United States: Iowa Department Of Revenue Addresses Wynne By Issuing Guidance On Credits For Taxes Paid To Other States

On October 16, 2015, the Iowa Department of Revenue became the second state tax authority to directly respond to the U.S. Supreme Court's decision in Comptroller of the Treasury v. Wynne following the Maryland Comptroller's acquiescence to the case.1 The Department's guidance conforms to the Wynne decision and expands the application of the individual income tax credit that Iowa residents may take for taxes paid to other states.2 Under the Department's new practice, the credit may be taken against Iowa local income surtaxes in addition to Iowa state income tax. Furthermore, the credit now also includes income taxes paid to local jurisdictions in other states. Because the change is being applied on both a prospective and retroactive basis, Iowa residents may have income tax refund opportunities.

Wynne Decision

On May 18, 2015, the U.S. Supreme Court affirmed a Maryland Court of Appeals decision concluding that the Maryland tax system (comprised of state-level and county-level components) was unconstitutional to the extent it denied Maryland resident taxpayers a credit against the county-level tax for income taxes they paid to other states.3 Based on this decision, the taxpayer and similarly situated residents are now afforded the credit against both components of the Maryland tax. While the full reach of the Wynne decision is not yet known, several states have been compelled to consider whether their state tax credits offered to residents may run into similar constitutional issues without explicit inclusion of local taxes within the scope of such credits.

Iowa's Credit Statute

For purposes of the Iowa individual income tax, a credit is available to Iowa resident individuals, estates and trusts for the amount of income tax paid to another state on income derived from sources outside the state that also is reported on the taxpayer's Iowa return.4 However, the credit may not exceed what the amount of the Iowa tax would have been on the same income which was taxed by the other state.5

Iowa Department's Response to Wynne

The Department's guidance explains that Iowa does not allow counties to impose a local income tax, but it allows school districts to impose a local "instructional support income surtax" upon residents of the district.6 Also, Iowa counties are authorized to impose an "emergency medical services (EMS) income surtax."7 These surtaxes are based on the amount of Iowa state income tax that a taxpayer owes. As discussed above, similar to Maryland, Iowa provides a credit for taxes paid to another state. The Department's previous practice was to calculate a local surtax prior to applying the out-of-state credit. This practice produced a result that was similar to the impermissible result of the Maryland tax system because Iowa's credit was only being applied to state income tax liability. The Department is changing its practice because it is inconsistent with Wynne. Accordingly, the amount calculated on Form IA 130, Out-of-State Credit Computation, must be applied prior to other non-refundable Iowa tax credits and before calculation of any school district or EMS surtax.

As explained by the Department, any Iowa resident who has paid taxes on income earned in any other state, a local jurisdiction of any other state, or the District of Columbia may be eligible for a refund. The Department notes that Wynne has no impact on Iowa residents who earned only wages or salaries in Illinois, because Iowa and Illinois have a reciprocal arrangement under which these Iowa residents are not required to file or pay Illinois income tax (and vice versa). The guidance also clarifies that taxpayers who live in Iowa and earn wages or salaries in another state, other than Illinois, must file income tax returns with both states. Any Iowa resident who worked in and paid taxes to another state, other than Illinois, may be entitled to a refund for these tax years. Similarly, taxpayers who live in Iowa and receive income, other than wages or salaries, from another state, including Illinois, must file income tax returns with both states. Any Iowa resident who paid taxes in another state may be entitled to a refund for these tax years.

To obtain a refund, taxpayers who have already filed individual income tax returns must file a separate Form IA 1040X, Amended Individual Income Tax Return, for each year for which the taxpayer is claiming a refund. Taxpayers who have not yet filed an Iowa individual income tax return must file Form IA 1040 for each tax year. Because taxpayers must apply the out-of-state tax credit prior to any other nonrefundable Iowa tax credits and before calculation of any local surtaxes, the out-of-state tax credit amount from Form IA 130 should be entered on line 17 (other Iowa credits) on Form IA 1040X.

The Department notes that the 2015 Form IA 1040 and Form IA 130 will be revised to reflect these changes, but prior forms will not be revised. As a result, for taxpayers filing 2013 or 2014 returns for the first time or amending those returns using Form IA 1040, rather than Form IA 1040X, the out-of-state tax credit calculated on Form IA 130 should be entered after line 49 (which reflects the balance of tax following the application of certain credits) on Form IA 1040, rather than on line 57 (which reflects the out-of-state tax credit historically applied following the reduction of the local surtaxes). Similarly, for tax years 2007 through 2012, the out-of-state tax credit should be entered on line 52 on Form IA 1040, rather than on line 62.

Taxpayers are reminded that a completed and signed copy of the income tax return filed in the other state must be attached. If a taxpayer is claiming a credit for taxes paid in more than one state, a separate Form IA 130 must be completed for each state. Also, the Department notes that amended returns must be filed within the normal three-year statute of limitations.


The positive guidance provided by the Department will be useful for Iowa residents who may have a refund claim or a prospective benefit, though there are some informational gaps that will need to be resolved. According to the Tax Policy Blog of the Tax Foundation, Iowa has estimated that it will refund approximately $9 million to 32,000 taxpayers.8 The school district surtax is imposed by many school districts and may not exceed 20 percent of income tax liability.9 The emergency medical services surtax may not exceed one percent of state income tax liability but is only imposed by Appanoose County at this time.10

Unlike the Kansas guidance provided by its own state tax authority that indicates the state tax credit includes local income or earnings taxes,11 the Iowa guidance does not specifically mention earnings taxes. The Kansas Department of Revenue seems to view this issue more liberally than the Iowa Department of Revenue because earnings taxes are not expressly included in the underlying Kansas credit statute.12 Similar to Kansas, the scope of local income taxes included within Iowa's state tax credit is not clear. Although the Kansas and Iowa guidance explains that income taxes imposed by local jurisdictions are includible taxes for purposes of calculating the state tax credit, it does not list the most significant local taxes that would qualify.

Now that Maryland, Kansas and Iowa have addressed the effect of Wynne on their state tax credits, one would expect that this guidance encourages other states to follow suit. To the extent that other states have similar income tax systems and have not addressed the need to change the scope of the state tax credit to include local taxes, residents that pay a significant amount of taxes to non-resident states should closely examine the existing state tax credit statute and consider filing protective refund claims where relevant and material.


1. 135 S. Ct. 1787 (2015). For a detailed discussion of this case, see GT SALT Alert: U.S. Supreme Court Holds Lack of County Personal Income Tax Credit for Taxes Paid to Other States Violates Commerce Clause. The Kansas Department of Revenue was the first state tax authority to issue guidance concerning Wynne following the Maryland Comptroller's acquiescence to the case. Notice 15-15, "Credit for Taxes Paid to Another State," Kansas Department of Revenue, Aug. 10, 2015. For a discussion of this guidance, see GT SALT Alert: Kansas Department of Revenue Provides Post-Wynne Guidance on Credits for Taxes Paid to Other States.

2. The Wynne Decision, Iowa Department of Revenue, Oct. 16, 2015.

3. Maryland State Comptroller v. Wynne, 64 A.3d 453 (Md. 2013). For a detailed discussion of this case, see GT SALT Alert: Maryland Court of Appeals Rules Denial of County-Level Tax Credit for Taxes Paid to Other States Violates Commerce Clause.

4. IOWA CODE § 422.8.1; IOWA ADMIN. CODE r. 701-42.6(422). In addition, the statute allows a credit for income tax paid to a foreign country.

5. Id. The limitation on this credit is computed according to the following formula: Income earned outside Iowa and taxed by another state is divided by the total income of the Iowa resident taxpayer. This amount multiplied by the net Iowa tax as determined on the total income of the taxpayer as if entirely earned in Iowa is the maximum tax credit that may be taken against the Iowa net tax. Id.

6. IOWA CODE § 257.21.

7. IOWA CODE § 422D.1.

8. Joseph Henchman, "Iowa to Refund Local Income Taxes After Wynne Decision," The Tax Policy Blog, Tax Foundation, Oct. 21, 2015.

9. Iowa Income School District Surtax, Iowa Department of Revenue. Note that the rate varies by school district. A list of the school districts imposing the tax and the applicable tax rates is included as part of Form IA 1040. For additional information, see the Iowa Department of Revenue's Web Site at https://tax.iowa.gov/iowa-tax-fee-descriptions-and-rates.

10. Iowa Income Emergency Medical Services Surtax, Iowa Department of Revenue.

11. Notice 15-15, "Credit for Taxes Paid to Another State," Kansas Department of Revenue, Aug. 10, 2015.

12. See KAN. STAT. ANN. § 79-32,111(a).

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