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Governor Reynolds announced a new flat tax rate for Iowans this week, hitting her target 1 year early. While it sounds great to save money on taxes, does this change anything for Iowans? Alec Epkes of Protego Advisers from Cedar Rapids explains there are “levers” you can pull in January to impact your tax burden that can’t be pulled in December.
Epkes also explains the President’s proposed extension of The Tax Cuts and Jobs Act (TCJA), explains why social security checks are taxed, and breaks down the changes for Iowans. He also explains how to handle itemized deductions. What does that even mean?
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Reynolds Flat Tax in Iowa
Iowa’s move to a flat tax began in 2018 with reforms aimed at lowering the state’s high tax rates. At that time, Iowa’s highest tax bracket was nearly 9%, which placed it among the least competitive states. The new system, effective January 1, 2025, will replace the tiered system with a single 3.8% rate for all residents. The reform is expected to return approximately a billion dollars to taxpayers over two years, marking a significant shift in the state’s approach to taxation.
Brady raised questions about how this change affects deductions and write-offs. Epkes noted that most deductions and credits remain the same, ensuring that lower-income earners still receive tax relief. Additionally, he pointed out that a flat tax simplifies the filing process and may enhance Iowa’s appeal to businesses. He highlighted Iowa’s improved tax competitiveness, stating that before 2020, the state ranked near the bottom but is now expected to be in the top 10-14 states.
Federal Tax Proposals and What They Mean for Iowans
The conversation shifted to federal tax reform proposals, including the potential elimination of federal income tax, Social Security tax cuts, and the removal of taxes on tips and overtime. While these proposals remain in discussion, Epkes acknowledged that they could have far-reaching effects. He explained that removing federal income tax might appeal to many, but replacing that revenue would require significant restructuring.
One major concern for retirees is the taxation of Social Security benefits. Brady was surprised to learn that Social Security income is taxed based on an individual’s highest earning years, which can create an added burden for retirees. Epkes indicated that eliminating Social Security taxes would provide substantial financial relief for many.
Another proposal involves exempting tips and overtime from taxation, which could directly impact the hospitality and service industries. Epkes suggested that such changes are likely aimed at increasing employment and retention in sectors currently facing worker shortages.
Smart Tax Planning Starts Now
Epkes encouraged listeners to take a proactive approach to tax planning rather than waiting until filing season. He emphasized that working with a CPA early in the year allows individuals to take advantage of tax-saving opportunities and avoid unnecessary costs.
He also pointed out that better organization throughout the year leads to lower CPA fees and fewer missed deductions. Brady, realizing the importance of tax strategy, reflected on how he had previously viewed taxes as a straightforward obligation rather than a system with opportunities for savings.For those interested in optimizing their tax strategies, Epkes and his team at Protego Advisers are available at protegoAdvisers.com.