Q: For many years, I have taken deductions on my federal income tax return of state taxes based on the amount of taxes shown on my prior year's state tax return. I have followed this practice since before state tax was withheld from my salary. Now I am concerned by the proposal to eliminate the state tax deduction. If it is eliminated in 1985, will I be able to deduct the state taxes withheld in 1984?
A: Let me say first that I think concern about possible major changes in the tax laws is premature. Congressional action isn't likely until late in the year -- and it is quite possible that nothing will be done until 1986.
In addition, the shape of any tax legislation is impossible to foresee. There are several conflicting proposals, and the form of any final legislation is likely to be different from anything being thrown in the ring now.
Next, I must point out that you have been reporting your state income tax incorrectly for many years. The proper deduction on your federal return is the amount actually paid during the calendar year of the federal return being prepared.
That is, the proper deduction for your 1984 federal return -- the one you are submitting now -- is the total of state tax withheld from your salary in 1984 plus any estimated tax payments made in 1984 (regardless of the year to which those payments applied) plus any additional tax you paid last spring when you submitted your 1983 state tax return.
Now that you are properly chastised, I can go on to answer your question. Under present tax law, if the state tax deduction is eliminated for 1985, you will not be permitted to deduct on the 1985 return the state tax withheld in 1984. But you probably would be allowed to file an amended federal return for 1984, on which you could claim that deduction.
I suggest instead that you now bring your reporting of state tax deduction in line with the instructions. If you haven't yet filed your 1984 federal return, go to Schedule A and include in your state income tax deduction claim the state tax liability from your 1983 state tax return (not previously claimed) plus the state tax withheld from your 1984 wages.
I suppose that technically you should go back and adjust every year's return to get the right number; but I think the IRS would accept the one-year doubling up (since you are not claiming the same payments twice) in order to get your deduction in the proper order.
If you take care of this on your 1984 return, you'll be caught up and future returns will be done properly; and you won't have to worry about any change in the tax laws costing you a deduction because you were a year behind.
Q: You have written in your column that to compute the threshold for determining if any Social Security benefits are subject to tax, we should add 50 percent of total Social Security income received. I have read in the papers and have heard from other supposedly reliable sources that the full Social Security benefit should be added to adjusted gross income. Can you clear up this confusion?
A: Your "other supposedly reliable sources" are not as reliable as you thought. To your adjusted gross income (before including any Social Security benefits), you add half of your total Social Security and Railroad Retirement Tier 1 benefits, plus all nontaxable interest income, to determine if you exceed the applicable ceiling ($32,000 on a joint return, $25,000 for a single person or zero for married couples filing separately).
It's possible that the confusion arises because of the way the worksheet is formulated in the IRS tax booklet. On line 1 of the worksheet, the instructions say to enter the "total amount" from all of the SSA and RRB annual statements.
But the instruction for line 2 -- which is separated from line 1 by an explanatory note -- says "Divide the amount on line 1 by 2." As you can see, you will only include half of your Social Security and Railroad Retirement benefits in the calculations.