Important Information about 2008 State Tax Returns

submitted by Dan Bontrager, CPA, EA
I wanted to inform everyone of a situation that is taking regarding the individual state income tax return that is due this Thursday, April 30.
The Iowa Department of Revenue reported today that it will not be adopting certain federal income tax provisions on the 2008 return, which is contrary to the instructions it printed a few months ago. When the Department of Revenue printed its instruction booklets this year, it “made an assumption” that the Iowa Legislature would adopt certain federal provisions (commonly referred to as ‘extenders’) that are not a permanent part of the federal tax code. This session of the Iowa Legislature adjourned over the weekend without addressing the issue of whether or not it would adopt the federal extenders this year. The Department of Revenue is now stating that by default, it must change its instructions relative to the federal tax extenders.
As a result, state income tax returns that have been filed using the instructions printed by the Department of Revenue may be incorrect and therefore will have to be amended. Taxpayers who have already filed for 2008 (most of them, presumably), will need to review their returns to see if they took a deduction that is not allowed.
The federal extenders not being allowed on the state income tax return this year are:

1. Educator Expenses – up to $250 in unreimbursed classroom expenditures that teachers are allowed to deduct directly against taxable income
2. Tuition and Fees Deduction – parents who have children in college (or students who claim themselves) may have benefited more from taking a deduction against income rather than a tax credit
3. Itemized Deduction for Sales Taxes – certain taxpayers have been able to deduct a calculated ‘state sales taxes paid’ as opposed to state income taxes paid as an itemized deduction on their Schedule A.

In defense of the Department of Revenue, the State Legislature did couple with these same three federal extenders in 2007. I was also recently informed by a State House Democratic Staff member that the legislature has not fully coupled with federal changes only three times in the past. In each of those instances, the Legislature let everyone know in advance that they were not going to couple with the federal changes so taxpayers and their preparers could plan accordingly.
I encourage anyone with questions to speak to their local state representative, the Iowa Department of Revenue, and/or a qualified tax professional.