Iowa's Flat Income Tax Went Into Effect Jan. 1

As of Jan. 1, working Iowans began paying a flat income tax of 3.8%. The flat tax was approved in the Iowa Legislature last spring.

Under the state’s previous tax structure, the income tax rate for married couples filing jointly making up to $12,420 was 4.4%. The rate was 4.82% for couples that made over $12,420 - $62,100 and 5.7% for couples making over $62,100.

Although the new income tax rate will be the same for all Iowans, the savings they enjoy as a result of the flat tax will be determined by income. The more income a person makes, the greater their income tax reduction will be.

According to statistics from the Iowa Census Bureau, the average Iowan makes $39,728, meaning they’d pay an income tax of $1509 under the new rate, a reduction of about $755 from the 2024 tax year. A married couple making the state’s median income of $73,147 is projected to pay $2,779 with the 3.8% rate, down from $4,169 (a reduction of $1,390). For a married couple making a combined $250,000, their projected income tax would be reduced by $4,750, from $14,250 to $9,500.

Iowa State Rep. David Sieck (R-Glenwood) said the flat income tax got enacted sooner than many of his fellow lawmakers were expecting. When the matter was first brought up for discussion, concerns were voiced about the negative impact the reduction could have on the state budget.

“We actually thought it was going to take longer and we accelerated it because it wasn’t causing as many budget issues as we thought, so it kind of got put into place faster than everybody thought it would,” Sieck said. “We wanted to see what it was going to do to the budget."

Sieck said there were several issues that surfaced after the COVID pandemic that created concerns about the state budget, so getting the income tax reduction in place was expected to be a longer process. He said one of the major post-COVID issues causing concern was the elimination of Enhanced Medicaid. In March 2020, at the start of the pandemic, Congress passed legislation to increase federal funding to states. To get  the additional dollars, states were required to meet a continuous coverage requirement for its Medicaid enrollees until April 1, 2023, despite changes in a person’s status that might normally cause them to lose their Medicaid status.

In Iowa, there were over 800,000 enrollees in the managed care system and more than 168,000 members were maintained in the Medicaid program because of the federal government’s public health emergency requirements. States lost the additional federal dollars on April 1, 2023, forcing Iowa and other states to evaluate Medicaid enrollees to determine who was still eligible for the program. Those who were no longer qualified would have their coverage terminated because the state was no longer receiving the increased federal funding it was getting during the pandemic.

“We knew the fed was going to do away with that, so all those extra people were going to get dumped into us having to pay for it,” Sieck said. “We call it the cliff and I think it was like $180 million that we were going to have to pick up with Enhanced

Medicaid going away, but so far everything is fine, there’s a lot of extra money.”

Sieck called the fixed income tax rate “a great deal” but said the focus of the governor and the legislature needs to shift to property taxes. He said property taxes are a much bigger issue than income taxes when he visits with constituents in his district.

“That’s the next big dog,” he said. “It’s going to be hard to figure out a way but I think that’s going to be a lot of what we address this year – property taxes,” he said. “That’s where most people have an issue. I haven’t heard anybody complain about their income tax but I’ve heard a lot of people complaining about their property taxes.

“I don’t know exactly how we’re going to do it. All the heads are getting together to try and figure out the best plan and what we can afford to do to start.”
Iowa’s 2025 legislative session begins Monday, Jan. 13. Gov. Reynolds will give her “State of the State Address” on Tuesday.
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What does flat tax mean for employers, employees?

The Iowa Department of Revenue is issuing updated income tax withholding formulas and tables for 2025. The department updates withholding formulas and tables when necessary to account for inflation and for changes in individual income tax liability resulting from changes in Iowa law.

The Iowa withholding formula and the IA W-4 have been revised for tax year 2025 to accommodate for the new 3.8% percent flat tax rate on Iowa individual that went into effect Jan. 1.

Because of changes reflected on the 2025 IA W-4 form, employees should be encouraged to file an updated Iowa W-4 using the 2025 IA W-4 (44-019). However, employers may continue to compute withholding based on the information from the employee’s most recently furnished IA W-4. To do so, employers must make certain additional calculations for those employees whose IA W-4 on file dates to 2023 or earlier.

Employers can view the Iowa 2025 withholding formulas and tables online.

The Department has updated the online Withholding Estimator to help individuals calculate their 2025 withholding amounts. Employers were required to start updating withholding amounts on Jan. 1.  Employees can also make changes to their Iowa W-4 (withholding) form by contacting their employer.

Employers with questions can contact the Department at 515-281-3114 or 800-367-3388.