On July 4, 2025, President Trump signed into law Public Law (P.L.) 119-21 which allowed for no tax on tips, no tax on overtime, and no tax on car loan interest, with qualifications. The bill also created a new enhanced deduction for senior citizens. The starting point for Iowa taxable income is federal taxable income. Iowa has also adopted rolling conformity, meaning the state will automatically conform with any changes made to the Internal Revenue Code, except as specified by law. Iowa will conform with the federal tax provisions related to no tax on tips, no tax on overtime,no tax on car loan interest,and the new enhanced deduction for senior citizens.
Because P.L. 119-21 was passed after the 2025 Iowa legislative session, the Iowa Code and related Iowa Administrative Code rules do not currently provide for a withholding allowance related to the deductions for no tax on tips, no tax on overtime, and no tax on car loans interest. Meaning that the 2026 Iowa W-4 form cannot be modified to allow for these new deductions.
What does this mean to taxpayers?
Similar to tax year 2025, Iowa taxpayers will not be taxed on the qualified portion of tip income, overtime pay, and will be able to benefit from the no tax on car loan interest allowed for federal purposes. Also similar to tax year 2025, taxpayers will not be able to change the amount of withholding allowances claimed on their 2026 Iowa W-4 to reflect the above three new deductions. When taxpayers file their 2026 Iowa individual income tax return the amount of their refund may be a little higher than usual, or the amount they owe may be a little less than usual due to the additional deduction allowed for no tax on tips, no tax on overtime, and no tax on car loan interest.
How will the new enhanced deduction for seniors affect my withholding?
Iowa conforms with the new federal tax law which allows taxpayers who are age 65 or older to claim an exemption of up to $6,000. Iowa law also allows taxpayers to claim a withholding allowance for personal exemptions. If a taxpayer is 65 or older and would like to adjust the amount of income tax withheld from their wages, by the amount of their allowed enhanced deduction for seniors, they must complete a new IA W-4 form and complete the applicable allowance information.