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| Why Reform Plan Means Tax Cuts for Most | |
| Selected Representative Iowa Tax Filers Under Current Law, 2009 Proposal | |
| Backgrounder (2-pg PDF) April 9, 2009 The following are tax scenarios for different representative Iowa tax filers that show their federal and Iowa income-tax liabilities today and under the proposed income-tax changes. The first three compare different types of moderate income-tax filers — a working married couple with children, a single working person, and a retired individual. The next three examples show married working families with increasing incomes ($60,000, $90,000 and $180,000, respectively). As these examples show, most of the proposed changes in Iowa taxes are relatively modest, but moderate-income families with children receive more substantial reductions. | |
| Scenario One Married Couple, $30,000 Income | |
| Married couple family with two children income of $30,000 from a $20,000 per year full-time job and a $10,000 per year part-time job. Couple pays $2,000 for child care expenses. Claims standard deduction. Federal income-tax liability None (receives a refund from EITC) Current Iowa income-tax liability $352 Iowa income-tax liability under proposed tax reform $80 Change $272 reduction in Iowa income tax, -77.2 percent (effective tax rate: 0.27 percent of income). | |
| Scenario Two Single Working Individual, $30,000 Income | |
| Single individual with income of $30,000 from full-time job. Claims standard deduction. Federal income-tax liability $2,753 Current Iowa income-tax liability $1,166 Iowa income-tax liability under proposed tax reform $1,097 Change $69 reduction in Iowa income tax, -5.9 percent (effective tax rate: 3.66 percent of income). | |
| Scenario Three Single Retiree, $30,000 Income | |
| Single retired person with income of $30,000, $10,000 from Social Security, $10,000 from private pension, $5,000 from treasury notes, and $5,000 from interest income. Claims standard deduction Federal income tax-liability — $1,030 Current Iowa income-tax liability — none Iowa income-tax liability under proposed tax reform — none Change — none (effective tax rate: 0 percent of income). | |
| Scenario Four — Married Couple, $60,000 Income | |
| Married couple with two children, income of $60,000 from one $40,000 and one $20,000 job. Couple
has itemized federal deductions of $15,000, which includes state income taxes paid. Federal income-tax liability $3,844 Current Iowa income-tax liability $1,785 Iowa income-tax liability under proposed tax reform $1,704 Change $81 reduction in Iowa income tax, -4.5 percent (effective tax rate: 2.84 percent of income), $20 increase in federal income tax, net $61 reduction in taxes paid. | |
| Scenario Five — Married Couple, $90,000 Income | |
| Married couple with grown children, income of $90,000 from one $28,000 job, one $56,000 job and
$6,000 in interest income. Couple has itemized federal deductions of $20,000, which includes state income-taxes paid. Federal income-tax liability $8,647 Current Iowa income-tax liability $3,429 Iowa income-tax liability under proposed tax reform $3,369 Change $60 reduction in Iowa income tax, -1.7 percent (effective tax rate: 3.74 percent of income), $15 increase in federal income tax, net $45 reduction in taxes paid. | |
| Scenario Six — Married Couple, $180,000 Income | |
| Married couple family with income of $180,000 from one $100,000 job and one $50,000 job and $30,000 in interest income. Couple has itemized federal deductions of $36,000, which includes state income taxes. Federal income-tax liability $27,104 Current Iowa income-tax liability $8,136 Iowa income-tax liability under proposed tax reform $8,333 Change $197 increase in Iowa income tax, 2.4 percent increase (effective tax rate: 4.63 percent of income), $55 reduction in federal income tax, net $142 increase in taxes paid. The final scenario points to the fact that some Iowa income is sheltered from any tax liability. This particular example is for Iowas total exclusion from income of certain types of capital gains. Many very high-income individuals have substantial preferential tax items (including municipal bonds and other tax exempt income) that shelters income from taxes. The examples above were designed for simplicity; in fact, most tax filers with incomes of $180,000 will have some income that is taxed at preferential rates at the federal and state levels. This will lower their overall tax liability and mean their effective tax rate is lower than that shown in the examples above. | |
| Scenario Seven — Entrepreneur | |
| Entrepreneur whose income is from $3 million sale of business in which entrepreneur materially participated and secured a capital gains of $600,000. Current Iowa income tax liability $0 Iowa income tax liability under proposed tax reform $0 Change none, (tax rate of 0 percent of income). | |
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