The Governor signed into law significant tax changes in 2022. In 2021, the top Iowa tax rate was 8.53% and this legislation lowered the top tax rate to 6.5% for 2022. In addition, the top tax rate will step down to 6% for 2023, 5.7% for 2024, 4.82% for 2025 and 3.9% for 2026. Once we reach 2026, the 3.9% will be a flat tax rate for all Iowans.
The impact on CTO could be significant especially when donors calculate the amount of their CTO donation to eliminate all of their Iowa tax liability. If that’s the case, then their donation would logically be reduced by more than half. For example, if a $200,000 donor gives that amount to eliminate their Iowa income tax currently, by 2026 they may give $80,000.
For donors wanting to wipe out their Iowa income tax liability, it becomes easier as their donation to CTO could be reduced. The opposite may be true as well as more than 300 of our donors give less than $5,000 and you could assume those donors are not eliminating all of their tax liability. Perhaps, they may increase their contribution when recognizing their ability to reduce their entire Iowa tax liability to zero.
Below is an example of top tax credits and eventually the flat tax rate in 2026:
The reduction in tax rate is good for individual taxpayers and, as more and more Iowans see the benefits ~ both to children in receiving a Catholic education AND in the significant tax savings ~ the CTO will increase the number of donors and allocate all tax credits each year.
Retirement Income Not Taxed
Beginning in 2023, retirees will not be taxed on income received from their retirement funds, whether a withdrawal or required minimum distribution. Many donors of CTO have given to CTO from their required minimum distribution, which has eliminated the income tax they normally would pay on those withdrawals. Those contributions, which come directly from their retirement plan, do not pass through the retirees hands and come directly to CTO. Not paying income tax on those funds plus receiving the Iowa tax credit is a great benefit to donors. Many of our donors who are retirees give to CTO because of the benefit to the children in attending our Catholic schools. The tax incentive may be gone, but the desire to help others remains strong.
Tax Credits Remain Unchanged
For the school tuition programs in Iowa, the tax credit program remains unchanged. For CTO, the amount of tax credits allocated to CTO annually is $3.4 million allowing CTO to raise $4.5 million in tuition assistance for our families.
Impact on Total
Will raising $4.5 million be a challenge given the reduction in Iowa tax liability? Not in the near future, but by 2026, it may be difficult. Our research shows that the primary reason donors give to CTO is to help families send their children to Catholic schools who otherwise could not afford to do so.
In a society plagued by relativism, sending our children to Catholic schools allows them the grace to be rooted in our Catholic faith, understand natural law and grow in values and virtues needed by all in society.