Tax Form 2555 filers' income at stacked rates (26 U.S.C. 911(f))

changelog.d/feie-tax-stacking-911f.fixed.md

@@ -0,0 +1 @@
+Tax the income of filers who exclude foreign earned income at the rates it would face on top of the excluded amount, in the regular tax, the capital gains rates and the alternative minimum tax (26 U.S.C. 911(f), the Foreign Earned Income Tax Worksheet).

policyengine_us/reforms/additional_tax_bracket/additional_tax_bracket_reform.py

@@ -1,6 +1,12 @@
 from policyengine_us.model_api import *
 from policyengine_core.periods import period as period_
 from policyengine_core.periods import instant
+from policyengine_us.variables.gov.irs.tax.federal_income.before_credits.tax_at_main_rates import (
+    tax_at_main_rates,
+)
+from policyengine_us.variables.gov.irs.tax.federal_income.foreign_earned_income_exclusion.schedule_d_tax_worksheet_after_capital_gain_excess import (
+    schedule_d_tax_worksheet_after_capital_gain_excess,
+)
 
 
 def create_additional_tax_bracket() -> Reform:
@@ -15,14 +21,19 @@ class regular_tax_before_credits(Variable):
         def formula(tax_unit, period, parameters):
             p = parameters(period).gov.irs
             filing_status = tax_unit("filing_status", period)
-            dwks1 = tax_unit("taxable_income", period)
+            # As in the baseline formula, a Form 2555 filer stacks taxable
+            # income on the excluded amount (26 U.S.C. 911(f)).
+            dwks1 = tax_unit("taxable_income_plus_section_911_exclusion", period)
+            worksheet = schedule_d_tax_worksheet_after_capital_gain_excess(
+                tax_unit, period, tax_unit("taxable_income", period)
+            )
 
             dwks16 = min_(p.capital_gains.thresholds["1"][filing_status], dwks1)
             dwks17 = min_(tax_unit("dwks14", period), dwks16)
             dwks20 = dwks16 - dwks17
             lowest_rate_tax = p.capital_gains.rates["1"] * dwks20
             # Break in worksheet lines
-            dwks13 = tax_unit("dwks13", period)
+            dwks13 = worksheet.line_13
             dwks21 = min_(dwks1, dwks13)
             dwks22 = dwks20
             dwks23 = max_(0, dwks21 - dwks22)
@@ -36,11 +47,8 @@ def formula(tax_unit, period, parameters):
             dwks31 = dwks21 - dwks30
             dwks32 = p.capital_gains.rates["3"] * dwks31
             # Break in worksheet lines
-            dwks33 = min_(
-                tax_unit("dwks09", period),
-                add(tax_unit, period, ["unrecaptured_section_1250_gain"]),
-            )
-            dwks10 = tax_unit("dwks10", period)
+            dwks33 = min_(worksheet.line_9, worksheet.unrecaptured_section_1250_gain)
+            dwks10 = worksheet.line_10
             dwks34 = dwks10 + dwks19
             dwks36 = max_(0, dwks34 - dwks1)
             dwks37 = max_(0, dwks33 - dwks36)
@@ -54,25 +62,18 @@ def formula(tax_unit, period, parameters):
             dwks41 = p.amt.brackets.rates[-1] * dwks40
 
             # Compute regular tax using bracket rates and thresholds
+            # The shared schedule clamps inverted brackets as in the
+            # baseline formulas (#9084).
             reg_taxinc = max_(0, dwks19)
-            p_reform = parameters(period).gov.contrib.additional_tax_bracket
-            bracket_tops = p_reform.bracket.thresholds
-            bracket_rates = p_reform.bracket.rates
-            reg_tax = 0
-            bracket_bottom = 0
-            for i in range(1, len(list(bracket_rates.__iter__())) + 1):
-                b = str(i)
-                # Clamp as in the baseline formulas (#9084): an
-                # inverted bracket contributes zero width.
-                bracket_top = max_(bracket_bottom, bracket_tops[b][filing_status])
-                reg_tax += bracket_rates[b] * amount_between(
-                    reg_taxinc, bracket_bottom, bracket_top
-                )
-                bracket_bottom = bracket_top
+            bracket = parameters(period).gov.contrib.additional_tax_bracket.bracket
+            reg_tax = tax_at_main_rates(reg_taxinc, filing_status, bracket)
 
             # Return to worksheet lines
             dwks42 = reg_tax
             dwks43 = dwks29 + dwks32 + dwks38 + dwks41 + dwks42 + lowest_rate_tax
+            excluded = max_(0, tax_unit("foreign_earned_income_exclusion", period))
+            tax_on_excluded = tax_at_main_rates(excluded, filing_status, bracket)
+            dwks43 = where(excluded > 0, max_(0, dwks43 - tax_on_excluded), dwks43)
             dwks44 = tax_unit("income_tax_main_rates", period)
             dwks45 = min_(dwks43, dwks44)
             return where(tax_unit("has_qdiv_or_ltcg", period), dwks45, dwks44)
@@ -82,33 +83,31 @@ class income_tax_main_rates(Variable):
         entity = TaxUnit
         definition_period = YEAR
         label = "Income tax main rates"
-        reference = "https://www.law.cornell.edu/uscode/text/26/1"
+        reference = [
+            "https://www.law.cornell.edu/uscode/text/26/1",
+            "https://www.law.cornell.edu/uscode/text/26/911#f_1_A",
+        ]
         unit = USD
 
         def formula(tax_unit, period, parameters):
-            # compute taxable income that is taxed at the main rates
-            full_taxable_income = tax_unit("taxable_income", period)
+            # compute taxable income that is taxed at the main rates; as in
+            # the baseline formula, a taxpayer excluding foreign earned
+            # income adds the excluded amount back (26 U.S.C. 911(f)(1)(A))
+            full_taxable_income = tax_unit(
+                "taxable_income_plus_section_911_exclusion", period
+            )
             cg_exclusion = tax_unit(
                 "capital_gains_excluded_from_taxable_income", period
             )
             taxinc = max_(0, full_taxable_income - cg_exclusion)
             # compute tax using bracket rates and thresholds
-            p = parameters(period).gov.contrib.additional_tax_bracket
-            bracket_tops = p.bracket.thresholds
-            bracket_rates = p.bracket.rates
+            bracket = parameters(period).gov.contrib.additional_tax_bracket.bracket
             filing_status = tax_unit("filing_status", period)
-            tax = 0
-            bracket_bottom = 0
-            for i in range(1, len(list(bracket_rates.__iter__())) + 1):
-                b = str(i)
-                # Clamp as in the baseline formulas (#9084): an
-                # inverted bracket contributes zero width.
-                bracket_top = max_(bracket_bottom, bracket_tops[b][filing_status])
-                tax += bracket_rates[b] * amount_between(
-                    taxinc, bracket_bottom, bracket_top
-                )
-                bracket_bottom = bracket_top
-            return tax
+            tax = tax_at_main_rates(taxinc, filing_status, bracket)
+            # less the tax on the excluded amount alone
+            excluded = max_(0, tax_unit("foreign_earned_income_exclusion", period))
+            tax_on_excluded = tax_at_main_rates(excluded, filing_status, bracket)
+            return where(excluded > 0, max_(0, tax - tax_on_excluded), tax)
 
     class reform(Reform):
         def apply(self):

policyengine_us/reforms/biden/budget_2025/capital_gains_tax_increase.py

@@ -1,4 +1,7 @@
 from policyengine_us.model_api import *
+from policyengine_us.variables.gov.irs.tax.federal_income.foreign_earned_income_exclusion.section_911_net_capital_gain_other_than_dividends import (
+    section_911_net_capital_gain_other_than_dividends,
+)
 
 
 def create_capital_gains_tax_increase() -> Reform:
@@ -10,10 +13,16 @@ class capital_gains_tax(Variable):
         definition_period = YEAR
 
         def formula(tax_unit, period, parameters):
-            net_cg = tax_unit("net_capital_gain", period)
-            taxable_income = tax_unit("taxable_income", period)
+            # As in the baseline formula, a taxpayer excluding foreign earned
+            # income applies the rates to taxable income plus the excluded
+            # amount, with gains reduced by any capital gain excess
+            # (26 U.S.C. 911(f)).
+            net_cg = tax_unit("section_911_net_capital_gain", period)
+            taxable_income = tax_unit(
+                "taxable_income_plus_section_911_exclusion", period
+            )
             adjusted_net_cg = min_(
-                tax_unit("adjusted_net_capital_gain", period),
+                tax_unit("section_911_adjusted_net_capital_gain", period),
                 taxable_income,
             )  # ANCG is referred to in all cases as ANCG or taxable income if less.
 
@@ -42,7 +51,12 @@ def formula(tax_unit, period, parameters):
 
             p_reform = parameters(period).gov.contrib.biden.budget_2025.capital_gains
             income_threshold = p_reform.income_threshold[filing_status]
-            excess_income = max_(0, taxable_income - income_threshold)
+            # The threshold tests the filer's own income, which leaves out an
+            # amount excluded under section 911, so it uses taxable income
+            # before the excluded amount is added back; the rates still stack.
+            excess_income = max_(
+                0, tax_unit("taxable_income", period) - income_threshold
+            )
 
             cg_in_top_bracket = min_(adjusted_net_cg, excess_income)
 
@@ -90,14 +104,18 @@ def formula(tax_unit, period, parameters):
             )
 
             unrecaptured_s_1250_gain = tax_unit(
-                "unrecaptured_section_1250_gain", period
+                "section_911_unrecaptured_section_1250_gain", period
             )
 
-            qualified_dividends = add(tax_unit, period, ["qualified_dividend_income"])
-
+            # Net capital gain determined without regard to section 1(h)(11),
+            # reduced first by any capital gain excess (26 U.S.C.
+            # 911(f)(2)(A)(i)).
+            net_cg_other_than_dividends = (
+                section_911_net_capital_gain_other_than_dividends(tax_unit, period)
+            )
             max_taxable_unrecaptured_gain = min_(
                 unrecaptured_s_1250_gain,
-                max_(0, net_cg - qualified_dividends),
+                net_cg_other_than_dividends,
             )
             unrecaptured_gain_deduction = max_(
                 non_cg_taxable_income + net_cg - taxable_income,
@@ -113,8 +131,7 @@ def formula(tax_unit, period, parameters):
             )
 
             remaining_cg_tax = (
-                tax_unit("capital_gains_28_percent_rate_gain", period)
-                * cg.other_cg_rate
+                tax_unit("section_911_28_percent_rate_gain", period) * cg.other_cg_rate
             )
             return main_cg_tax + unrecaptured_gain_tax + remaining_cg_tax
 

policyengine_us/reforms/crfb/non_refundable_ss_credit.py

@@ -38,8 +38,12 @@ class highest_tax_rate(Variable):
         unit = "/1"
 
         def formula(tax_unit, period, parameters):
-            # compute taxable income that is taxed at the main rates
-            full_taxable_income = tax_unit("taxable_income", period)
+            # compute taxable income that is taxed at the main rates; a
+            # taxpayer excluding foreign earned income adds the excluded
+            # amount back (26 U.S.C. 911(f)(1)(A))
+            full_taxable_income = tax_unit(
+                "taxable_income_plus_section_911_exclusion", period
+            )
             cg_exclusion = tax_unit(
                 "capital_gains_excluded_from_taxable_income", period
             )

policyengine_us/reforms/harris/capital_gains/harris_capital_gains.py

@@ -1,4 +1,7 @@
 from policyengine_us.model_api import *
+from policyengine_us.variables.gov.irs.tax.federal_income.foreign_earned_income_exclusion.section_911_net_capital_gain_other_than_dividends import (
+    section_911_net_capital_gain_other_than_dividends,
+)
 
 
 def create_harris_capital_gains() -> Reform:
@@ -10,10 +13,16 @@ class capital_gains_tax(Variable):
         definition_period = YEAR
 
         def formula(tax_unit, period, parameters):
-            net_cg = tax_unit("net_capital_gain", period)
-            taxable_income = tax_unit("taxable_income", period)
+            # As in the baseline formula, a taxpayer excluding foreign earned
+            # income applies the rates to taxable income plus the excluded
+            # amount, with gains reduced by any capital gain excess
+            # (26 U.S.C. 911(f)).
+            net_cg = tax_unit("section_911_net_capital_gain", period)
+            taxable_income = tax_unit(
+                "taxable_income_plus_section_911_exclusion", period
+            )
             adjusted_net_cg = min_(
-                tax_unit("adjusted_net_capital_gain", period),
+                tax_unit("section_911_adjusted_net_capital_gain", period),
                 taxable_income,
             )  # ANCG is referred to in all cases as ANCG or taxable income if less.
 
@@ -85,12 +94,17 @@ def formula(tax_unit, period, parameters):
             )
 
             unrecaptured_s_1250_gain = tax_unit(
-                "unrecaptured_section_1250_gain", period
+                "section_911_unrecaptured_section_1250_gain", period
+            )
+            # Net capital gain determined without regard to section 1(h)(11),
+            # reduced first by any capital gain excess (26 U.S.C.
+            # 911(f)(2)(A)(i)).
+            net_cg_other_than_dividends = (
+                section_911_net_capital_gain_other_than_dividends(tax_unit, period)
             )
-            qualified_dividends = add(tax_unit, period, ["qualified_dividend_income"])
             max_taxable_unrecaptured_gain = min_(
                 unrecaptured_s_1250_gain,
-                max_(0, net_cg - qualified_dividends),
+                net_cg_other_than_dividends,
             )
             unrecaptured_gain_deduction = max_(
                 non_cg_taxable_income + net_cg - taxable_income,
@@ -106,8 +120,7 @@ def formula(tax_unit, period, parameters):
             )
 
             remaining_cg_tax = (
-                tax_unit("capital_gains_28_percent_rate_gain", period)
-                * cg.other_cg_rate
+                tax_unit("section_911_28_percent_rate_gain", period) * cg.other_cg_rate
             )
 
             return main_cg_tax + unrecaptured_gain_tax + remaining_cg_tax

policyengine_us/tests/policy/baseline/contrib/biden/budget_2025/capital_gains_tax_increase.yaml

@@ -21,7 +21,34 @@
   output:
     # First 100,000 taxed at 20%
     # Last 100,000 taxed at 37%
-    capital_gains_tax: 57_000 # 15,000 + 37,000
+    capital_gains_tax: 57_000 # 20,000 + 37,000
+
+- name: A section 911 exclusion stacks the rates but not the $1 million test
+  period: 2024
+  reforms: policyengine_us.reforms.biden.budget_2025.capital_gains_tax_increase.capital_gains_tax_increase
+  input:
+    gov.contrib.biden.budget_2025.capital_gains.active: true
+    people:
+      head:
+        age: 36
+        qualified_dividend_income: 0
+        long_term_capital_gains: 80_000
+      spouse:
+        age: 36
+        qualified_dividend_income: 120_000
+        long_term_capital_gains: 0
+    tax_units:
+      tax_unit:
+        members: [head, spouse]
+        taxable_income: 1_100_000
+        filing_status: JOINT
+        foreign_earned_income_exclusion: 300_000
+  output:
+    # The threshold is tested on taxable income without the excluded amount,
+    # so as in the first case 100,000 of the gains is over it: 100,000 at
+    # 20% and 100,000 at 37%. Testing it on taxable income plus the excluded
+    # amount would put all 200,000 at 37%.
+    capital_gains_tax: 57_000 # 20,000 + 37,000
 
 - name: Reform not applied
   period: 2024

policyengine_us/tests/policy/baseline/gov/irs/credits/ctc/integration.yaml

@@ -1,3 +1,48 @@
+# Section 911 filer with positive taxable income: the CTC's tax limit sees the
+# tax figured on the Foreign Earned Income Tax Worksheet (26 U.S.C. 911(f)).
+- name: Head of household with two children, positive taxable income and a section 911 exclusion in 2025.
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    people:
+      parent:
+        age: 40
+        # Wages included in gross income; $40,000 of foreign wages is
+        # excluded on Form 2555.
+        employment_income: 60_000
+      child1:
+        age: 5
+      child2:
+        age: 8
+    tax_units:
+      tax_unit:
+        members: [parent, child1, child2]
+        foreign_earned_income_exclusion: 40_000
+    households:
+      household:
+        members: [parent, child1, child2]
+        state_code: TX
+  output:
+    filing_status: HEAD_OF_HOUSEHOLD
+    # $60,000 less the $23,625 head of household standard deduction.
+    taxable_income: 36_375
+    # Foreign Earned Income Tax Worksheet (Form 1040 line 16): line 3 =
+    # $76,375, line 4 = $9,977.50 (Tax Table $9,978), line 5 = tax on
+    # $40,000 = $4,460 (Tax Table $4,463), line 6 = $5,517.50 (Tax Table
+    # $5,515). Taxed from the bottom bracket it would be $4,025.
+    income_tax_before_credits: 5_517.50
+    eitc: 0
+    # Schedule 8812 line 12: 2 x $2,200.
+    ctc: 4_400
+    # Credit Limit Worksheet A sees the stacked tax, which covers the whole
+    # credit, so nothing is left to refund (section 24(d)(3) would bar the
+    # refund in any case).
+    ctc_limiting_tax_liability: 5_517.50
+    refundable_ctc: 0
+    non_refundable_ctc: 4_400
+    income_tax_before_refundable_credits: 1_117.50
+    income_tax: 1_117.50
+
 - name: Single parent of 10 children aged 6 to 17, $200k income during ARP.
   period: 2021
   absolute_error_margin: 0