A Single taxpayer has a state AGI of $765,000 and federal AGI of $785,000. Itemized deductions total $55,000 under both federal and state law (No adjustments). The total amount of medical expense deduction included in that figure is $17,500. What is the amount of itemized deductions that can be claimed on the state return?

Question

Select one:
a. Their AGI level limits all itemized deductions to $0.
b. They can claim all $55,000 of itemized deductions without limitation.
c. $25,000 - The total $55,000 minus the $30,000 from the "80% of itemized deductions" calculation.
d. $20,637 - The total $55,000 minus the $34,363 from the "6% of the excess" deduction limitation calculation.

Answer 1

To determine the amount of itemized deductions that can be claimed on the state return for the taxpayer with a state AGI of $765,000, we need to evaluate the potential limitations on itemized deductions based on the taxpayer's AGI.

For many states, itemized deductions can be limited at higher income levels. There are often income-based thresholds and caps that dictate how much can be deducted.

In this case:

• AGI: $765,000
• Itemized deductions: $55,000
• Medical expenses included in itemized deductions: $17,500

Steps to analyze the options:

1. Check if AGI limits itemized deductions: Some states do indeed limit itemized deductions for high-income earners. In practice, you may see a reduction based on AGI over a certain threshold.

2. Examine the options:

   • (a) suggests $0 deductions due to AGI limits. This would typically occur if the state has a hard cap at that AGI level; however, we need more information to be certain this is the case.

   • (b) states that all $55,000 can be taken without limit. This is unlikely given the high AGI.

   • (c) calculates a reduction of $30,000 from the $55,000, resulting in $25,000. The rationale for the $30,000 reduction isn't specified; we would need to consider the state rules on which this deduction is based.

   • (d) applies a logic of 6% of the excess income over a specific threshold. However, we need the threshold to ascertain how it's calculated.

To proceed, we'd typically apply the state rules applicable to AGI at this level. Assuming standard limit rules do apply based on common state income tax structures, option (a) seems probable under many interpretations since filers at this AGI can often see all itemized deductions phased out, but again, it relies on specific state rules.

Upon evaluating choices and general practices regarding cap levels, we often see significant itemized deduction curtailment above $500,000 or $1,000,000 in many states.

Based on the given figures and typical arrangements:

• If state limits ALL itemized deductions for an itemized deduction base of $765K AGI are stringent, then option (a) "Their AGI level limits all itemized deductions to $0" may be the selected choice.

However, without explicitly knowing the state's tax code, the universal answer could vary.

In conclusion, if we use general knowledge of state AGI limits on deductions likely to cap them significantly at this income level without loopholes — option (a) might apply. If further specific data on the state's treatment of itemized deductions at this AGI were available, the answer could differ.