I have the EXACT same problem. My SONY 32-inch is set to 4:3 Letterbox, I don't have zoom on, and the subtitles reach below the bottom edge of the screen. I've taken to actually converting whole FS anime series to WS (704x396) using River Video Cleaner Pro, which does the trick, naturally, but at great expense of time and mild aesthetic superstition about doing such things. Still, it's that, or no subtitles. (Choosing Widescreen 16:9 in ConvertXtoDVD will solve the problem, but it doesn't stretch the edges of the film to the right or left -- it just dumps the FS version in the middle of a letter box with bands not only on top but on either side. Looks goofy.
I only have this problem only with Full-Screen AVIs, since I extract MKV and OGM subtitles and add them externally, and they end up all right. One other problem though with the subtitle feature in ConvertXtoDVD is that I'm not really sure if it "works" by default, or if you have to check the "Choose default subtitle" box on the Subtitle tab. Any help there, please?
(By the way, when I play my converted DVDs on a portable Mustek 8inch DVD player, the subtitles are well in the clear. I believe this is probably a matter of our televisions' scope simply extending beyond the traditional edges, and new televisions (I'm 50) don't have adjustment for horizon and vertical anymore like computer monitors and LCDs do. My two cents.)
If there is a tip, though, I'd give worlds to hear it.