Iowa has undergone a tax transformation unlike almost any other state in the country over the past five years. In 2022, Iowa’s top marginal income tax rate stood at 8.53% — one of the highest flat or near-flat rates in the Midwest. Governor Kim Reynolds signed sweeping tax reform legislation that initiated a multi-year phase-down: 2023 saw the top rate drop to 6%; 2024 moved to a flat 4.82%; and 2025 brought the rate to a flat 3.8% — a reduction of over 4.7 percentage points in just three years.
Equally significant: Iowa made all retirement income fully exempt from state income tax effective 2023. Pensions, Social Security, IRA distributions, 401(k) withdrawals, and military retirement are all now untaxed in Iowa. The state also eliminated its estate tax effective January 1, 2022, and phased out its inheritance tax. For retirees, Iowa has pivoted from one of the most burdensome states to one of the most attractive in the region. This guide explains what changed, what’s current for 2026, and what Iowa’s overall tax picture means for workers and retirees.
To understand how dramatic Iowa’s tax transformation is, consider the starting point. In 2022, Iowa had nine income tax brackets with rates from 0.33% to 8.53%. At the top bracket, Iowa’s income tax rate was among the highest in the Midwest and competitive even with some coastal states. A high-income Iowan was paying nearly the same percentage in state income tax as someone in California (which tops out at 13.3%) on a relative basis.
Governor Reynolds’ 2022 tax reform bill set a legislated schedule for rate reductions:
The driving argument for the cuts: Iowa was losing residents — particularly retirees and high-income households — to nearby states with no or low income taxes, particularly South Dakota (no income tax) and Florida. The reform aimed to arrest that outflow and attract new residents and businesses.
For 2025 and 2026, Iowa taxes all income above the standard deduction at a flat 3.8%. Iowa uses federal adjusted gross income (AGI) as the starting point, with Iowa-specific modifications. Iowa couples the flat tax with a standard deduction based on federal amounts. One notable Iowa provision: Iowa allows a deduction for federal income taxes paid on the Iowa return (partially, and subject to limitation), which can modestly reduce Iowa taxable income for some filers.
| Annual Income | Iowa (3.8% flat) | Illinois (4.95% flat) | Minnesota (top 9.85%) | South Dakota (0%) |
|---|---|---|---|---|
| $60,000 | ~$1,900 | ~$2,475 | ~$3,100 | $0 |
| $120,000 | ~$4,240 | ~$5,310 | ~$8,100 | $0 |
| $250,000 | ~$9,025 | ~$11,363 | ~$21,000 | $0 |
| $500,000 | ~$18,525 | ~$23,363 | ~$46,000 | $0 |
Estimates after approximate standard deduction. Minnesota uses graduated brackets and examples assume top-rate income. Actual amounts vary.
Effective January 1, 2023, Iowa made all retirement income exempt from state income tax for residents who are 55 years of age or older. Prior to 2023, Iowa taxed most retirement income — including Social Security, pension distributions, and IRA/401(k) withdrawals — as ordinary income. The change was part of the same 2022 tax reform package that initiated the income tax rate reductions.
The following retirement income sources are completely exempt from Iowa income tax for qualifying residents (age 55+):
For a retired Iowa couple receiving $30,000 in Social Security, $40,000 in pension income, and $20,000 in IRA distributions — a combined $90,000 in retirement income — the Iowa income tax bill is $0. Under the pre-2023 system with the old 8.53% top rate, that same couple could have owed thousands of dollars in state income tax.
Prior to 2022, Iowa was routinely ranked among the less tax-friendly states for retirees. With the combination of the retirement income exemption and the flat 3.8% rate on non-retirement income, Iowa has pivoted dramatically. The state now competes meaningfully with Wisconsin (which taxes most retirement income) and Minnesota (top rate 9.85%, retirement income largely taxable) for residents who want to remain in the upper Midwest without facing heavy state income taxes on their retirement savings withdrawals.
Iowa’s effective property tax rate of approximately 1.57% of market value is relatively high — well above the national average of about 1.1% and significantly higher than most neighboring states. Property taxes in Iowa are administered at the county level and fund local governments and school districts. Iowa assesses property at 100% of market value for residential properties. Rates vary by county and city.
Iowa offers several property tax relief programs:
Iowa’s sales tax is among the more straightforward systems in the country: 6% state rate plus a mandatory 1% local option sales tax in most counties (which has been adopted by virtually all Iowa counties), resulting in a uniform 7% rate across nearly all of Iowa. There are no additional city-level sales tax additions beyond this 1% local option.
Iowa exempts groceries (unprepared food) from sales tax — a meaningful relief for families. Prescription drugs are also exempt. Prepared food from restaurants is taxed at the standard 7% rate. Iowa has expanded its sales tax to cover certain digital services and software-as-a-service in recent years as part of efforts to modernize its tax base.
Iowa eliminated its state estate tax effective January 1, 2022. Prior to this, Iowa had a separate state estate tax for larger estates. There is no Iowa estate tax for deaths occurring on or after January 1, 2022.
Iowa had an inheritance tax that applied to non-immediate-family heirs. The 2021 tax reform legislation phased this out over several years, reducing rates each year until the tax reached 0% effective January 1, 2025. Iowa no longer has an inheritance tax. For all practical purposes, Iowa is now a no-estate-tax, no-inheritance-tax state — a significant improvement for families with meaningful assets to transfer.
| State | Income Tax | Retirement Exempt? | Avg Property Tax | Sales Tax (typical) |
|---|---|---|---|---|
| Iowa | 3.8% flat | Yes (fully, age 55+) | ~1.57% | 7.0% |
| Illinois | 4.95% flat | Yes (fully) | ~2.08% | ~8.8% |
| Minnesota | 5.35–9.85% | SS partial; other taxed | ~1.12% | ~7.5% |
| Wisconsin | 3.5–7.65% | Partial only | ~1.61% | ~5.6% |
| South Dakota | None | N/A | ~1.14% | ~6.4% |
CountryTaxCalc.com is reader-supported. When you use our partner links, we may earn a commission at no cost to you. Learn more about our affiliate partnerships
★ 4.8 verified reviews · 3,758 reviews
An Iowa CPA can help you confirm your retirement income exemption eligibility, optimize your Iowa flat-rate tax filings, and plan for ongoing rate reductions.
⚠ Not for simple single-state returns. Free filing is fine for straightforward W-2 situations.
Talk to an Iowa CPA About Your Taxes →Interested in reaching this audience? Advertise on CountryTaxCalc →