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Possible Refunds to Iowa Residents as a Result of Wynne

On October 16, 2015, the Iowa Department of Revenue released guidance on how Iowa residents who earned out-of-state income (excluding Illinois) may be eligible for a refund as a result of Comptroller of the Treasury of Maryland v. Wynne.

To recap the Wynne case, Maryland was allowing Maryland residents to take a credit on their Maryland return for taxes paid to other states for state income taxes purposes but not for local taxes. The U.S. Supreme Court determined that this was not constitutional and therefore Maryland is now in the process of allowing Maryland residents to claim a refund due to double taxation.  Although Iowa does not allow counties to impose a local income tax, it does allow school districts to impose a local “instructional support income surtax” and counties to impose an “emergency medical services (“EMS”) income surtax.”  These surtaxes are based upon the Iowa state income taxes a resident taxpayer owes. Similar to Maryland, Iowa allowed a credit for out-of-state taxes paid against Iowa state income tax; however, this credit was not applied against the local surtax liability.

Based on this, Iowa has announced that this practice, similar to Maryland, is not in conformity and is inconsistent with the Supreme Court ruling. Therefore, the department is changing its practice. Going forward, the out-of-state tax credit must be applied prior to other nonrefundable Iowa tax credits and before the calculation of any school district or EMS surtax.

Iowa therefore is allowing refunds for anyone that paid out-of-state taxes and one or both of the above surtaxes. For more information on how to claim the refund and other information, click here.

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