|How Does Iowa’s Income Tax Stack Up With Our Neighbors?
Remember House File 2317 from 2022? You should since it was the largest tax cut ever passed in Iowa! Everyone saw a tax cut as a result. House File 2317 gets Iowa to a flat tax of 3.9% on all taxable income in tax year 2026. House File 2317 helps the single mom with two kids on an income of $25,000. That mom would pay $714 in Iowa taxes under the current law but will only pay $521 in 2026 because of this bill. That is a 27% reduction in her taxes!
The bill also helps the family of four with two working parents on an income of $50,000. That family would pay $1,918 under the current law, but will have that number cut to $1,520 because of this tax cut. That’s more than a 20% tax cut for that middle-class, working family!
House File 2317 not only reduced individual income tax rates and provides for an eventual flat tax rate of 3.9% on individual income, but also exempts retirement income from individual income tax, lowers the corporate tax rate to an eventual 5.5% flat tax based on a revenue trigger, and makes changes to tax credits. Couple that with the fact that Iowa hasn’t taxed social security in more than a decade and Iowa really is the Midwest’s Field of Dreams when it comes to taxes. So how do our neighbors stack up?
To the north—Minnesota has a graduated individual income tax, with rates ranging from 5.35% to 9.85%. Minnesota has a 9.80% corporate income tax rate. Minnesota taxes your social security and all retirements. Moving north does not seem viable—especially if you are over 55. Additionally, Minnesota raised their gas tax, raised vehicle registration fees, increased taxes on the sales of new vehicles and enacted a new fee on the delivery of most goods. Minnesota really is earning their new nickname as the California of the Midwest.
Let’s look to the east—Illinois has a flat 4.95% individual income tax rate. Illinois also has a 9.50% corporate income tax rate. Surprisingly, Illinois does not tax social security or retirement.
How about Michigan? Michigan has a flat 4.25% individual income tax rate, but there are also jurisdictions there that collect local income taxes. Michigan has a 6% corporate income tax rate. Governor Whitmer has also twice vetoed tax cuts in 2023. It’s retirement that gets really weird in Michigan. If you were born before 1946, the tax breaks for retirement income are pretty good. However, if you were born later, the state is a lot stingier (although some seniors still might qualify for a tax break). There were some new retirement tax benefits signed into law this year that seem to stairstep in based on age. Michigan does not tax social security.
What about Wisconsin? They have a graduated individual income tax, with rates ranging from 3.54% to 7.65%. Wisconsin also has a flat 7.90% corporate income tax rate. Their governor also recently vetoed an income tax cut. The Badgers exempt Social Security benefits from state taxes, but pension income along with distributions from IRAs and 401(k) plans, are generally taxable. Bottom line—retiring in Wisconsin is expensive!
What about our neighbor right to the west? Nebraska has a graduated individual income tax, with rates ranging from 2.46% to 6.64%. Nebraska also has a 5.58% to 7.25% corporate income tax rate. Doesn’t sound too bad unless you are a retiree. The Cornhuskers tax most Social Security benefits and other retirement income. The best decision here is to cross the Missouri River and retire in Iowa.
So, if you have landed in the Midwest and Iowa or Iowa State’s tailgating experience is not reason enough for you to homestead in Iowa…just stack us up against our neighbors and see where you will keep the most of your hard-earned money. It turns out, all roads lead to Iowa.