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Military Retirement Benefits Exclusion from Iowa Income Tax

On May 26, 2014, Governor Branstad signed Senate File 303 which provides for the exclusion of military retirement benefits from Iowa individual income tax.

Iowa Code sections 422.7(31A) and (31B) provide an exclusion from Iowa Individual Income Tax for military retirement benefits retroactive to tax years beginning on or after January 1, 2014, regardless of a taxpayer’s age. The retirement pay is only deductible to the extent it is included in the taxpayer’s federal adjusted gross income. The exclusion also applies to military survivor benefits received under 10 U.S.C. 1447. It is available for both residents and nonresidents of Iowa. 

The exemption is in addition to the general $6,000/$12,000 pension exclusion available for Iowa individual income tax for taxpayers 55 years of age or older.  

For example, if a married individual age 65 receives $20,000 in military retirement pay and $25,000 in pension income from John Deere, that individual will be able to exclude $32,000 ($20,000 plus $12,000) of pension income on their Iowa income tax return. 

How to Change Military Pension Withholding

Contact DFAS at the following address:

Defense Finance and Accounting Service U.S. Military Retired Pay
8899 E 56th Street
Indianapolis, IN  46249-1200

Defense Finance and Accounting Service U.S. Military Annuitant Pay
8899 E 56th Street
Indianapolis, IN 46249-1300

DFAS can also be contacted toll free at 1-800-321-1080 or through their website www.dfas.mil

Filing Threshold and Alternative Tax Calculation

In addition, the military retirement pay, unlike other pension income, is not included in the calculation of the filing threshold to determine if a taxpayer has to file an Iowa income tax return, and it is not included in the calculation of the alternate tax for those taxpayers with income just above the filing threshold.  

The current filing threshold for Iowa individual income tax is $9,000 for single taxpayers under age 65, $13,500 for married taxpayers, head of households, or surviving spouses under age 65, $24,000 for single taxpayers age 65 or older, or $32,000 for married taxpayers, head of households, and surviving spouses age 65 or older.