Senate File 2398 - Introduced SENATE FILE 2398 BY COMMITTEE ON WAYS AND MEANS (SUCCESSOR TO SSB 3038) A BILL FOR An Act relating to state taxation by modifying alternate and 1 individual income tax rates, and including effective date 2 and retroactive applicability provisions. 3 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 4 TLSB 5398SV (4) 90 jm/jh
S.F. 2398 Section 1. Section 421.27, subsection 9, paragraph a, 1 subparagraph (3), Code 2024, is amended to read as follows: 2 (3) In the case of all other entities, including 3 corporations described in section 422.36, subsection 5 , and all 4 other entities required to file an information return under 5 section 422.15, subsection 2 , the entitys Iowa net income 6 after the application of the Iowa business activity ratio, 7 if applicable, multiplied by the top income tax rate imposed 8 under section 422.5A 422.5 for the tax year, less any Iowa tax 9 credits available to the entity. 10 Sec. 2. Section 422.5, subsection 1, paragraph a, Code 2024, 11 is amended to read as follows: 12 a. A tax is imposed upon every resident and nonresident 13 of the state which tax shall be levied, collected, and paid 14 annually upon and with respect to the entire taxable income 15 as defined in this subchapter at rates as provided in section 16 422.5A. the following rates: 17 (1) For the tax year beginning on or after January 1, 2024, 18 but before January 1, 2025, a rate of 3.65 percent. 19 (2) For the tax years beginning on or after January 1, 2025, 20 a rate of 3.50 percent. 21 Sec. 3. Section 422.5, subsection 2, paragraph b, Code 2024, 22 is amended by striking the paragraph. 23 Sec. 4. Section 422.5, subsection 3, paragraph b, Code 2024, 24 is amended by striking the paragraph. 25 Sec. 5. Section 422.5, subsection 6, Code 2024, is amended 26 by striking the subsection. 27 Sec. 6. Section 422.16, subsection 2, paragraph e, Code 28 2024, is amended to read as follows: 29 e. For the purposes of this subsection , state income tax 30 shall be withheld at the highest rate for the applicable tax 31 year described in section 422.5A 422.5 from supplemental wages 32 of an employee in those circumstances in which the employer 33 treats the supplemental wages as wholly separate from regular 34 wages for purposes of withholding and federal income tax is 35 -1- LSB 5398SV (4) 90 jm/jh 1/ 5
S.F. 2398 withheld from the supplemental wages under section 3402(g) of 1 the Internal Revenue Code. 2 Sec. 7. Section 422.16B, subsection 2, paragraph a, Code 3 2024, is amended to read as follows: 4 a. (1) A pass-through entity shall file a composite return 5 on behalf of all nonresident members and shall report and pay 6 the income or franchise tax imposed under this chapter at the 7 maximum state income or franchise tax rate applicable to the 8 member under section 422.5A 422.5 , 422.33 , or 422.63 on the 9 nonresident members distributive shares of the income from the 10 pass-through entity. 11 (2) The tax rate applicable to a tiered pass-through entity 12 shall be the maximum state income tax rate under section 422.5A 13 422.5 . 14 Sec. 8. Section 422.16C, subsection 4, paragraph a, Code 15 2024, is amended to read as follows: 16 a. A taxpayer making an election under this section shall 17 be subject to tax in an amount equal to the maximum rate for 18 the applicable tax year under section 422.5A 422.5 , imposed 19 against the taxable income of the taxpayer for the taxable 20 year properly determined under this chapter and allocated 21 and apportioned to the state under the rules adopted by the 22 department. The tax shall be due with the taxpayers return 23 required under this chapter . 24 Sec. 9. Section 422.16C, subsection 5, paragraph a, 25 subparagraph (2), Code 2024, is amended to read as follows: 26 (2) The difference between one hundred percent and the 27 highest individual income tax rate in effect for the tax year. 28 Sec. 10. Section 422.21, subsection 5, Code 2024, is amended 29 to read as follows: 30 5. The director shall determine for the 2023 calendar year 31 and each subsequent calendar year the annual and cumulative 32 inflation factors for each calendar year to be applied to tax 33 years beginning on or after January 1 of that calendar year. 34 The director shall compute the new dollar amounts as specified 35 -2- LSB 5398SV (4) 90 jm/jh 2/ 5
S.F. 2398 to be adjusted in section 422.5 by the latest cumulative 1 inflation factor and round off the result to the nearest one 2 dollar. The annual and cumulative inflation factors determined 3 by the director are not rules as defined in section 17A.2, 4 subsection 11 . 5 Sec. 11. Section 422.25A, subsection 5, paragraph c, 6 subparagraphs (3), (4), and (5), Code 2024, are amended to read 7 as follows: 8 (3) Determine the total distributive share of all final 9 federal partnership adjustments and positive reallocation 10 adjustments as modified by this title that are reported to 11 nonresident individual partners and nonresident fiduciary 12 partners and allocate and apportion such adjustments as 13 provided in section 422.33 at the partnership or tiered partner 14 level, and multiply the resulting amount by the maximum highest 15 individual income tax rate pursuant to section 422.5A for the 16 reviewed year. 17 (4) For the total distributive share of all final federal 18 partnership adjustments and positive reallocation adjustments 19 as modified by this title that are reported to tiered partners: 20 (a) Determine the amount of such adjustments which are of a 21 type that would be subject to sourcing to Iowa under section 22 422.8, subsection 2 , paragraph a , as a nonresident, and then 23 determine the portion of this amount that would be sourced to 24 Iowa under those provisions as if the tiered partner were a 25 nonresident. 26 (b) Determine the amount of such adjustments which are of 27 a type that would not be subject to sourcing to Iowa under 28 section 422.8, subsection 2 , paragraph a , as a nonresident. 29 (c) Determine the portion of the amount in subparagraph 30 division (b) that can be established, as prescribed by the 31 department by rule, to be properly allocable to indirect 32 partners that are nonresident partners or other partners not 33 subject to tax on the adjustments. 34 (d) Multiply the total of the amounts determined in 35 -3- LSB 5398SV (4) 90 jm/jh 3/ 5
S.F. 2398 subparagraph divisions (a) and (b), reduced by any amount 1 determined in subparagraph division (c), by the highest 2 individual income tax rate pursuant to section 422.5A for the 3 reviewed year. 4 (5) For the total distributive share of all final federal 5 partnership adjustments and positive reallocation adjustments 6 as modified by this title that are reported to resident 7 individual partners and resident fiduciary partners, multiply 8 that amount by the highest individual income tax rate pursuant 9 to section 422.5A for the reviewed year. 10 Sec. 12. REPEAL. 2022 Iowa Acts, chapter 1002, sections 19, 11 20, 21, 22, 23, and 24, are repealed. 12 Sec. 13. REPEAL. 2023 Iowa Acts, chapter 115, sections 20 13 and 21, are repealed. 14 Sec. 14. REPEAL. Section 422.5A, Code 2024, is repealed. 15 Sec. 15. RATE OF WITHHOLDING. Notwithstanding any other 16 provision of law to the contrary, for tax years beginning on 17 or after January 1, 2024, any required rate of withholding 18 shall not be higher than the rate for the applicable tax year 19 pursuant to section 422.5 as amended by this Act. 20 Sec. 16. EFFECTIVE DATE. This Act, being deemed of 21 immediate importance, takes effect upon enactment. 22 Sec. 17. RETROACTIVE APPLICABILITY. This Act applies 23 retroactively to January 1, 2024, for tax years beginning on 24 or after that date. 25 EXPLANATION 26 The inclusion of this explanation does not constitute agreement with 27 the explanations substance by the members of the general assembly. 28 This bill relates to state taxation by modifying alternate 29 and individual income tax rates. 30 The bill strikes the graduated individual income tax rates 31 that go into effect in tax years 2024 and 2025, and establishes 32 new individual income tax flat rates beginning in tax years on 33 or after January 1, 2024. 34 The bill establishes the individual income tax flat rate for 35 -4- LSB 5398SV (4) 90 jm/jh 4/ 5
S.F. 2398 the tax year beginning January 1, 2024, but before January 1, 1 2025, at 3.65 percent. 2 The bill establishes the individual income tax flat rate for 3 the tax years beginning on or after January 1, 2025, at 3.50 4 percent. Under current law, the individual income tax flat 5 rate of 3.90 percent goes into effect for tax years beginning 6 on or after January 1, 2026. 7 The bill strikes references to calculating the latest 8 cumulative inflation factor in Code section 422.5(6) and Code 9 section 422.21(5) due to removing income tax brackets and 10 establishing the individual income tax flat rate commencing 11 with tax years beginning on or after January 1, 2024. 12 The bill repeals the alternate individual income tax rates. 13 The alternate income tax rate is available for a taxpayer whose 14 income marginally exceeds the individual income tax filing 15 thresholds in Code sections 422.5(2) and (3), and is used to 16 calculate income tax owed. 17 The bill takes effect upon enactment and applies 18 retroactively to tax years beginning on or after January 1, 19 2024. 20 -5- LSB 5398SV (4) 90 jm/jh 5/ 5