Allow non-disaster casualty and theft losses in California and Minnesota itemized deductions

changelog.d/fix-ca-mn-casualty-loss.fixed.md

@@ -0,0 +1 @@
+Allow non-disaster personal casualty and theft losses in California and Minnesota itemized deductions (and Minnesota alternative minimum taxable income), which do not follow the federal limit to declared disasters (Cal. Rev. & Tax. Code 17204(b); Minn. Stat. 290.0122, subd. 8): add `ca_casualty_loss_deduction` and `mn_casualty_loss_deduction`, each the loss less $100 and 10% of federal adjusted gross income, in place of the federal deduction.

policyengine_us/parameters/gov/irs/deductions/itemized/casualty/per_casualty_reduction.yaml

@@ -0,0 +1,20 @@
+description: The IRS reduces each casualty or theft loss of personal-use property by this amount before applying the income floor.
+values:
+  2008-01-01: 100
+  2009-01-01: 500
+  2010-01-01: 100
+metadata:
+  unit: currency-USD
+  period: year
+  label: Casualty loss reduction per casualty
+  reference:
+    - title: 26 U.S.C. § 165(h)(1)
+      href: https://www.law.cornell.edu/uscode/text/26/165#h_1
+    - title: 2008 Form 4684, line 11
+      href: https://www.irs.gov/pub/irs-prior/f4684--2008.pdf#page=1
+    - title: 2009 Form 4684, line 11
+      href: https://www.irs.gov/pub/irs-prior/f4684--2009.pdf#page=1
+    - title: 2022 Form 4684, line 11
+      href: https://www.irs.gov/pub/irs-prior/f4684--2022.pdf#page=1
+    - title: IRS Publication 547 (2022), $100 Rule
+      href: https://www.irs.gov/pub/irs-prior/p547--2022.pdf#page=10

policyengine_us/parameters/gov/states/ca/tax/income/deductions/itemized/limit/excluded_deductions.yaml

@@ -2,7 +2,9 @@ description: Itemized deductions excluded from CA high-AGI limitation.
 values:
   2021-01-01:
     - medical_expense_deduction
-    - casualty_loss_deduction
+    # California's own casualty and theft loss (Schedule CA line 15), which
+    # replaces the federal one in the pre-limitation total.
+    - ca_casualty_loss_deduction
     - non_mortgage_interest
 
 metadata:
@@ -18,5 +20,12 @@ metadata:
     href: https://www.ftb.ca.gov/forms/2024/2024-540-ca-instructions.html
   - title: 2025 Form 540 Schedule CA instructions
     href: https://www.ftb.ca.gov/forms/2025/2025-540-ca-instructions.html
+  - title: 2024 Schedule CA (540) instructions, line 29 itemized deductions worksheet, line 2
+    href: https://www.ftb.ca.gov/forms/2024/2024-540-booklet.pdf#page=68
   - title: Cal. Rev. & Tax. Code § 17077
     href: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC&sectionNum=17077
+  # R&TC 17077 adopts 26 U.S.C. 68, whose subsection (c)(3) (before P.L. 119-21)
+  # leaves casualty and theft losses described in 165(c)(2) or (3) out of the
+  # deductions the limitation reduces.
+  - title: 26 U.S.C. § 68 (amendment notes for subsection (c)(3))
+    href: https://www.law.cornell.edu/uscode/text/26/68

policyengine_us/reforms/states/mn/walz/mn_walz_hf1938.py

@@ -112,13 +112,22 @@ def formula(tax_unit, period, parameters):
             # ... calculate pre-limitation itemized deductions
             itm_deds_less_salt = tax_unit("itemized_deductions_less_salt", period)
             capped_property_taxes = tax_unit("capped_property_taxes", period)
-            mn_itm_deds = itm_deds_less_salt + capped_property_taxes
+            # Schedule M1SA line 19 takes Minnesota's own casualty and theft
+            # loss (Schedule M1CAT) in place of the federal one.
+            federal_casualty_loss = tax_unit("casualty_loss_deduction", period)
+            mn_casualty_loss = tax_unit("mn_casualty_loss_deduction", period)
+            mn_itm_deds = (
+                itm_deds_less_salt
+                - federal_casualty_loss
+                + mn_casualty_loss
+                + capped_property_taxes
+            )
             # ... calculate itemized deductions offset
             p = parameters(period).gov.states.mn.tax.income.deductions.itemized
             exempt_deds = add(
                 tax_unit,
                 period,
-                ["medical_expense_deduction", "casualty_loss_deduction"],
+                ["medical_expense_deduction", "mn_casualty_loss_deduction"],
             )
             net_deds = max_(0, mn_itm_deds - exempt_deds)
             net_deds_offset = p.reduction.alternate.rate * net_deds

policyengine_us/tests/policy/baseline/gov/states/ca/tax/income/deductions/itemized/ca_casualty_loss_deduction.yaml

@@ -0,0 +1,198 @@
+# 2024 Schedule CA (540) instructions, line 15 (Form 540 booklet, PDF p. 66):
+# federal law allows the personal casualty and theft loss deduction only for a
+# federally declared disaster; "California law does not conform." Filers
+# "complete another federal Form 4684 ... using California amounts".
+# Cal. Rev. & Tax. Code 17204(b) (as amended by SB 711, 2025): 26 U.S.C.
+# 165(h)(5) "shall not apply".
+# FTB Publication 1034 (PDF p. 4): "subtract $100 and then 10% of your federal
+# adjusted gross income."
+# 2024 Form 4684: line 11 enters $100; line 17 enters 10% of adjusted gross
+# income from Form 1040 line 11; line 18 is line 16 less line 17, not below 0.
+# A joint return is one individual for the $100 rule (165(h)(4)(B)). The model
+# records one loss amount per person, not separate casualty events, so a
+# return's losses are treated as one casualty. A dependent's loss belongs on
+# the dependent's own return, as the dependent's income does.
+
+- name: Case 1, the $100 reduction applies before the 10 percent floor.
+  period: 2024
+  input:
+    state_code: CA
+    employment_income: 100_000
+    casualty_loss: 15_000
+  output:
+    # Form 4684: line 12 = 15,000 - 100 = 14,900; line 17 = 10% x 100,000
+    # = 10,000; line 18 = 14,900 - 10,000.
+    ca_casualty_loss_deduction: 4_900
+    # California allows the loss though the federal deduction is suspended.
+    casualty_loss_deduction: 0
+
+- name: Case 2, a loss $100 above the floor nets to zero.
+  period: 2024
+  input:
+    state_code: CA
+    employment_income: 100_000
+    casualty_loss: 10_100
+  output:
+    # (10,100 - 100) - 10% x 100,000 = 10,000 - 10,000
+    ca_casualty_loss_deduction: 0
+
+- name: Case 3, a loss $101 above the floor leaves $1.
+  period: 2024
+  input:
+    state_code: CA
+    employment_income: 100_000
+    casualty_loss: 10_101
+  output:
+    # (10,101 - 100) - 10% x 100,000 = 10,001 - 10,000
+    ca_casualty_loss_deduction: 1
+
+- name: Case 4, a loss of exactly $100 is fully absorbed by the $100 reduction.
+  period: 2024
+  input:
+    state_code: CA
+    casualty_loss: 100
+  output:
+    ca_casualty_loss_deduction: 0
+
+- name: Case 5, with no income a loss is deductible above the $100.
+  period: 2024
+  input:
+    state_code: CA
+    casualty_loss: 101
+  output:
+    # (101 - 100) - 10% x 0
+    ca_casualty_loss_deduction: 1
+
+- name: Case 6, Publication 547 Example 1 with $80,000 of AGI.
+  period: 2024
+  input:
+    state_code: CA
+    employment_income: 80_000
+    casualty_loss: 14_800
+  output:
+    # IRS Publication 547 (2017, PDF p. 10), Example 1: loss after
+    # reimbursement 14,800; subtract $100 = 14,700; subtract 10% of 80,000 AGI
+    # = 6,700.
+    ca_casualty_loss_deduction: 6_700
+
+- name: Case 7, the floor uses federal AGI, not California AGI.
+  period: 2024
+  input:
+    state_code: CA
+    adjusted_gross_income: 100_000
+    ca_agi: 60_000
+    casualty_loss: 15_000
+  output:
+    # (15,000 - 100) - 10% x 100,000 federal AGI = 4,900. On California AGI it
+    # would be 14,900 - 6,000 = 8,900.
+    ca_casualty_loss_deduction: 4_900
+
+- name: Case 8, a negative federal AGI gives no floor, not a larger loss.
+  period: 2024
+  input:
+    state_code: CA
+    adjusted_gross_income: -20_000
+    casualty_loss: 15_000
+  output:
+    # The 10% floor is not allowed below zero: 15,000 - 100.
+    ca_casualty_loss_deduction: 14_900
+
+- name: Case 9, a joint return reduces the spouses' pooled losses by $100 once.
+  period: 2024
+  input:
+    people:
+      person1:
+        age: 40
+        employment_income: 60_000
+        casualty_loss: 10_000
+      person2:
+        age: 40
+        employment_income: 40_000
+        casualty_loss: 5_000
+    tax_units:
+      tax_unit:
+        members: [person1, person2]
+    households:
+      household:
+        members: [person1, person2]
+        state_code: CA
+  output:
+    filing_status: JOINT
+    # (10,000 + 5,000 - 100) - 10% x 100,000 = 14,900 - 10,000
+    ca_casualty_loss_deduction: 4_900
+
+- name: Case 10, a dependent's loss is left to the dependent's own return.
+  period: 2024
+  input:
+    people:
+      person1:
+        age: 40
+        employment_income: 100_000
+        casualty_loss: 15_000
+      person2:
+        age: 10
+        casualty_loss: 5_000
+    tax_units:
+      tax_unit:
+        members: [person1, person2]
+    households:
+      household:
+        members: [person1, person2]
+        state_code: CA
+  output:
+    is_tax_unit_dependent: [false, true]
+    # The child's 5,000 is not the parent's loss.
+    # (15,000 - 100) - 10% x 100,000 = 14,900 - 10,000
+    ca_casualty_loss_deduction: 4_900
+
+- name: Case 11, a loss only the dependent had gives the parent nothing.
+  period: 2024
+  input:
+    people:
+      person1:
+        age: 40
+        employment_income: 100_000
+      person2:
+        age: 10
+        casualty_loss: 15_000
+    tax_units:
+      tax_unit:
+        members: [person1, person2]
+    households:
+      household:
+        members: [person1, person2]
+        state_code: CA
+  output:
+    is_tax_unit_dependent: [false, true]
+    ca_casualty_loss_deduction: 0
+
+- name: Case 12, California keeps allowing the loss under its 2025 conformity date.
+  period: 2026
+  input:
+    state_code: CA
+    employment_income: 100_000
+    casualty_loss: 15_000
+  output:
+    # R&TC 17204(b) turns 165(h)(5) off for taxable years from 2025.
+    ca_casualty_loss_deduction: 4_900
+    casualty_loss_deduction: 0
+
+- name: Case 13, the deduction is zero outside California.
+  period: 2024
+  input:
+    state_code: NY
+    employment_income: 100_000
+    casualty_loss: 15_000
+  output:
+    ca_casualty_loss_deduction: 0
+
+- name: Case 14, lifting the federal suspension does not change California's deduction.
+  period: 2024
+  input:
+    gov.irs.deductions.itemized.casualty.active: true
+    state_code: CA
+    employment_income: 100_000
+    casualty_loss: 15_000
+  output:
+    # California's deduction does not read the federal switch.
+    ca_casualty_loss_deduction: 4_900

policyengine_us/tests/policy/baseline/gov/states/ca/tax/income/deductions/itemized/ca_itemized_deductions.yaml

@@ -51,3 +51,26 @@
     ca_itemized_deductions_pre_limitation: 10_000
   output:
     ca_itemized_deductions: 7_000  # charity subject to limitation
+
+# 2024 Schedule CA (540) instructions, line 29 worksheet (Form 540 booklet,
+# PDF p. 68): line 2 takes medical expenses, investment interest, casualty and
+# theft losses and gambling losses out before the 80%/6% limitation. Cal. Rev.
+# & Tax. Code 17077 adopts 26 U.S.C. 68, which leaves 165(c)(3) losses out.
+- name: California casualty loss is not subject to the high-AGI limitation
+  absolute_error_margin: 0.01
+  period: 2024
+  input:
+    state_code: CA
+    filing_status: SINGLE
+    adjusted_gross_income: 244_857 + 50_000
+    ca_charitable_deduction: 1_000
+    casualty_loss: 40_000
+  output:
+    # Form 4684: (40,000 - 100) - 10% x 294,857 = 39,900 - 29,485.70
+    ca_casualty_loss_deduction: 10_414.30
+    ca_itemized_deductions_pre_limitation: 11_414.30
+    # Worksheet: line 3 = 11,414.30 - 10,414.30 = 1,000; line 4 = 80% x 1,000
+    # = 800; line 8 = 6% x 50,000 = 3,000; line 9 = 800.
+    # 11,414.30 - 800. Were the loss limited too, line 4 would be 9,131.44,
+    # line 9 would be 3,000 and the result 8,414.30.
+    ca_itemized_deductions: 10_614.30

policyengine_us/tests/policy/baseline/gov/states/ca/tax/income/deductions/itemized/ca_itemized_deductions_pre_limitation.yaml

@@ -385,3 +385,31 @@
     # Also includes #10032's IRA 219(g) phase-out, since this is a two-cause
     # CA + IRA cell.
     state_income_tax_before_refundable_credits: 4441.45
+
+# 2024 Schedule CA (540) instructions, line 15 (Form 540 booklet, PDF p. 66):
+# "California law does not conform" to the federal limit of personal casualty
+# losses to declared disasters; filers complete a second Form 4684 with
+# California amounts.
+- name: California allows a non-disaster casualty loss the federal return does not.
+  period: 2024
+  input:
+    state_code: CA
+    employment_income: 100_000
+    casualty_loss: 15_000
+  output:
+    casualty_loss_deduction: 0
+    # Form 4684: (15,000 - 100) - 10% x 100,000 = 4,900
+    ca_itemized_deductions_pre_limitation: 4_900
+
+- name: California counts the casualty loss once when the federal suspension is lifted.
+  period: 2024
+  input:
+    gov.irs.deductions.itemized.casualty.active: true
+    state_code: CA
+    employment_income: 100_000
+    casualty_loss: 15_000
+  output:
+    ca_casualty_loss_deduction: 4_900
+    # The federal deduction, now positive, is replaced by California's 4,900,
+    # not added to it.
+    ca_itemized_deductions_pre_limitation: 4_900

policyengine_us/tests/policy/baseline/gov/states/mn/tax/income/mn_amt_taxable_income.yaml

@@ -19,3 +19,29 @@
     state_code: MN
   output:
     mn_amt_taxable_income: 200_000 - 250 - 3_000
+
+# 2024 Schedule M1MT, line 12 (PDF p. 1): "Casualty and theft losses (from line
+# 19 of Schedule M1SA)", Minnesota's own amount from Schedule M1CAT.
+- name: MN AMT taxable income subtracts the Minnesota casualty loss
+  period: 2024
+  input:
+    adjusted_gross_income: 200_000
+    mn_itemizing: true
+    casualty_loss: 40_000
+    state_code: MN
+  output:
+    # The federal deduction is suspended.
+    casualty_loss_deduction: 0
+    # M1CAT: (40,000 - 100) - 10% x 200,000 = 19,900
+    mn_casualty_loss_deduction: 19_900
+    mn_amt_taxable_income: 200_000 - 19_900
+
+- name: MN AMT taxable income leaves the casualty loss out for a non-itemizer
+  period: 2024
+  input:
+    adjusted_gross_income: 200_000
+    mn_itemizing: false
+    casualty_loss: 40_000
+    state_code: MN
+  output:
+    mn_amt_taxable_income: 200_000