Apply Arizona's $1,500 member capital loss limit and allow negative household income in the property tax credit

changelog.d/az-ptc-line-d-loss-limit.fixed.md

@@ -0,0 +1 @@
+Limit each Arizona household member's net capital loss to $1,500 in property tax credit household income (Form 140PTC line D), and let household income go negative, using zero only for the credit schedules (line J).

changelog.d/fix-az-ptc-capital-gains.fixed.md

@@ -0,0 +1 @@
+Arizona property tax credit household income counts capital gains and qualified dividends once, through federal AGI, instead of adding the federal preferential-rate amount again, and counts dependents' income, which federal AGI leaves out.

policyengine_us/parameters/gov/states/az/tax/income/credits/property_tax/capital_loss_limit.yaml

@@ -0,0 +1,22 @@
+description: Arizona limits each household member's net capital loss to this amount when computing household income for the property tax credit.
+values:
+  2021-01-01: 1_500
+metadata:
+  unit: currency-USD
+  period: year
+  label: Arizona property tax credit capital loss limit per household member
+  reference:
+    - title: A.A.C. R15-2C-502(C)(3). Property Tax Credit
+      href: https://www.law.cornell.edu/regulations/arizona/Ariz-Admin-Code-SS-R15-2C-502
+    - title: ITR 12-1. Income Tax Ruling - Property Tax Credit Household Income, item (7)
+      href: https://azdor.gov/sites/default/files/2023-03/RULINGS_INDV_2012_itr12-1.pdf#page=2
+    - title: 2025 Form 140PTC Instructions, Part 1 line D
+      href: https://azdor.gov/sites/default/files/document/FORMS_INDIVIDUAL_2025_140PTCi.pdf#page=4
+    - title: 2024 Form 140PTC Instructions, Part 1 line D
+      href: https://azdor.gov/sites/default/files/document/FORMS_INDIVIDUAL_2024_140PTCi.pdf#page=4
+    - title: 2023 Form 140PTC Instructions, Part 1 line D
+      href: https://azdor.gov/sites/default/files/2023-12/FORMS_INDIVIDUAL_2023_140PTCi.pdf#page=4
+    - title: 2022 Form 140PTC Instructions, Part 1 line D
+      href: https://azdor.gov/sites/default/files/2023-03/FORMS_INDIVIDUAL_2022_140PTCi-2D.pdf#page=4
+    - title: 2021 Form 140PTC Instructions, Part 1 line D
+      href: https://azdor.gov/sites/default/files/2023-03/FORMS_INDIVIDUAL_2021_140PTCi-2D.pdf#page=4

policyengine_us/parameters/gov/states/az/tax/income/credits/property_tax/income_sources.yaml

@@ -1,30 +1,60 @@
 description: Arizona accounts for the following income sources when computing household income for the property tax credit.
 values:
   2021-01-01:
-    # Item (7): Capital gains - excluded gains not in Federal AGI
-    - capital_gains_excluded_from_taxable_income
     # Item (2): All interest income including tax-exempt
     - tax_exempt_interest_income
     # Item (9): Pension income - tax-exempt portions not in Federal AGI
     # (taxable pension is already in Federal AGI via az_property_tax_credit_agi)
     - tax_exempt_public_pension_income
     - tax_exempt_private_pension_income
-    # Federal AGI minus Social Security (per ARS 43-1072(I) exclusion)
+    # Federal AGI minus Social Security (per ARS 43-1072(I) exclusion).
+    # Item (7) capital gains and losses (Form 140PTC Part 1 line D) are counted
+    # here, once, for members who are not dependents: federal AGI's net capital
+    # gain and capital loss deduction (limited to $3,000 per return) are
+    # replaced by each member's combined gains and losses, with a net loss
+    # limited to $1,500 for each member (A.A.C. R15-2C-502(C)(3)). The total can
+    # be negative; az_property_tax_credit uses zero for the schedules.
+    # ARS 43-1072(H)(6)(b) also adds "the amount of capital gains excluded from
+    # adjusted gross income"; the model has no gain excluded from federal AGI
+    # (such as a section 121 home sale or section 1202 small business stock
+    # exclusion), so nothing is added for it. Do not add
+    # capital_gains_excluded_from_taxable_income: it is the part of federal
+    # taxable income taxed at the capital gains rates (at zero taxable income,
+    # the adjusted net capital gain), which federal AGI already holds.
     - az_property_tax_credit_agi
+    # Federal AGI leaves out dependents' income; Arizona counts every household
+    # member's income whether or not the member is a dependent
+    # (A.A.C. R15-2C-502(A)(2), (B)). This includes each dependent's line D
+    # amount, with the same $1,500 loss limit.
+    - az_property_tax_credit_dependent_income
 metadata:
   unit: list
   period: year
   label: Arizona property tax credit income sources
   reference:
     - title: ARS 43-1072. Property tax credit - Income definition
       href: https://www.azleg.gov/ars/43/01072.htm
+    - title: A.A.C. R15-2C-502. Property Tax Credit
+      href: https://www.law.cornell.edu/regulations/arizona/Ariz-Admin-Code-SS-R15-2C-502
     - title: ITR 12-1. Income Tax Ruling - Property Tax Credit Household Income
-      href: https://azdor.gov/sites/default/files/2023-03/RULINGS_INDV_2012_itr12-1.pdf
+      href: https://azdor.gov/sites/default/files/2023-03/RULINGS_INDV_2012_itr12-1.pdf#page=2
+    - title: 2025 Form 140PTC Instructions, Part 1 lines A to I
+      href: https://azdor.gov/sites/default/files/document/FORMS_INDIVIDUAL_2025_140PTCi.pdf#page=4
+    - title: 2025 Property Tax Refund (Credit) Claim Form 140PTC, Part 1
+      href: https://azdor.gov/sites/default/files/document/FORMS_INDIVIDUAL_2025_140PTC_f.pdf#page=2
+    - title: 2024 Form 140PTC Instructions, Part 1 lines A to I
+      href: https://azdor.gov/sites/default/files/document/FORMS_INDIVIDUAL_2024_140PTCi.pdf#page=4
     - title: 2024 Property Tax Refund (Credit) Claim Form 140PTC
       href: https://azdor.gov/forms/tax-credits-forms/property-tax-refund-credit-claim-form-fillable
+    - title: 2023 Form 140PTC Instructions, Part 1 lines A to I
+      href: https://azdor.gov/sites/default/files/2023-12/FORMS_INDIVIDUAL_2023_140PTCi.pdf#page=4
     - title: 2023 Property Tax Refund (Credit) Claim Form 140PTC
       href: https://azdor.gov/forms/tax-credits-forms/property-tax-refund-credit-claim-form-fillable
+    - title: 2022 Form 140PTC Instructions, Part 1 lines A to I
+      href: https://azdor.gov/sites/default/files/2023-03/FORMS_INDIVIDUAL_2022_140PTCi-2D.pdf#page=4
     - title: 2022 Property Tax Refund (Credit) Claim Form 140PTC
       href: https://azdor.gov/sites/default/files/2023-03/FORMS_INDIVIDUAL_2022_140PTC.pdf
+    - title: 2021 Form 140PTC Instructions, Part 1 lines A to I
+      href: https://azdor.gov/sites/default/files/2023-03/FORMS_INDIVIDUAL_2021_140PTCi-2D.pdf#page=4
     - title: 2021 Property Tax Refund (Credit) Claim Form 140PTC
       href: https://azdor.gov/sites/default/files/2023-03/FORMS_INDIVIDUAL_2021_140PTC.pdf

policyengine_us/tests/policy/baseline/gov/states/az/tax/income/az_property_tax_credit_agi.yaml

@@ -38,14 +38,16 @@
   output:
     az_property_tax_credit_agi: 25_000
 
-- name: Capped at zero when Social Security exceeds other income
+- name: Negative when losses leave other income below taxable Social Security
   period: 2024
   input:
     state_code: AZ
     adjusted_gross_income: 5_000
     tax_unit_taxable_social_security: 6_000
   output:
-    az_property_tax_credit_agi: 0
+    # $5,000 - $6,000 = -$1,000. Not floored: Form 140PTC line J can be
+    # negative, and az_property_tax_credit uses zero only for the schedules.
+    az_property_tax_credit_agi: -1_000
 
 - name: Combined income types with Social Security exclusion
   period: 2024
@@ -56,3 +58,49 @@
   output:
     # $22,250 - $4,250 = $18,000
     az_property_tax_credit_agi: 18_000
+
+# A.A.C. R15-2C-502(C)(3): each member's net capital loss is limited to
+# $1,500, in place of federal AGI's $3,000 limit per return.
+- name: Federal capital loss limit is replaced by the 1,500 member limit
+  period: 2025
+  input:
+    people:
+      head:
+        age: 70
+        employment_income: 10_000
+        long_term_capital_gains: -5_000
+    tax_units:
+      tax_unit:
+        members: [head]
+    households:
+      household:
+        members: [head]
+        state_code: AZ
+  output:
+    # Federal AGI: 10,000 - 3,000 = 7,000.
+    adjusted_gross_income: 7_000
+    # Form 140PTC line A 10,000 + line D (1,500) = 8,500.
+    az_property_tax_credit_agi: 8_500
+
+- name: A dependent's capital loss is left to dependent income
+  period: 2025
+  input:
+    people:
+      head:
+        age: 70
+        employment_income: 3_000
+      child:
+        age: 12
+        is_tax_unit_dependent: true
+        long_term_capital_gains: -2_500
+    tax_units:
+      tax_unit:
+        members: [head, child]
+    households:
+      household:
+        members: [head, child]
+        state_code: AZ
+  output:
+    # Only the head's line A wages. The dependent's line D (1,500) is in
+    # az_property_tax_credit_dependent_income.
+    az_property_tax_credit_agi: 3_000

policyengine_us/tests/policy/baseline/gov/states/az/tax/income/credits/az_property_tax_credit.yaml

@@ -144,3 +144,20 @@
     households: {household: {members: [head], state_code: AZ}}
   output:
     az_property_tax_credit: 78
+
+# Form 140PTC line J note (2023-2025 instructions, page 5): a negative household
+# income is entered as is, and household income is considered zero for the
+# Schedule 1 and 2 amounts.
+- name: negative household income uses the zero-income schedule amount
+  period: 2025
+  input:
+    state_code: AZ
+    cohabitating_spouses: false
+    az_property_tax_credit_income: -1_000
+    az_property_tax_credit_eligible: true
+    real_estate_taxes: 0
+    rent: 4_000
+  output:
+    # Line 11a: Schedule 1, 0 - 1,750 -> 502.
+    # Line 13: 0.15 x 4,000 = 600. Line 15: smaller of 502 and 600.
+    az_property_tax_credit: 502

policyengine_us/tests/policy/baseline/gov/states/az/tax/income/credits/az_property_tax_credit_capital_gains.yaml

@@ -0,0 +1,57 @@
+# Form 140PTC Part 1 line D, for one household member: "combine gains and
+# losses from the sale or exchange of property. If the result is a gain, enter
+# the gain. If the result is a loss, enter the amount of the loss up to a
+# maximum of ($1,500)." (2021-2025 instructions, page 4;
+# A.A.C. R15-2C-502(C)(3); ITR 12-1 item (7).)
+
+- name: A net gain is entered in full
+  period: 2025
+  input:
+    state_code: AZ
+    long_term_capital_gains: 3_000
+    short_term_capital_gains: -500
+  output:
+    # 3,000 - 500 = 2,500.
+    az_property_tax_credit_capital_gains: 2_500
+
+- name: A net loss within the limit is entered in full
+  period: 2025
+  input:
+    state_code: AZ
+    long_term_capital_gains: -1_000
+  output:
+    az_property_tax_credit_capital_gains: -1_000
+
+- name: A net loss equal to the limit is entered in full
+  period: 2025
+  input:
+    state_code: AZ
+    short_term_capital_gains: -1_500
+  output:
+    az_property_tax_credit_capital_gains: -1_500
+
+- name: A net loss over the limit is entered as the limit
+  period: 2025
+  input:
+    state_code: AZ
+    long_term_capital_gains: 2_000
+    short_term_capital_gains: -6_000
+  output:
+    # 2,000 - 6,000 = (4,000), limited to (1,500).
+    az_property_tax_credit_capital_gains: -1_500
+
+- name: The limit applies in 2021
+  period: 2021
+  input:
+    state_code: AZ
+    long_term_capital_gains: -3_000
+  output:
+    az_property_tax_credit_capital_gains: -1_500
+
+- name: Not computed outside Arizona
+  period: 2025
+  input:
+    state_code: CA
+    long_term_capital_gains: -3_000
+  output:
+    az_property_tax_credit_capital_gains: 0