A few weeks ago I wrote about how the 0.9% Medicare surtax is handled on the Iowa tax return. In short, any amount of surtax withheld from a ID-10042878taxpayer’s wages is NOT deductible on the Iowa tax return, even though that withholding is counted as withholding on the taxpayer’s federal tax return.

At the time I wrote the post, my software was handling this wrong. A few days after I published that post, my software provider issued a fix for the problem. (I am sure the fix was in the works before I published my post, so I can’t take credit.)

But is the Fix Right?

Here’s how my software is handling the 0.9% Medicare withholding on the Iowa return:

  1. It deducts all federal withholding — including the 0.9% surtax — on Line 31
  2. It adds the full amount of 0.9% Medicare surtax back to income on Line 28

There’s something about this that doesn’t seem right.

Here’s what the instructions to Line 31 say:

Enter the amount(s) listed in the box labeled “Federal income tax withheld” on the W-2 or 1099 form(s) that you received.

The 0.9% Medicare tax is not considered a federal income tax and is, therefore, not deductible on the Iowa return. Taxpayers can deduct their entire withholding amount on line 31, but the self-employment tax portion must be added back on line 28.

The 0.9% Medicare surtax is not included in the “federal income tax withheld” box of the W-2. It’s shown in Box 6 of the W-2 under Medicare taxes.

On the federal return, the surtax withholding is lumped together with income tax withholding and shown as one lump-sum number. I assume this is why the software is putting that same number on Line 31 of the Iowa return. But the Line 31 instructions appear to say that you should only show income tax withholding from W-2s and 1099s, not any other type of withholding.

0.9% Surtax Isn’t a Self-Employment Tax

The second part of the Line 31 instructions are ambiguous. It says you can deduct all withholding but must add back the “self-employment tax portion” on Line 28. The 0.9% surtax is not a self-employment tax.

And here’s what the Line 28 instructions say:

The 0.9% Medicare tax is not considered a federal income tax and is, therefore, not deductible on the Iowa return. Taxpayers can deduct their entire withholding amount on line 31, but the self-employment tax portion must be added back on line 28.

Again, this is poorly worded because it appears the second sentence is referring to the 0.9% Medicare tax, but that tax is not a self-employment tax.

How it Should Be Treated

I would say it’s probably okay to deduct all of the withholding on Line 31 and then add back the amount of the surtax on Line 28. But why include any of this on the Iowa return at all? I think it would be far better to just show actual income tax withholding on Line 31 and forget about the surtax.

As of right now, I’m leaving it alone and not overriding my software. And luckily, almost all of the returns on my desk that are subject to the surtax are on hold for other reasons, so I have more time to ponder this.

Splitting Hairs

Yes I’m splitting hairs, but that’s how I operate.

Image courtesy of freedigitalphotos.net / renjith krishnan

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