As the end of the year approaches, Iowa taxpayers should be aware of new state laws impacting 2024 tax returns. Beginning in 2023, Iowa Code § 422.5(3)(a) exempts all “retirement income” from state taxation for eligible individuals.
Recognizing that for many producers, farm assets are the main source of retirement income, Iowa law now allows “retired farmers” to choose to exclude either farm rental income or eligible capital gain from state taxation. Retired farmer means an individual who is disabled or who is 55 years of age or older and who no longer materially participates in a farming business. Federal tax laws still apply.
Lease income exclusion
Under Iowa Code § 422.7, retired farmers may elect to exclude from Iowa taxation:
• The net income received from a written “farm tenancy agreement.”
• Covering real property held by the eligible individual for 10 or more years.
• If the eligible individual materially participated in a “farming business” for 10 or more years.
If a retired farmer makes this election, they will not be eligible for the Beginning Farmer Tax Credit or the Iowa Capital Gain Deduction in future years.
Capital gain exclusion
Beginning in 2023, retired farmers may qualify for the Iowa capital gain deduction for the sale of real property used in a farming business if the retired farmer materially participated in a farming business for ten years or more in the aggregate before making an election to take the deduction.
The law also allows retired farmers to deduct gain from the sale of breeding, draft, dairy or sport cattle or horses (held for 24 months or more) if the taxpayer:
• Materially participated in the farming business for five of the eight years previous years.
• And sold all or substantially all of the taxpayer’s interest in the farming business when the election is made.
The same rule will apply to the sale of other breeding livestock held for a period of 12 months or more. Retired farmers may make a single lifetime election to exclude all qualifying capital gains under these provisions. However, retired farmers who elect to exclude gain under this provision may not claim the Beginning Farmer Tax Credit or the retired farmer lease income exclusion in future years.
Of course, it is always important to discuss your situation with your own tax professional. For more information on eligibility and other requirements, see the Legal Issues Brief at tinyurl.com/4d3vkzv7.— Iowa State University Growing Beef Newsletter
