Creating a catastrophic savings account and modifying individual income taxes for account holders and including applicability provisions

This bill allows individuals who are residents, on or after January 1, 2026, to open an interest-bearing savings account with a state or federally chartered bank, savings and loan association, credit union, or trust company in this state and designate the account as a catastrophic savings account (account) for the purpose of financing the payment of qualified catastrophic expenses. “Qualified catastrophic expense” is defined in the bill to mean the payment of a homeowner’s property and casualty insurance deductible under an insurance policy covering the account holder’s homestead, if the policy covers flood, windstorm, or another catastrophic event, or the equivalent of such payments by an uninsured account holder. The bill further defines “catastrophic event”. The account may be established individually, or jointly with a spouse if the married couple files a joint Iowa income tax return. In order to properly establish the account, the bill requires the account holder to submit certain forms to the department of revenue (department) designating the account as a catastrophic savings account (account), and designating one beneficiary of the account (designated beneficiary). These designation forms must be submitted no later than April of the year following the tax year during which the account is opened. An individual may not establish more than one account. The account holder may change the designated beneficiary at any time, and may designate himself or herself as the beneficiary. Contributions to an account may be made in the form of cash by any person. Account funds shall not be used to pay expenses, if any, of administering the account, except that fees and charges may be deducted from the account by the financial institution where the account is held. The bill requires an account holder to submit certain reports to the department, including an annual report for the account, a transaction report upon a withdrawal of funds from the account, and a copy of any federal internal revenue service form 1099 or other similar income statement issued for the account. The bill provides protection to financial institutions from being required to perform, and from being responsible or liable for, certain activities as described in the bill with respect to accounts. The bill requires the department to create the forms required to be filed by account holders, and to adopt rules to implement and administer the bill. The bill provides two individual income tax incentives relating to the accounts. First, an account holder is allowed to deduct from the individual income tax up to the aggregate lifetime contribution limit amount. Second, the bill exempts from the individual income tax any interest received from the account holder’s accounts. For account holders whose annual homeowner’s property and casualty insurance policy (policy) premium paid during the tax year is less than $1,000, the aggregate lifetime limit shall not exceed $2,000. For an account holder whose annual policy premium during the tax year is equal to or exceeds $1,000, the aggregate lifetime limit shall not exceed the lesser of $15,000 or twice the annual policy premium. For account holders who self-insure or who are unable to obtain a policy, the aggregate lifetime limit shall not exceed the lesser of $350,000 or the assessed value of the home. The aggregate lifetime contribution limitations of an account holder may increase if an account holder’s homeowner’s property and casualty homeowner’s insurance policy premium increases, but are not required to decrease. The bill requires an account holder to add to net income for purposes of calculating the individual income tax any payment from the account that is not for qualified catastrophic expenses (nonqualified withdrawal), but amounts transferred between different accounts of the same account holder by a person other than the account holder are not considered nonqualified withdrawals.5 percent of the nonqualified withdrawal, unless the withdrawal was made by reason of the death of the account holder, or was made pursuant to a garnishment, levy, or other order, including an order in bankruptcy following a filing for protection under the federal bankruptcy code. If an account holder dies, the amount of money in the account shall be included in the taxable income of the person who receives the account, unless that person is the surviving spouse of the account holder. Upon the death of the surviving spouse, the amount of money in the account shall be included in the taxable income of the person who receives the account. Upon the sale of the homestead without the purchase of a new homestead within six months of the sale, the bill also requires the amount of money in the account to be included in the taxable income of the account holder. Finally, the bill prohibits the amount of qualified catastrophic expenses that are paid or reimbursed from funds in an account from being allowed as an itemized deduction for Iowa individual income tax purposes. The tax provisions of the bill apply to tax years beginning on or after January 1, 2026.