Dependents' qualified dividends and capital gains enter the filer's 26 USC 1(h) preferential-rate base, although AGI leaves them out #9869

Summary

irs_gross_income multiplies every income source by ~is_tax_unit_dependent, so a dependent's dividends and gains never enter the filer's AGI or taxable income. The capital gains worksheet does the opposite. It sums them over every tax-unit member:

• net_capital_gain: add(tax_unit, period, ["qualified_dividend_income"]), long_term_capital_gains, short_term_capital_gains and non_sch_d_capital_gains.
• adjusted_net_capital_gain: add(tax_unit, period, ["qualified_dividend_income"]).

As a result, a dependent's qualified dividends move the same amount of the filer's wages from the ordinary brackets into the 0%/15%/20% rates.

A child's dividends belong on the child's own return, under the kiddie tax (26 USC 1(g)). They reach the parent's return only through the Form 8814 election (1(g)(7)), and then they also enter the parent's gross income.

This is the federal sibling of #9814 (state AGIs that add dependents' income) and point 1 of #9635 (EITC investment income). Neither of those covers the 1(h) base.

Reproduction (policyengine-us 1.811.2, 45d51ef5d4; the same add(tax_unit, ...) is on main)

from policyengine_us import Simulation

Y = 2025
def run(child_qd):
    return Simulation(situation={
        "people": {"p": {"age": {Y: 40}, "employment_income": {Y: 100_000}},
                   "c": {"age": {Y: 10}, "qualified_dividend_income": {Y: child_qd}}},
        "tax_units": {"t": {"members": ["p", "c"]}},
        "households": {"h": {"members": ["p", "c"], "state_code": {Y: "TX"}}}})
for qd in (0, 10_000):
    s = run(qd)
    print(qd, s.calculate("adjusted_gross_income", Y)[0], s.calculate("taxable_income", Y)[0],
          s.calculate("net_capital_gain", Y)[0], s.calculate("income_tax_before_credits", Y)[0])

Expected: $9,977.50 in both cases. The child's dividends change neither the parent's taxable income nor the parent's tax, unless the parent elects Form 8814.

Files

• policyengine_us/variables/gov/irs/tax/federal_income/capital_gains/net_capital_gain.py (lines 21-37 at 1.811.2)
• policyengine_us/variables/gov/irs/tax/federal_income/capital_gains/adjusted_net_capital_gain.py (line 27)

Possible fix: sum over the head and spouse only (tax_unit_non_dep_sum, as filer_adjusted_earnings does), or apply ~is_tax_unit_dependent at person level.

Found by

The PRD comparison (PolicyEngine/prd-comparison), cause fed_tax.dependent_qualified_dividends. It covers 109 to 112 CPS tax units a year, with $2.8M to $3.1M less federal income tax in PE.

The largest example (2025) is a filer with $5.4M of wage-only taxable income and a dependent with $9.6M of qualified dividends: PE taxes the filer's wages at the preferential rates, about $0.88M less.

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