(1) When a modification required by any of the paragraphs in section 615 (c) of the Tax Law pertains to Federal itemized deductions that have been reduced or limited by Federal provisions other than the overall limitation on itemized deductions required by section 68 of the Internal Revenue Code, then the modification required by that paragraph will be determined on a pro rata basis. (An example of this type of modification is the modification for premiums paid for long-term care insurance under section 615[c][4] of the Tax Law: the premiums are an item of deduction on the Federal return as a medical expense. Medical expenses are only allowed as a deduction to the extent that they exceed 7.5 percent of adjusted gross income.) The amount of each modification is determined by multiplying the amount of all Federal itemized deductions that are subject to the particular floor, reduction, or limitation being applied, after application of such floor, reduction, or limitation, by a fraction. The numerator of the fraction is the amount of the item of deduction, which is subject to modification as required by a particular paragraph of section 615 (c) of the Tax Law, that would have been allowed for Federal income tax purposes if there were no Federal floor, reduction or limitation. The denominator is the amount of all Federal itemized deductions that are subject to the particular floor, reduction, or limitation being applied, before application of such floor, reduction, or limitation. The numerator and the denominator of the fraction are determined without regard to the effect of the overall limitation. Example:
For the 2003 tax year, taxpayer Y is a single taxpayer with a Federal adjusted gross income of $80,000. Y is 61 years old. Y's Federal form 1040 schedule A contains the following information:
| Total medical and dental expenses | 18,000 |
| Less: Limitation (7.5% of 80,000) | 6,000 |
| Medical and dental expenses allowed | 12,000 |
Of Y's total medical and dental expenses, $2,000 were for long term care insurance premiums (this amount is below the Federal deduction limit for an individual who is 61 years old).
Section 615(c)(4) requires that Y must make a subtraction modification for long term care insurance premiums allowed as a Federal itemized deduction. The amount of the subtraction modification is computed as follows:
The total medical and dental expenses allowed after the limitation is applied, $12,000 is multiplied by a fraction. The numerator is the amount subject to the modification in section 615 (c) (4), the long term care insurance premium of $2,000. The denominator is the total medical and dental expenses before application of the limitation, $18,000.
The subtraction modification for long term care insurance premiums is: $12,000 × $2,000/$ 18,000 = $1,333.
(2) When the amount of the Federal itemized deductions otherwise allowable for the taxable year is reduced by the overall limitation on itemized deductions required by section 68 of the Internal Revenue Code, then the amount of the modifications required by any of the paragraphs in section 615(c) of the Tax Law that are also subject to the overall limitation will be reduced on a pro rata basis. (Examples of this type of modification are: State and local income taxes described in section 615[c][1] of the Tax Law; expenses or amortizable bond premiums described in section 615[c][3] of the Tax Law; and charitable contributions included in the items of deduction, for a shareholder of a non-electing S corporation, described in section 615[c][6] of the Tax Law.) The amount of the reduction for all the modifications subject to the overall limitation is determined by multiplying the total amount of all the modifications required by section 615(c) that are subject to the overall limitation by a fraction. The numerator of the fraction is the amount of the reduction in Federal itemized deductions resulting from the application of the overall limitation. The denominator of the fraction is the total amount of the Federal itemized deductions otherwise allowable for the taxable year before the overall limitation is applied minus the amount of the itemized deductions excluded from the overall limitation by the provisions of subdivision (c) of section 68 of the Internal Revenue Code. That subdivision provides that certain deductions will not be subject to the reduction of itemized deductions required by subdivision (a) of section 68 (that is, those deductions relating to medical expense, deductions allowed for investment interest, and deductions for casualty or theft losses). Example:
For the 2003 tax year, taxpayer X is a single taxpayer with a Federal adjusted gross income of $200,000. X's Federal form 1040 Schedule A contains the following information:
| Total medical and dental expenses | 25,000 |
| Less: Limitation (7.5% of $200,000 | 15,000 |
| Medical and dental expenses allowed | 10,000 |
| Taxes: | State and local income | 4,000 |
| Real estate property taxes | 3,500 |
| Total taxes | 7,500 |
| Home mortgage interest | 5,000 |
| Gifts to charity | 2,500 |
| Total itemized deductions before overall limitation | 25,000 |
| The amount of itemized deductions after the limitation | 22,988 |
To compute the New York itemized deduction, X must determine the amount of the subtraction modification required by section 615(c) after taking into consideration the pro rata reduction for items subject to the Federal overall limitation.
The amount of the itemized deductions that is subject to a section 615(c) modification and is subject to the overall limitation is $4,000 (the amount of the State and local income taxes). In this example, X's gifts to charity are not subject to any section 615(c) modification.
This amount, $4,000, is multiplied by a fraction to compute the pro rata reduction in the subtraction modification. The numerator is $2,012, which is the amount that X's total itemized deductions are reduced by the overall limitation ($25,000 -$ 22,988 = $2,012). The denominator is $15,000, which is the total itemized deductions before the overall limitation is applied minus the amount of the itemized deductions excluded from the overall limitation by IRC section 68(c), in this case. the medical and dental expenses ($25,000 - $10,000 = $15,000)
The computation of the pro rata reduction is: $4,000 × $2,012/$15,000=$536.
The total section 615(c) subtraction modification for items subject to the overall limitation for X in computing the New York itemized deduction is $3,464 ( $4,000 - $536 = $3,464).