I posed this issue with a former WI Dept. of Revenue employee and this was his response.
Although questionable tax policy, this treatment appears proper. I checked the instructions to the WI Schedule SB and there is no mention of an adjustment in either subtraction for Medicare premiums that are included in the portion of federally taxable Social Security (that is subsequently eliminated from WI income). The WDOR fact sheet on the medical insurance premium deduction doesn’t indicate any reductions or adjustments are necessary.
This outcome is probably due to sloppy drafting of the subtraction modifications. I have seen things like this in other parts of WI tax law. Unless the revenue loss is high, the state puts up with the issue for the sake for keeping its calculations and forms simple.
