In May of 2017, Iowa passed a bill that created the Iowa First Time Homebuyer Savings Account and related tax deduction. Effective January 1, 2018 Iowa first time homebuyers may save for their future Iowa residence tax free, and get a deduction on their Iowa tax return for savings contributions.
Individuals or married couples may now open an interest-bearing savings account in Iowa with a state or federally chartered financial institution, and designate the account as an Iowa First Time Homebuyer Savings Account. Amounts of up to $4,000 joint (filing as married filing jointly on the Iowa return) or $2,000 filing individual/married filing separate may be deducted by the account holder from their Iowa tax return in the year of contribution for up to 10 years or a maximum lifetime deduction of $40,000 joint or $20,000 individual. The deduction will be increased annually for inflation. Income, such as interest, earned by the account that has been reported on the Federal return may also be deducted on the Iowa return.
Any amount withdrawn for reasons other than a qualified home purchase, or still in the savings account after the 10th year after opening will be penalized by being included in the account holders Iowa income for that year and assessed a 10% penalty.
Who Qualifies as a First-Time Homebuyer?
- The account holder designates a beneficiary that must be a qualifying first-time homebuyer.
- A qualifying first-time homebuyer for these purposes is an Iowa resident who does not own, individually or jointly, a single or multi family residence for 3 years prior to being named a beneficiary and using funds to purchase a home.
- The account holder and beneficiary can be the same person (you can open one for yourself).
- Account holders may change designated beneficiaries at any time. (If you realize your designated beneficiary will not purchase an Iowa home in time, you can change beneficiaries).
- A home that is purchased by the beneficiary 90 days or more after the account holder first opened the savings account.
- Home purchased must be an Iowa single-family residence owned and occupied by the designated beneficiary as their principal residence. This includes manufactured homes, mobile homes, and condos.
- An individual may establish more than one first-time homebuyer savings account, if each account has a different beneficiary. (This means that parents or grandparents could have an account for each of their children/grandchildren).
- And likewise, an individual can be the beneficiary of multiple accounts.
- There is no limitation on the amount of contributions that may be made or retained in the savings account, but maximum tax deductions remain as noted above.
Account Holder Reporting Requirements
- A new form to be completed and submitted annually with the Iowa income tax return of the account holder. This form is currently still being drafted by the State.
- Include annually with your Iowa tax return any 1099-INT forms related to interest earned by the savings account.
- A transaction report upon a withdrawal of funds from the account.
This is a great opportunity for Iowa first-time homebuyers!
Amie Kuntz is a CPA with over 10 years’ experience in taxation, focusing on privately held businesses and their owners. Amie has experience both in public accounting and private industry, which allows her to understand how tax law affects business owners inside and out. Amie is committed to being a trusted advisor, in conjunction with providing tax planning and compliance.