A nonresident or part-year resident of Iowa must complete the IA 1040 reporting the individual’s total income, including income earned outside Iowa. The taxpayer is allowed adjustments to income, a federal tax deduction, and standard or itemized deductions on the same basis as if the taxpayer were a resident of Iowa.
The nonresident or part-year resident then completes a Schedule IA 126. On the IA 126, only Iowa income is reported and a percentage of Iowa income to total income is determined. The taxpayer receives a credit against the initial tax liability based on the percentage of income from outside Iowa. Therefore, the result of this credit is that only Iowa-source income is taxed.
Although non-Iowa income is used to calculate the initial tax liability at the appropriate tax rate, the non-Iowa income itself is not subject to tax. By using this method, Iowa taxes the Iowa-source income of nonresidents and part-year residents at the same rate it taxes Iowa residents. Iowa, like many states and the federal government, uses a graduated tax rate system based on level of income
A nonresident of Iowa with all-source income of $250,000 and $10,000 of Iowa income, will use the same tax rate as an Iowa resident with $250,000 of income to calculate their initial tax liability, rather than using the same tax rate as an Iowa resident with $10,000 of total income.