Bills › 89th General Assembly
Providing a deduction from the individual income tax for the amount of interest paid on a qualified education loan and including retroactive applicability provisions
Where it is now
- Done: IntroducedFebruary 22, 2021
- Done: SubcommitteeFebruary 24, 2021
- Stopped: Senate committeeDied when the General Assembly ended
- Next: Passes the Senate
- Next: House committee
- Next: Passes the House
- Next: To the Governor
- Next: Signed into law
Died when the session ended The 2022 session adjourned on May 24, 2022, the General Assembly’s last regular session. Bills that didn’t pass both chambers died. What’s a funnel?
What’s in it
AI summary People paying back student loans can now deduct the full amount of their interest from their Iowa income taxes. Currently, this deduction is limited to $2,500 and disappears for people who earn above certain income levels. This change removes those limits and applies to tax years starting from January 1, 2021.1
Read the official explanation
This bill relates to the deduction of student loan interest for purposes of the individual income tax. Under current law for federal income tax purposes and Iowa income tax purposes, an individual is allowed to deduct up to $2,500 of interest paid on a qualified education loan (section 221 of the Internal Revenue Code). However, this deduction is gradually phased out for individuals with income in excess of $70,000 ($140,000 for a married couple filing a joint return), and is completely phased out for individuals with income of $85,000 or more ($170,000 for a married couple filing a joint return). These income phase-out levels are adjusted for inflation each year according to federal law. The bill allows an individual to deduct, for Iowa income tax purposes, the total amount of interest paid during the tax year on a qualified education loan. The bill applies retroactively to tax years beginning on or after January 1, 2021.
Senate subcommittee
Named February 24, 2021. On March 11, 2021 it recommended passage.
Three legislators hear a bill first and recommend what the committee should do; it’s the best time to weigh in. How to take part
Fiscal note
Less revenue: up to $750,000 Compare with other bills
AI summary This bill removes the $2,500 limit and income restrictions on the state income tax deduction for student loan interest. It is projected to reduce annual net General Fund revenue by $25.5 million per fiscal year beginning in fiscal year 2022. The change will also reduce the annual revenue raised by the local option income surtax for schools by $750,000 beginning in fiscal year 2022.3
Read the fiscal note
Description
Senate File 432 expands the existing Iowa income tax deduction for student loan interest paid by a taxpayer by removing the annual maximum deduction amount of $2,500 and by removing a restriction that limits availability of the deduction for taxpayers with modified adjusted gross income above an amount specified in federal law. The Bill is retroactive to the beginning of tax year (TY) 2021.
Background
Iowa tax law couples with the federal deduction for qualified student loan interest. The federal maximum amount of interest a taxpayer may deduct in a year is $2,500. The deduction phases out for taxpayers with modified adjusted gross income between $70,000 and $85,000 for single taxpayers and between $140,000 and $170,000 for married taxpayers. The thresholds listed are TY 2020 amounts, and the amounts are adjusted annually for inflation. Taxpayers with incomes above the top threshold do not benefit from the current federal or Iowa student loan interest deduction.
Assumptions
The projection developed by the Department of Revenue is based on actual TY 2019 income tax returns filed by Iowa taxpayers adjusted for demographic changes. Assumptions include the following:
- To project the impact on Iowa taxpayers, the Department of Revenue adjusted the student interest claimed on actual Iowa TY 2019 income tax returns for two factors:
- The amount of 2019 interest paid by taxpayers impacted by the income thresholds that is above the amount they were allowed to deduct.
- The amount of 2019 interest paid by taxpayers above the maximum $2,500 allowed deduction.
- After adjustment for the two factors, the projected amount of student loan interest claimed by taxpayers under the proposal is $967.1 million. This compares to the projected $190.4 million in interest deductions allowed under current law.
- Although the change is effective retroactive to January 1, 2021, taxpayers are not assumed to make withholding or estimate payment changes until after June 30, 2021. The General Fund impact for a tax year is assumed to occur in the fiscal year that begins after the start of the tax year.
- Tax exemptions impact the calculation of the local option income surtax for schools. As a statewide average, the surtax equals 3.0% of State income tax liability.
Fiscal Impact
Removing the current $2,500 qualified student loan interest deduction limit and the related income thresholds is projected to reduce annual net General Fund revenue by $25.5 million per fiscal year, beginning FY 2022.
The expanded income tax exemption will also reduce the annual amount of revenue raised by the local option income surtax for schools by $750,000, beginning FY 2022.
Sources
- Iowa Department of Revenue
- Moody’s Analytics
- Regional Economic Models, Inc. (REMI)
- Tax Deduction, Student Loan Interest · March 17, 2021 · $750,000