The big news in Iowa’s tax world as of January 1, 2025, is that Iowa adopted a flat income tax rate of 3.8% for all taxpayers. That means whether you’re earning $50,000 or $500,000, everyone pays the same percentage, and this change makes Iowa one of the most tax-friendly states in the Midwest for higher earners, while simplifying the tax filing process for everyone.
Iowa Governor, Kim Reynolds, signed the tax into law and fast tracked the original timeline. The new tax rate, which drops the income tax rate for Iowa’s top earners from 5.7% in 2024 to a flat rate of 3.8% gives Iowa the sixth-lowest income tax rate in the country amongst states that levied an individual income tax in 2024.
So, how does Iowa stack up? For comparison, Illinois has a flat rate too—at 4.95%. Wisconsin, on the other hand, uses a progressive system with rates up to 7.65%. This new rate positions Iowa as a competitive option for those moving from higher-tax states like Minnesota or coastal states like California and New York.
This lower income tax rate means you could have more money in your pocket for things like housing, savings, travel, or whatever else you might feel inclined to spend your money on. While Iowa’s property taxes are higher than the national average, this income tax reform helps offset that for many families. The cost of living in Iowa—especially housing—is still far below the national average, making Iowa an affordable and attractive option that many prospective home buyers notice. An article I read while researching for this video mentioned Iowa legislators plan to tackle Iowa’s property tax rates next. While legislators said they are still figuring out specifics on policy proposals, Senator Mike Bousselot said Iowans should expect to see further action on property taxes in the upcoming year. In 2023, lawmakers passed House File 718, a measure Republicans estimated would save Iowa taxpayers $100 million in property taxes by capping levy rates for cities and counties, according to a article in the Iowa Capital Dispatch.
You might be thinking, will this flax tax save my family money? For many people, the answer is yes. The flat rate is especially beneficial for middle-to-high income earners. Here’s how it breaks out for people at different income levels. According to an article by Conner Hendricks with Gray Media Iowa Capitol Bureau, an Iowan earning $40,000 a year will save $750 a year, which only shake out to about $63 a month. A married couple earning the median household income of $73,000 will see just under $1400 a year in savings, or $115 a month. For a married couple making a combined $250,000 in household income, they’ll save nearly $400 a month.
However, Iowa’s switch to a flat rate income tax policy was not without controversy. The flat rate income tax is expected to create a $602 million dollar drop in state revenue in the fiscal year 2025, as compared to the previous year. Governor Reynolds and Republicans in the Iowa Legislature have long said the state us collecting too much money from taxpayers and it is time to pass on tax cuts to Iowans. Democrats criticized the policy saying lower income Iowans already pay a larger percentage of their income towards taxes and this new law’s benefits are skewed towards corporations and wealthier Iowans. Millionaires in Iowa will see an average tax cut of $24,000 while households earning under $20,000 will see just $24, a disparity of over 900 times. Critics are also concerned that lower-income Iowans will face the brunt of reduced funding for public services, education and health programs as the state shifts its financial resources.
Taxes are just one part of the puzzle when relocating to Iowa. If you’re considering making a move, I’d love to help you navigate the process and find the perfect home for your family.
