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Iowans who used IRA distributions for charity get a surprise

August 26, 2009

The 150 ruling supergeniuses in the Iowa legislature failed to pass the usual "conformity" bill to link the Iowa income tax to the federal rules. This has caused a bunch of stupid little headaches. For example, the above-the-line teacher deduction didn't apply in computing Iowa taxes for 2008.

It didn't help that the Iowa Department of Revenue first told taxpayers to assume that a conformity bill would pass, before changing its tune later in tax season. Now the Department presents another annoyance: older folks who used the special rule make IRA distributions directly to charity face a stupid adustment to their 2008 returns.

When you have the IRA make the contribution, it bypasses your return entirely. The advantage of this is for most folks is that you don't raise your AGI, avoiding AGI-based phaseouts of personal exemptions and itemized deductions. It also avoids any AGI-based limits on charitable deductions.

Not for Iowa:

Therefore, for Iowa purposes, the pre-2006 federal rules would be applicable. The IRA distribution would be included as income on the Iowa 1040 form, even though it is not reported as income on the federal 1040 form. Similarly, the amount of the IRA distribution donated to charity would be reflected as a charitable contribution on Iowa Schedule A, Itemized Deductions, even though it is not reflected on the federal Schedule A.

Worse, you have to do an Iowa-only computation of AGI phaseouts.

As long as the Iowa tax is linked to the federal income tax, it should automatically incorporate federal tax changes. The legislature can then opt out of ones they don't like.

This rule is also ridiculous from a policy standpoint and foolish from a cost-effectiveness standpoint. A sensible Department of Revenue would let this slide.

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