer to retain a net income of $9,000.

b.An exemption of $18,000 for single taxpayers and an exemption of $24,000 for other taxpayers who are 65 years of age or older. These exemption amounts apply for tax years beginning on or after January 1, 2007, but before January 1, 2009. To be eligible for the $18,000 or less exemption for single taxpayers and the $24,000 or less exemption for all other taxpayers as provided in 2007 Iowa Code section 422.5, subsection 3A, the total amount of a lump-sum distribution subject to the separate federal tax must be included in the net income. If this net income (including the lump-sum distribution income) is less than $18,000 for single taxpayers and less than $24,000 for all other taxpayers, then no tax (other than Iowa minimum tax) is due. The Iowa tax on lump-sum distributions and the computed tax may be limited to the amount of income tax that exceeds $18,000 for single taxpayers and $24,000 for all other taxpayers (including the lump-sum distribution income).

EXAMPLE: If the net income of a single taxpayer including a lump-sum distribution was $18,200 and the computed tax and lump-sum tax was $300 after personal exemptions and out-of-state credit, the payment of $300 tax would reduce the income below $18,000; therefore, the amount of tax due is reduced to $200 in order for the taxpayer to retain a net income of $18,000.

For married persons filing jointly, filing separately on a combined return or filing separate returns, only one spouse is required to be 65 years of age or older on December 31 of the tax year.

c.An exemption of $24,000 for single taxpayers and an exemption of $32,000 for all other taxpayers who are 65 years of age or older. These exemption amounts apply for tax years beginning on or after January 1, 2009. To be eligible for the $24,000 or less exemption for single taxpayers and the $32,000 or less exemption for all other taxpayers as provided in Iowa Code section 422.5, subsection 3B, the total amount of a lump-sum distribution subject to the separate federal tax must be included in the net income. If this net income (including the lump-sum distribution income) is less than $24,000 for single taxpayers and less than $32,000 for all other taxpayers, then no tax (other than Iowa minimum tax) is due. The Iowa tax on lump-sum distributions and the computed tax may be limited to the amount of income tax that exceeds $24,000 for single taxpayers and $32,000 for all other taxpayers (including the lump-sum distribution income).

EXAMPLE: If the net income of a single taxpayer including a lump-sum distribution was $24,300 and the computed tax and lump-sum tax was $500 after personal exemptions and out-of-state credit, the payment of $500 tax would reduce the income below $24,000; therefore, the amount of tax due is reduced to $300 in order for the taxpayer to retain a net income of $24,000.

For married persons filing jointly, filing separately on a combined return or filing separate returns, only one spouse is required to be 65 years of age or older on December 31 of the tax year.

(2)Nonresidents. A nonresident is liable for tax on a lump-sum distribution or a portion of a lump-sum distribution attributable to services performed within Iowa. If a distribution to a nonresident is attributable to services performed both within and outside Iowa, the tax must be allocated in the ratio of the income from services performed within Iowa to the total income from all services performed relating to the lump-sum distribution unless it can be shown that another method of proration would result in a more equitable amount of tax on the distribution.

(3)Penalty and interest. In computing penalty and interest for failing to file a timely return or to pay the lump-sum tax, refer to 701-Chapter 306.

(4)Personal exemption credits. Personal and dependent exemption credits may be applied against the separate lump-sum tax to the extent that the credits are not fully applied against the computed tax on income reported under Iowa Code section 422.7.

(5)Out-of-state tax credit. When computing an out-of-state tax credit for a year in which tax on a lumpsum distribution has been computed separately, the amount of the lump-sum distribution on which the separate tax has been computed must be included on the Iowa gross income.

This rule is intended to implement Iowa Code section 422.5 as amended by 2006 Iowa Acts, Senate File 2408.

Iowa Admin. Code r. 701-301.7

ARC 1303C, IAB 2/5/14, effective 3/12/14; Editorial change: IAC Supplement 11/2/22; Editorial change: IAC Supplement 10/18/23