3.8% Medicare Tax

[Kram BergGold]

I just read an article that said investment income gets reduced by investment expenses before the Medicare tax is computed and that state and local taxes are an investment expense for this calculation. If this is true, then we are going to have to figure this. There is not way our software can figure the amount of state tax applicable to the investment income and transfer it from the state to the federal return. Any thoughts?

[mactoolsix]

Here is an excerpt from a very in depth article by U.S. Trust http://www.ustrust.com/Publish/Conte...are-Surtax.pdf

State and local
income taxes are also allowed as a deduction when
calculating NII, but only to the extent allocable to NII.
For example, state and local income taxes allocable to
salary would not be deductible when calculating the
surtax because salary is not NII. The Regulations
state that this allocation of state and local income
taxes between NII and non-NII can be “determined by
taxpayers using any reasonable method.” The
Regulations provide an effective “safe harbor” by
stating that allocating state and local income tax based
on the ratio of (NII)/(Gross Income) is an example of a
reasonable method.

So, only taxes allocable to NII are deducted. I would assume tax software can make this calculation as long as you are doing State returns with the Federal.

Mike

[Burke]

Interesting. Not sure how this would affect most TP's landing in this category, who would be high-incomers as a result of the NII anyway, but would taking it off the top (highest rate) be considered a reasonable method? Might make a difference using state tax graduated rates.

[Burke]

Here is an excerpt from a very in depth article by U.S. Trust http://www.ustrust.com/Publish/Conte...are-Surtax.pdf Mike

Excellent article. I printed the whole thing.