Count only deductible mortgage interest in Montana, give Maryland spouses their own losses, report the whole Virginia EITC

changelog.d/fix-state-head-fallbacks.fixed.md

@@ -0,0 +1 @@
+Montana itemized deductions count only federally deductible mortgage interest, so interest on acquisition debt above the IRC 163(h)(3) caps is no longer deducted. The Virginia EITC reports the credit the tax applies for spouses filing separately, not only the share of the spouse listed as head. Maryland's two-income subtraction gives each spouse their own losses and deductions when the couple has no gross income, instead of giving all of them to the head.

changelog.d/fix-state-head-fallbacks.removed.md

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+Removed `va_eitc_person` and `va_agi_share`, which fed only the head-share branch of `va_eitc`; `va_eitc` now reports the tax unit's applied Virginia EITC for every filing status.

policyengine_us/tests/code_health/test_non_refundable_credit_downstream_consumers.py

@@ -78,7 +78,6 @@
     "va_non_refundable_eitc": {
         "variables/gov/states/va/tax/income/credits/eitc/refundability_calculation/va_income_tax_if_claiming_non_refundable_eitc.py",
         "variables/gov/states/va/tax/income/credits/eitc/va_eitc.py",
-        "variables/gov/states/va/tax/income/credits/eitc/va_eitc_person.py",
     },
 }
 

policyengine_us/tests/core/test_mt_mortgage_interest_federal_limit_properties.py

@@ -0,0 +1,157 @@
+"""Montana's itemized mortgage interest is the amount federal law allows.
+
+Former MCA 15-30-2131(1)(a) allowed the items in 26 U.S.C. 161 (which
+includes section 163 interest), and MCA 15-30-2101 reads "Internal Revenue
+Code" as the Code as amended. The Form 2 instructions for itemized deductions
+line 9 (2018-2023) say to enter the home mortgage interest "allowed by federal
+law" and that interest on acquisition debt incurred after Dec. 15, 2017 "is
+limited to the first $750,000". From 2024 Montana starts from the federal
+itemized deductions. So interest on acquisition debt above the 26 U.S.C.
+163(h)(3) caps is never a Montana deduction.
+
+A grid of couples with one acquisition mortgage (balance, origination year,
+interest) shares one simulation per year. The other Montana itemized
+components are set to zero so each variable is its mortgage interest line,
+and the federal limit is restated here independently of the parameter files:
+$1,000,000 of debt incurred before the TCJA date ($750,000 after), with
+interest prorated by the share of the balance under the cap. PolicyEngine
+approximates the Dec. 15, 2017 date by origination year 2017, and treats a
+mortgage with no reported balance as fully deductible; the restatement uses
+the same input conventions.
+
+1. Joint returns (every year): the Montana joint itemized deductions, and the
+   variant used for the federal itemization choice, equal the allowed amount.
+2. Spouses filing separately on the same form (through 2023): each spouse's
+   deduction is the allowed amount times the share of the interest that
+   spouse reported, and the two sum to the allowed amount.
+
+The YAML cases check single points of this rule. The grid checks it for every
+combination of balance, origination year, interest, the spouse's share, year
+and filing path against the restatement above, so a change in the caps, the
+grandfathering year, the proration or the spouse split is caught wherever it
+binds.
+"""
+
+from itertools import product
+
+import numpy as np
+import pytest
+
+from policyengine_us import Simulation
+
+YEARS = range(2021, 2027)
+# Montana ended filing separately on the same form from tax year 2024 (SB 399
+# of 2021; see the references in
+# married_filing_separately_on_same_return_allowed.yaml).
+LAST_SEPARATE_ON_SAME_FORM_YEAR = 2023
+BALANCES = (0, 300_000, 750_000, 1_000_000, 2_500_000)
+ORIGINATION_YEARS = (2005, 2017, 2018, 2024)
+INTERESTS = (0, 15_000, 40_000)
+SPOUSE_SHARES = (0.0, 0.25)  # share of the interest the spouse reported
+UNITS = tuple(product(BALANCES, ORIGINATION_YEARS, INTERESTS, SPOUSE_SHARES))
+
+ZERO_PERSON_COMPONENTS = (
+    "mt_misc_deductions",
+    "mt_medical_expense_deduction_joint",
+    "mt_medical_expense_deduction_indiv",
+    "mt_salt_deduction",
+    "mt_federal_income_tax_deduction_indiv",
+    "mt_federal_income_tax_deduction_for_federal_itemization_indiv",
+)
+ZERO_TAX_UNIT_COMPONENTS = (
+    "charitable_deduction",
+    "mt_federal_income_tax_deduction_unit",
+    "mt_federal_income_tax_deduction_for_federal_itemization",
+)
+
+
+def allowed_interest(interest, balance, origination_year):
+    """Home mortgage interest allowed under 26 U.S.C. 163(h)(3)."""
+    if balance == 0:
+        return interest
+    cap = 1_000_000 if origination_year <= 2017 else 750_000
+    return interest * min(1, cap / balance)
+
+
+def _situation(year):
+    period = str(year)
+    people, tax_units, households, marital_units = {}, {}, {}, {}
+    for i, (balance, origination, interest, spouse_share) in enumerate(UNITS):
+        head, spouse = f"u{i}_head", f"u{i}_spouse"
+        for name, role, share in (
+            (head, "is_tax_unit_head", 1 - spouse_share),
+            (spouse, "is_tax_unit_spouse", spouse_share),
+        ):
+            people[name] = {
+                "age": {period: 50},
+                role: {period: True},
+                "home_mortgage_interest": {period: interest * share},
+                **{v: {period: 0} for v in ZERO_PERSON_COMPONENTS},
+            }
+        members = [head, spouse]
+        tax_units[f"u{i}"] = {
+            "members": members,
+            "first_home_mortgage_balance": {period: balance},
+            "first_home_mortgage_origination_year": {period: origination},
+            **{v: {period: 0} for v in ZERO_TAX_UNIT_COMPONENTS},
+        }
+        households[f"u{i}"] = {"members": members, "state_code": {period: "MT"}}
+        marital_units[f"u{i}"] = {"members": members}
+    return {
+        "people": people,
+        "tax_units": tax_units,
+        "households": households,
+        "marital_units": marital_units,
+    }
+
+
+@pytest.mark.parametrize("year", YEARS)
+def test_montana_mortgage_interest_is_the_federally_allowed_amount(year):
+    sim = Simulation(situation=_situation(year))
+
+    def per_person(variable):
+        return np.asarray(sim.calculate(variable, year), dtype=float).reshape(-1, 2)
+
+    allowed = np.array(
+        [
+            allowed_interest(interest, balance, origination)
+            for balance, origination, interest, _ in UNITS
+        ]
+    )
+    spouse_share = np.array([unit[3] for unit in UNITS])
+
+    # 1. Joint returns. The head-only units (spouse share 0) keep this check
+    # independent of how the joint formula splits interest between spouses.
+    head_only = spouse_share == 0
+    for variable in (
+        "mt_itemized_deductions_joint",
+        "mt_itemized_deductions_for_federal_itemization_joint",
+    ):
+        np.testing.assert_allclose(
+            per_person(variable).sum(axis=1)[head_only],
+            allowed[head_only],
+            atol=0.01,
+            err_msg=f"{variable} in {year}",
+        )
+
+    # 2. Spouses filing separately on the same form, through 2023. Check the
+    # model's switch against that boundary, so turning it off by mistake
+    # fails here rather than skipping these checks.
+    p = sim.tax_benefit_system.parameters(year).gov.states.mt.tax.income
+    separate_allowed = year <= LAST_SEPARATE_ON_SAME_FORM_YEAR
+    assert bool(p.married_filing_separately_on_same_return_allowed) == (
+        separate_allowed
+    )
+    if not separate_allowed:
+        return
+    expected = np.stack([allowed * (1 - spouse_share), allowed * spouse_share], 1)
+    for variable in (
+        "mt_itemized_deductions_indiv",
+        "mt_itemized_deductions_for_federal_itemization_indiv",
+    ):
+        np.testing.assert_allclose(
+            per_person(variable),
+            expected,
+            atol=0.01,
+            err_msg=f"{variable} in {year}",
+        )