01-04-2016 | Legal News

Iowa’s Out-of-State Tax Credit and the Wynne Decision – Are You Due an Income Tax Refund?

By: Christopher Nuss and Cynthia Boyle Lande

The Supreme Court Decision

On May 18, 2015, the United States Supreme Court released its decision in Comptroller of the Treasury of Maryland v. Wynne, which held unconstitutional a tax practice in the State of Maryland that allowed an out-of-state tax credit to be applied to state income tax, but not to local county tax paid by a resident. The State of Maryland taxes income that a resident earns both within the state of Maryland as well as outside the state. Maryland imposes on its residents both state tax as well as a local county tax. Prior to the Wynne decision, Maryland’s tax system allowed for a tax credit for taxes paid out of state.  The credit applied against a resident’s state income tax liability. It did not, however, apply against the local county taxes a resident paid. The Court found that this practice resulted in double taxation to income earned out of state and held it to be unconstitutional. As a result, any affected taxpayer is allowed a refund for the overage paid, subject to relevant statute of limitations.

The case in its entirety can be found here: http://www.supremecourt.gov/opinions/14pdf/13-485_o7jp.pdf.

Impact on Iowa Taxpayers

Though Iowa does not impose the same county tax as Maryland, Iowa allows school districts to collect both instructional support income surtax (school district surtax), as well as allows counties to impose emergency medical services income surtax (EMS surtax). The amount a resident pays in surtax is based directly on the amount of income a taxpayer earns in Iowa. Prior to Wynne, the Iowa Department of Revenue (IDR) would calculate these surtaxes prior to applying the out-of-state tax credit, resulting in a taxpayer’s out-of-state tax credit applying only against the taxpayer’s state income tax liability, and not the surtax. Since the Wynne decision has deemed this practice unconstitutional, the IDR will now calculate a resident’s out-of-state tax credit on the IA 130 form, and the credit will be applied before the surtaxes are calculated – essentially allowing a taxpayer to avoid any double taxation on out-of-state taxes paid.

Refund Process

Any Iowa taxpayer who has paid income tax on income earned in another state, and lives in a jurisdiction in which the school district collects school district surtax or the local county collects EMS surtax, may apply for a refund for the overage paid. This can be done by filing an amended tax return – IA Form 1040X – for the years the taxpayer was affected. Due to the statute of limitations on amended returns, a taxpayer affected by this decision may only apply for a refund for the previous three (3) years. 

To see if you qualify for a refund, revisit your income tax returns filed for the years 2012-2014. In addition, you may find more information at the Iowa Department of Revenue website located at: https://tax.iowa.gov/wynne-decision.

The amended Iowa income tax return form IA 1040X may be found here: https://tax.iowa.gov/sites/files/idr/forms1/IA1040X%2841122%29_0.pdf