Limit self-employed plan contributions to the Pub. 560 maximum deduction

changelog.d/fix-se-pension-earned-income-limit.fixed.md

@@ -0,0 +1 @@
+Limit the self-employed SEP, SIMPLE and qualified plan deduction to the Pub. 560 maximum, based on Schedule C net profit less the deductible part of self-employment tax, so it can no longer reach 100% of profit or make AGI negative.

policyengine_us/parameters/gov/irs/gross_income/retirement_contributions/limit/profit_sharing_deduction_rate.yaml

@@ -0,0 +1,18 @@
+description: The US limits the deduction for employer contributions to a SEP or profit-sharing plan to this share of participants' compensation.
+values:
+  2002-01-01: 0.25
+metadata:
+  unit: /1
+  period: year
+  label: SEP and profit-sharing plan employer deduction limit rate
+  reference:
+  - title: 26 U.S. Code § 404(a)(3)(A)(i)(I) - Stock bonus and profit-sharing trusts
+    href: https://www.law.cornell.edu/uscode/text/26/404#a_3_A_i_I
+  - title: 26 U.S. Code § 404(h)(1)(C) - Simplified employee pensions
+    href: https://www.law.cornell.edu/uscode/text/26/404#h_1_C
+  - title: Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. 107-16, § 616 (15 to 25 percent, years beginning after 2001)
+    href: https://www.congress.gov/107/plaws/publ16/PLAW-107publ16.pdf#page=66
+  - title: IRS Publication 560 (2025), Rate Table for Self-Employed
+    href: https://www.irs.gov/pub/irs-pdf/p560.pdf#page=40
+  - title: IRS Publication 560 (2022), Rate Table for Self-Employed
+    href: https://www.irs.gov/pub/irs-prior/p560--2022.pdf#page=35

policyengine_us/tests/policy/baseline/gov/irs/credits/retirement_saving/savers_credit_qualified_contributions.yaml

@@ -10,7 +10,9 @@
     roth_ira_contributions_desired: 1_000
     roth_401k_contributions_desired: 1_000
     roth_403b_contributions_desired: 1_000
-    self_employment_income: 1_000
+    # Enough profit for the self-employed plan limit (earned income of
+    # 9,293.52) to allow the full 1,000.
+    self_employment_income: 10_000
     self_employed_pension_contributions_desired: 1_000
     able_contributions_person: 100
     retirement_distributions: 1_000
@@ -36,7 +38,9 @@
 - name: Self-employed pension contributions count after applying the annual additions cap
   period: 2026
   input:
-    self_employment_income: 100_000
+    # 20% of earned income plus the 24,500 deferral limit exceeds the 72,000
+    # annual additions limit at this profit.
+    self_employment_income: 500_000
     self_employed_pension_contributions_desired: 100_000
   output:
     self_employed_pension_contributions: 72_000

policyengine_us/tests/policy/baseline/gov/irs/income/taxable_income/adjusted_gross_income/above_the_line_deductions/self_employed_pension_contribution_ald.yaml

@@ -0,0 +1,55 @@
+- name: Case 1, the deduction cannot make AGI negative when Schedule C profit is the only income.
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    people:
+      person1:
+        age: 40
+        self_employment_income: 20_000
+        self_employed_pension_contributions_desired: 20_000
+  output:
+    # Half of self-employment tax: 20,000 x 92.35% x 15.3% / 2 = 1,412.96.
+    # Pub. 560 Deduction Worksheet step 3: 20,000 - 1,412.96 = 18,587.05,
+    # the most the plan deduction can be (26 U.S.C. 404(a)(8)(C)).
+    self_employment_tax_ald: 1_412.96
+    self_employed_pension_contribution_ald_person: [18_587.05]
+    self_employed_pension_contribution_ald: 18_587.05
+    adjusted_gross_income: 0
+
+- name: Case 2, contributions supplied directly are still limited.
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    people:
+      person1:
+        age: 40
+        self_employment_income: 20_000
+        self_employed_pension_contributions: 20_000
+  output:
+    self_employed_pension_contribution_ald_person: [18_587.05]
+    adjusted_gross_income: 0
+
+- name: Case 3, a married couple's limits are each spouse's own.
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    people:
+      person1:
+        age: 40
+        self_employment_income: 200_000
+        self_employed_pension_contributions_desired: 100_000
+      person2:
+        age: 40
+        self_employment_income: 30_000
+        self_employed_pension_contributions_desired: 30_000
+    tax_units:
+      tax_unit:
+        members: [person1, person2]
+    marital_units:
+      marital_unit:
+        members: [person1, person2]
+  output:
+    # Person 1: 20% x 186,403.65 + 23,500 = 60,780.73 (the Pub. 560 2025
+    # example's step 3). Person 2: (27,880.57 + 23,500) / 2 = 25,690.28.
+    self_employed_pension_contribution_ald_person: [60_780.73, 25_690.28]
+    self_employed_pension_contribution_ald: 86_471.01

policyengine_us/tests/policy/baseline/gov/irs/income/taxable_income/adjusted_gross_income/above_the_line_deductions/self_employment_income.yaml

@@ -16,11 +16,14 @@
 
 - name: Self-employed pension ALD uses SSTB income
   period: 2024
+  absolute_error_margin: 0.01
   input:
     sstb_self_employment_income: 8_000
     self_employed_pension_contributions_desired: 9_000
   output:
-    self_employed_pension_contribution_ald_person: 8_000
+    # Earned income: 8,000 - 7,388 x 15.3% / 2 = 7,434.82, all of which
+    # elective deferrals can cover (Pub. 560 Deduction Worksheet steps 9-19).
+    self_employed_pension_contribution_ald_person: 7_434.82
 
 - name: Loss ALD includes SSTB self-employment losses
   period: 2024

policyengine_us/tests/policy/baseline/gov/states/ut/tax/property/homeowner_renter_relief/ut_homeowner_renter_relief.yaml

@@ -215,6 +215,7 @@
 
 - name: Case 12, nontaxable income uses self-employed pension contributions.
   period: 2026
+  absolute_error_margin: 0.01
   input:
     people:
       person1:
@@ -230,5 +231,7 @@
         members: [person1]
         state_code: UT
   output:
-    self_employed_pension_contributions: 72_000
-    ut_homeowner_renter_relief_nontaxable_income: 72_000
+    # Pub. 560 worksheet: 20% x 92,935.23 of earned income + 24,500 of
+    # deferrals + the 8,000 catch-up at age 66.
+    self_employed_pension_contributions: 51_087.05
+    ut_homeowner_renter_relief_nontaxable_income: 51_087.05