Leave state tax refunds and the section 68 reduction out of federal AMTI, and fix Colorado AMTI to match

[MaxGhenis]

WIP (draft). Pending: targeted YAML runs (queued under the hub heavy lock), main-vs-branch households, the microsimulation (held by Fleet ops), an independent review and the Axiom parity item.

What changes

Federal alternative minimum taxable income (amt_income) starts from taxable income, Form 6251 line 1. Main made two adjustments too few:

1. State and local tax refunds. 26 U.S.C. 56(b)(1)(C): "No recovery of any tax to which subparagraph (A)(ii) applied shall be included in gross income for purposes of determining alternative minimum taxable income." Form 6251 line 2b (line 7 in 2017) subtracts the refund. Main left salt_refund_income in AMTI. The branch subtracts the filers' refunds; dependents' refunds are on their own returns, as in irs_gross_income.
2. Section 68. 56(b)(1)(E): "Section 68 shall not apply." That text is unchanged after P.L. 119-21, which amended other parts of section 56. Taxable income is net of itemized_taxable_income_deductions_reduction, which applies to 2013–2017 and from 2026. The 2017 Form 6251 line 6 instruction says: "enter the amount from line 9 of the Itemized Deductions Worksheet in the Instructions for Schedule A" as a negative amount. Main kept the cut. The branch subtracts it for itemizers.

Colorado. C.R.S. 39-22-105(2)(a) starts Colorado AMTI from federal AMTI. The 2025 DR 0104AMT instructions say: "Enter on line 2 of form DR 0104AMT the sum of lines 3 through 7 and line 9 from form DR 0104. Enter on line 4 of form DR 0104AMT the sum of all subtractions entered on the DR 0104AD excluding the State Income Tax Refund (line 1, DR 0104AD)…" Main added all of co_additions, including the line 2 state income tax addback, and subtracted all of co_subtractions, including salt_refund_income. The refund subtraction offset the federal omission in item 1, so both change in this PR.

Law

• 26 U.S.C. 56(b)(1)(C), (E): https://www.law.cornell.edu/uscode/text/26/56
• 2025 Instructions for Form 6251, line 2b (PDF p.2): "Include any refund from Schedule 1 (Form 1040), line 1, that is attributable to state or local income taxes … Enter the total as a negative amount." https://www.irs.gov/pub/irs-prior/i6251--2025.pdf#page=2
• 2017 Form 6251 lines 6–7 and instructions (PDF pp.2–3): https://www.irs.gov/pub/irs-prior/i6251--2017.pdf#page=2
• 2025 DR 0104AMT (PDF p.1): https://tax.colorado.gov/sites/tax/files/documents/DR0104AMT_2025.pdf#page=1

Not changed

amt_separate_addition (married filing separately) still approximates AMTI as taxable income plus the excluded deductions; that approximation predates this PR.

Coordination

#10094 fixes Colorado's separate DR 0104 line 4 addback, and #10094 no longer touches Colorado AMT. Raised in the review of #10038.

Invariants

With the itemization choice fixed and no AGI-dependent deductions, adding a state tax refund to a filer's income leaves AMTI unchanged. The refund enters AGI and is subtracted back out. Any change it causes in the section 68 reduction or the capped SALT deduction cancels, because AMTI reverses the first and adds back the second. policyengine_us/tests/core/test_amt_income_refund_and_section_68_invariants.py checks this with Hypothesis for 2017 (old section 68), 2025 and 2026 (new section 68), for single and joint filers with and without itemizing.

Microsimulation

(pending; Fleet ops hold)

axiom: (pending)

🤖 Generated with Claude Code