Iowa Senate passes tax exemption for military retirement pay

Backers hope more former service members will return to Iowa

Rod Boshart
Published: January 27 2014 | 4:25 pm - Updated: 29 March 2014 | 2:44 am in

The Iowa Senate voted Monday to exempt military retirement pay from state income taxes – a move that backers hope will encourage more veterans to stay, return or move to Iowa.

“This is a great piece of legislation,” said Sen. Herman Quirmbach, D-Ames, who was floor manager for the first bill to clear the Senate chambers in the third week of the 2014 legislative session. The measure is retroactive to Jan. 1.

“It reflects a long-standing tradition of Iowa,” said Quirmbach, noting that veterans have been held in high regard throughout state history. “It’s time to welcome them back home and this is a terrific way to do it,” he told his Senate colleagues prior to Monday’s 46-0 passage of Senate File 303.

The measure now goes to the Iowa House, where it is expected to win passage and head to the desk of Gov. Terry Branstad, who has made the measure part of his Home Base Iowa initiative to entice newly discharged veterans to fill skilled positions in Iowa as national military operations are downsized.

“This does more than simply reward and recognize the veterans for their service and their sacrifices,” said Sen. Daryl Beall, D-Fort Dodge. “It places an incentive for retired veterans to return to Iowa and to stay in Iowa.”

According to a Legislative Services Agency fiscal note, pension income paid to 11,472 Iowans in 2012 totaled $252.8 million. The state Department of Revenue estimates that 7,765 tax returns would benefit from the legislation not covered by other tax exemptions or provisions already in Iowa Code.

“I think it’s great for our veterans that they get this extra pension benefit,” said Sen. Randy Feenstra, R-Hull. “I hope that maybe as we move down the road that we can also do this for all of our pensions and we can keep more of our seniors living here instead of moving out of our state.”

Iowa currently exempts the first $6,000 (single) and $12,000 (married) in qualified retirement income from the state income tax – provisions that apply to traditional pensions, annuities, and distributions from Individual Retirement Accounts (IRA) and deferred compensation plans.

To qualify, the taxpayer or the taxpayer’s spouse must be 55 years of age or older, disabled, or a surviving spouse or a survivor having an insurable interest in an individual that would have qualified for the exemption during that tax year.Iowa also is in the final year of phasing out the state tax on U.S. Social Security benefits.

Backers said the exemption will provide about $8.4 million in relief for the 2014 tax year, growing to $10 million by 2018. Currently, 26 other U.S. states offer similar tax breaks for military retirement benefits.

“Passing Senate File 303 moves our state in the right direction when it comes to competing with Midwest states, such as Illinois, Kansas, Michigan, Missouri, Ohio, South Dakota and Wisconsin, who have a similar exemptions already in place,” said Sen. Roby Smith, R-Davenport. He said the measure should benefit hundreds of present and past military employees at the Rock Island Arsenal living in Iowa.

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