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The Wynne Decision

 

YOU MAY BE ELIGIBLE FOR A REFUND – INFORMATION ABOUT THE IOWA OUT-OF-STATE TAX CREDIT

 

The Wynne Decision

Recently the United States Supreme Court issued a ruling in the case of Comptroller of the Treasury of Maryland v. Wynne, 135 S.Ct. 1787 (May18, 2015). The State of Maryland imposes both a state income tax and a county income tax on its residents.  Maryland allowed a credit for tax paid to another state to be applied to any state income tax liability.  However, the state did not allow that same out-of-state tax credit to be applied to any county tax liability. The Court found that this practice could lead to double taxation.  As a result, Maryland is changing its practice and refunding money to taxpayers whose out-of-state tax credits were not properly applied to any county income tax liability.

How does this apply to Iowans?

While Iowa does not allow counties to impose a separate, local income tax, it does allow school districts to impose a local “instructional support income surtax” (“the surtax”) upon residents of the district.  Iowa counties are also allowed to impose a “emergency medical services (EMS) income surtax” (“the surtax”).  The surtax is based upon the amount of Iowa state income tax a taxpayer owes.  Like Maryland, Iowa allows a credit for tax paid to another state.  The Iowa Department of Revenue’s (“the Department”) previous practice was to calculate the surtax prior to applying the out-of-state tax credit.  This produced a similar result to Maryland’s; that is, Iowa’s out-of-state tax credit was only being applied to state income tax liability, not local tax (surtax) liability.  Because this practice is inconsistent with the Supreme Court ruling, the Department must change its practice.  The result is that the out-of-state tax credit calculated on form IA 130 must be applied prior to other nonrefundable Iowa tax credits and before calculation of any school district surtax or EMS surtax. 

Who is entitled to a tax refund?

Any Iowa resident who has paid taxes on income earned in any other state, a local jurisdiction of any other state, or the District of Columbia may be eligible for a refund. 

  • The decision has no impact on Iowa residents who earned only wages or salaries in Illinois, as this state has a reciprocal arrangement with Iowa and doesn’t require these Iowans to also file or pay income taxes in Illinois. 
  • What if I live in Iowa, but work in a state other than Iowa or Illinois? Taxpayers who live in Iowa and earn wages or salaries in another state, other than Illinois, must file income tax returns with both states.  Any Iowa resident who worked in and paid taxes to another state, other than Illinois, may be entitled to a refund for these tax years.
  • What if I live in Iowa, but receive income from another state, other than wages or salaries?  Taxpayers who live in Iowa and receive income, other than wages or salaries, from another state, including Illinois, must file income tax returns with both states.  Any Iowa resident who paid taxes in another state may be entitled to a refund for these tax years.

How do I obtain a refund?

To obtain a refund you will need to file amended tax returns for each applicable year.  You may use the Iowa 1040X form for any of those years, but you will need to submit a separate return for each year.  The IA 1040X is available here.

As stated earlier, you must apply the out-of-state tax credit prior to any other nonrefundable Iowa tax credits and before calculation of any school district surtax or EMS surtax.  This means on the IA 1040X, the out-of-state tax credit calculated on form IA 130 should be entered on line 17.  You may want to have a tax preparer or attorney assist you in completing the forms.

The 2015 IA 1040 and IA 130 will reflect these changes; however, prior year Iowa forms will not.  For taxpayers filing 2013 or 2014 returns for the first time or amending those returns using the IA 1040, rather than the IA 1040X, the out-of-state tax credit calculated on form IA 130 should be entered on line 50 of the IA 1040, rather than on line 57 as shown on the form for those prior years. For tax years 2007 through 2012, the out-of-state tax credit calculated on form IA 130 should be entered on line 53 of the IA 1040, rather than on line 62.  Tax years 2007 through 2011 might not be eligible for refund due to the normal three (3) year statute of limitations.

Note: For tax years 2013 and 2014 line 4 on the IA 130 will now use line 49 of IA 1040 instead of line 51 to calculate the credit

Note: For tax years 2007 through 2012 line 4 on the IA 130 will now use line 52 of IA 1040 instead of line 54 to calculate the credit

For more information, please review the following Frequently Asked Questions (FAQs):

 

FAQs

 

Q:  What did the Supreme Court decide in this case?

A:  Maryland’s personal income tax on state residents consists of a state income tax and a local tax. Residents who pay income tax to another state were allowed a credit against the state income tax, but not against the local tax. The Supreme Court determined this taxing scheme was unconstitutional because it discriminated in favor of intrastate over interstate economic activity in violation of the dormant Commerce Clause. The Court found this inherently discriminatory as it operates as an impermissible tariff against residents who earn income in interstate commerce

 

Q:  How are Iowans affected by this decision?

A:  Residents of Iowa who paid income tax in another state and who reside in a school district with an income surtax or a county with an EMS surtax may be impacted by this decision.  Also impacted are Iowans who paid income taxes to local jurisdictions in other states.

 

Q:  Will I be able to claim a credit for income taxes paid to local jurisdictions in other states?

A:  Yes.  Follow the instructions on form IA 130 to claim credit for income taxes paid to other states and to local jurisdictions in other states. 

 

Q:  How can I claim a refund?

A:  You may request a refund in the following ways:

  • If you have already filed Iowa individual income tax returns, file a separate form IA 1040X for each year you are claiming a refund.
  • If you have not yet filed an Iowa individual income tax return, file form IA 1040 for each year.

Don’t forget:

  • You must indicate the tax year on the top of each IA 1040X.
  • A completed, signed copy of the income tax return filed in the other state must also be attached.
  • If you are claiming credit for taxes paid in more than one state, a separate form IA 130 must be completed for each state.

 

Q:  Will the Iowa Department of Revenue issue refunds automatically?

A:  No.  You must file a return for each year for which you are requesting a refund.

 

Q:  How far back can I file a claim for refund?

A:  Amended returns must be filed within the normal three (3) year statute of limitations.

 

Q:  When can I expect to receive my refund?

A:  The Department will process claims for refunds as soon as possible. All claims will be processed in the order received.