Iowa releases guidance for impact of OBBBA on employee withholding tax
Posted by DaveMoll on Jan. 7, 2026 / Subscribe 0
The Iowa Department of Revenue has released updated guidance on the One Big Beautiful Bill Act (P.L. 119-21) impact on employee withholding tax. The Act allows for no tax on tips, no tax on overtime, no tax on car loan interest, and a new enhanced deduction for senior citizens. Iowa has 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. However, because the Act 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. This means that the 2026 Iowa W-4 form cannot be modified to allow for these new deductions. 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. Taxpayers will not be able to change the amount of withholding allowances claimed on their 2026 Iowa W-4 to reflect these 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. Iowa also 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.
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