Iowa Tax Rates

This post provides an overview of the primary taxes levied at the state level in Iowa. The information contained here is intended for general reference. For individuals or businesses seeking comprehensive support with tax filings, compliance, or strategic planning, indinero offers expert services. We encourage all who utilize this summary to explore the tailored tax support available through indinero.

Individual Income Tax

Iowa has completed a transition to a flat rate individual income tax system, replacing its former graduated bracket structure.

  • State Rate (2025): Effective for the 2025 tax year, the state income tax rate is a flat 3.8% of Iowa taxable net income. This single rate applies to all levels of income above the deduction and exemption thresholds.
  • Retirement Income Exemption: A significant change is the full exemption of most retirement income from state tax. Since 2023, income from pensions, IRAs, 401(k) withdrawals, and other qualified retirement sources are not taxable in Iowa. Social Security benefits are also fully exempt.
  • Local Income Tax: Some local jurisdictions impose a School District Surtax, which is calculated as a percentage of the taxpayer’s Iowa state income tax liability. This rate varies by school district, adding to the overall burden.

Sales and Use Tax

Sales tax is a key revenue source in Iowa, combining a state rate with local option taxes.

  • State Rate: The state sales tax rate is 6.0% on the retail sale of tangible personal property, certain services, and leases.
  • Local Option Sales Tax (LOST): Most local jurisdictions (counties and cities) impose an additional 1% Local Option Sales Tax (LOST), which must be approved by local voters.
  • Combined Rate: Due to the prevalence of LOST, the combined state and local sales tax rate is typically 7.0% in most areas of the state. The maximum combined rate can reach up to 8% in some jurisdictions with special local taxes.
  • Exemptions: Essential items like most groceries (unprepared food) and prescription drugs are exempt from the state sales tax.

Property Tax (Ad Valorem Tax)

Property taxes in Iowa are administered and collected exclusively at the local level by various taxing authorities (school districts, counties, etc.), though the state plays a role in regulating and equalizing assessment values. Iowa’s effective property tax rate is generally above the national average.

  • Assessment: Real property is assessed at its market value every odd-numbered year.
  • Assessment Limitation (Rollback): The state applies an assessment limitation (commonly called a “rollback”) to certain classes of property, such as residential and agricultural, to control the growth of taxable values statewide. This means property taxes are calculated on the taxable value (which is less than the full assessed value), not the full market value.
  • Tax Calculation: The tax owed is calculated by applying the local millage rate (set by local budgets) to the property’s taxable value.
  • Tax Credits: The state offers property tax relief through mechanisms like the Homestead Tax Credit, which reduces the final tax bill for owner-occupied residences.

Corporate Income Tax

Iowa imposes a graduated tax on the net income of corporations that are derived from sales within the state.

  • Tax Rates: Iowa uses a graduated rate structure that is currently in a phase-down. The current rates range from 5.5% on the lowest bracket of income to a top marginal rate of 7.1% on net income over $100,000. The legislative goal is to reduce the top rate to a flat 5.5% in the next few years, contingent upon state revenue triggers being met.
  • Federal Deductibility: Iowa is one of the few states that allows corporations to deduct 50% of the federal income taxes paid when calculating state taxable income.
  • Apportionment: For multi-state corporations, Iowa uses a single sales factor apportionment method, meaning corporate income is allocated to the state based only on the proportion of sales made in Iowa.

Unique Taxes: Inheritance Tax

  • Inheritance Tax (Phased Out): Iowa is phasing out its inheritance tax. For deaths occurring on or after January 1, 2025, the state inheritance tax is fully repealed. However, in prior years, this tax was levied on the property transferred to certain beneficiaries, with exemptions depending on the relationship to the deceased.

R&D Offer Quiz

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Answer to find out if you're eligible for R&D tax credits.

Do the activities performed relate to a new or improved business component’s function, performance, reliability, quality, or composition?(Required)
For Example: A mid-sized packaging company develops a slightly modified cardboard box design to improve its stacking strength (reliability) for warehouse storage, involving minor adjustments to the corrugation pattern to reduce collapse under standard weight loads.
Is your company trying to discover information to eliminate uncertainty concerning the capability or method for developing or improving a business component?(Required)
For Example: A furniture manufacturer investigates whether a cheaper wood adhesive can hold joints as effectively as the current one during assembly, testing bond strength to resolve doubts about its capability in standard production lines.
Do the activities performed constitute a process of experimentation?(Required)
For Example: An auto parts supplier runs a series of bench tests on different lubricant formulations to find one that reduces friction in engine bearings more effectively, systematically comparing wear rates over simulated operating cycles.