A new tax for 2013 is the 0.9% Medicare surtax, assessed on wages and self-employment income above $200,000 if single or $250,000 for a married couple.

The mechanics of the surtax are for a different blog post on a different day. But in general, if a taxpayer works at a job where they receive a salary, the employer will withhold the surtax on wages above $200,000 (regardless of the taxpayer’s marital status). Taxpayer’s perform a reconciliation on Form 8959 when they file their tax return. If they paid in too much toward the surtax, they’ll get a refund. If they paid in too little, they’ll owe additional tax on their return.

Something I’ve encountered is how to deal with the surtax withholding on an Iowa tax return.

Why is this an Issue?

Any surtax taken out of a taxpayer’s paycheck is lumped together with regular income tax withholding on Line 62 of the federal Form 1040.

Income tax withholding is deductible on the Iowa tax return.

So the question is, is withholding attributed to the 0.9% Medicare surtax deductible in Iowa?

IDR Guidance

The short answer is: no, any withholding attributed to the 0.9% Medicare surtax is NOT deductible in Iowa. Here’s what the Iowa Department of Revenue says:

 

The 0.9% Medicare tax is not considered a federal income tax and is, therefore, not deductible on the Iowa return.

(from the expanded Iowa 1040 instructions)

Watch Your Software

Whether you’re a tax pro or a do-it-yourselfer using TurboTax, I would strongly recommend watching your software closely to make sure it’s carrying the correct amount of withholding to the Iowa tax return. My software is carrying all withholding on the federal return, including the 0.9% surtax, to the Iowa return and I have to manually override the software to get the right amount to show.

 

“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”