Fiscal Note
Fiscal Services Division
SF 432 – Tax Deduction, Student Loan Interest (LSB2588XS)
Staff Contact: Jeff Robinson (515.281.4614) jeff.robinson@legis.iowa.gov
Fiscal Note Version – New
Description
Senate File 432 expands the existing Iowa income tax deduction for student loan interest paid
by a taxpayer by removing the annual maximum deduction amount of $2,500 and by removing a
restriction that limits availability of the deduction for taxpayers with modified adjusted gross
income above an amount specified in federal law. The Bill is retroactive to the beginning of tax
year (TY) 2021.
Background
Iowa tax law couples with the federal deduction for qualified student loan interest. The federal
maximum amount of interest a taxpayer may deduct in a year is $2,500. The deduction phases
out for taxpayers with modified adjusted gross income between $70,000 and $85,000 for single
taxpayers and between $140,000 and $170,000 for married taxpayers. The thresholds listed
are TY 2020 amounts, and the amounts are adjusted annually for inflation. Taxpayers with
incomes above the top threshold do not benefit from the current federal or Iowa student loan
interest deduction.
Assumptions
The projection developed by the Department of Revenue is based on actual TY 2019 income
tax returns filed by Iowa taxpayers adjusted for demographic changes. Assumptions include the
following:
• To project the impact on Iowa taxpayers, the Department of Revenue adjusted the student
interest claimed on actual Iowa TY 2019 income tax returns for two factors:
• The amount of 2019 interest paid by taxpayers impacted by the income thresholds that
is above the amount they were allowed to deduct.
• The amount of 2019 interest paid by taxpayers above the maximum $2,500 allowed
deduction.
• After adjustment for the two factors, the projected amount of student loan interest
claimed by taxpayers under the proposal is $967.1 million. This compares to the
projected $190.4 million in interest deductions allowed under current law.
• Although the change is effective retroactive to January 1, 2021, taxpayers are not assumed
to make withholding or estimate payment changes until after June 30, 2021. The General
Fund impact for a tax year is assumed to occur in the fiscal year that begins after the start of
the tax year.
• Tax exemptions impact the calculation of the local option income surtax for schools. As a
statewide average, the surtax equals 3.0% of State income tax liability.
Fiscal Impact
Removing the current $2,500 qualified student loan interest deduction limit and the related
income thresholds is projected to reduce annual net General Fund revenue by $25.5 million per
fiscal year, beginning FY 2022.
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The expanded income tax exemption will also reduce the annual amount of revenue raised by
the local option income surtax for schools by $750,000, beginning FY 2022.
Sources
Iowa Department of Revenue
Moody’s Analytics
Regional Economic Models, Inc. (REMI)
/s/ Holly M. Lyons
March 17, 2021
Doc ID 1216941
The fiscal note for this Bill was prepared pursuant to Joint Rule 17 and the Iowa Code. Data used in
developing this fiscal note is available from the Fiscal Services Division of the Legislative Services
Agency upon request.
www.legis.iowa.gov
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Statutes affected:
Introduced: 422.7