With certain changes to Iowa tax law going into effect in 2023, retired farmers can significantly benefit through lower Iowa taxes. HR 2317 was passed in 2022 providing multiple ways and means by which retired farmers can reduce their Iowa taxes. The new tax law provides for a retirement income tax exclusion, a farm lease income exclusion, and an Iowa capital gain deduction on transactions involving certain real property and livestock.
While not all of these provisions can be utilized by the same taxpayer, all should be considered and discussed when working on tax planning matters. It’s important to note that none of these provisions impact federal tax liability. These only apply to a taxpayer’s Iowa tax liability.
Retirement Income Tax Exclusion:
HR 2317 provides an exclusion from Iowa taxation for all retirement income for those who are disabled or 55 years of age or older and for retirement income received by surviving spouses. For married couples, the retirement income exclusion is only applicable to a spouse that meets one of the required conditions. If both spouses meet one of the required conditions, they may exclude all eligible retirement income. The new law defines retirement income as including pension plans (including IPERS), defined benefit or defined contributions plans, annuities, individual retirement accounts, plans maintained or contributed to by an employer, or maintained or contributed to by a self-employed person as an employer, deferred compensation plans or any earnings attributable to the deferred compensation plans, and ROTH conversion income.
Pick One – Farm Lease Income Exclusion or Iowa Capital Gain Deduction:
In addition to the exclusion of retirement income, eligible retired farmers have the option to elect to either:
- exclude from Iowa taxation the net income received under a written farm lease covering real property or,
- deduct eligible capital gains from Iowa taxation. Eligible capital gains include those attributable to real property and livestock with certain participation and holding requirements for each.
Eligibility for the farmer lease income exclusion is contingent on three requirements:
(1) be disabled or 55 years of age or older,
(2) no longer be materially participating in the farming business, and
(3) have owned the real property and materially participated in a farming business for 10 or more years.
One point to emphasize from above in addition to the three listed requirements is that the exclusion only applies to written farm leases. Examples of these written agreements include written farm tenancy agreements, cash leases, crop share leases, and livestock share leases. The exclusion does not apply to rental income received as an owner of certain entities including partnerships, S corporations, and trusts or estates. Individuals who own single-member LLCs may be eligible to make the election.
If the election is made for the exclusion to apply, the individual who made the election may not:
(1) apply the Iowa capital gain deduction in the current year or succeeding tax years, or
(2) take the beginning farmer tax credit in the current or succeeding tax years.
While previous tax law allowed for the deduction of capital gains on the sale of businesses and certain livestock, in 2023, the Iowa capital gain deduction applies only to the sale of real property used in a farming business and to the sale of some breeding, dairy, and draft livestock by retired farmers.
A seller of real property may be eligible for the capital gains deduction in two ways:
(1) the seller materially participated in a farming business for 10 years (for retired or disabled farmers, the 10 years is in the aggregate), and the seller held the property used in a farming business for a minimum of 10 years, or
(2) the seller sells the property held and used in a farming business to a relative, including lineal descendants and cousins, to the second degree (if selling to a qualifying relative there is no requirement that the seller meets the material participation or holding period requirements).
For retired (55 years of age or older) or disabled farmers to be eligible for the livestock deduction, they must:
(1) have materially participated in the farming business for five of the eight years preceding retirement or disability, and
(2) sold all or substantially all the taxpayer’s interest in the farming business when the election is made.
The same rule applies to the sale of other breeding livestock held for a period of 12 months or more.
An important consideration to make when evaluating these new rules is that once an election is made between excluding eligible farm rental income or deducting eligible capital gain from Iowa taxation, the election cannot be changed. In addition to not being able to change an election, if a taxpayer elects to exclude farm rental income from Iowa taxation, they may not apply the Iowa capital gain deduction in the current or succeeding tax years nor take the beginning farmer tax credit in the current or succeeding tax years.
While the new tax laws provide ample ways for retired farmers to reduce their Iowa tax liability, the new rules are complex, and it is important to discuss these new rules so that proper planning can be done.
At BerganKDV, we partner with farmers on their unique tax planning needs to ensure that they stay up to date on ever-changing tax laws and take full advantage of the benefits available to them. If you have any questions on these new tax laws or want to learn more about our tax advisory services, contact us today and one of our team members will assist you.
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