Net capital gain distributions inside the capital loss limit in AGI

changelog.d/sch-d-cg-distributions-agi.fixed.md

@@ -0,0 +1 @@
+Net capital gain distributions against Schedule D capital losses before the 26 U.S.C. 1211(b) $3,000 loss limit in adjusted gross income, net investment income, loss-limited capital gains (Michigan, Mississippi, Delaware and Georgia), a dependent's Social Security modified AGI and the capital gain tax worksheet test, and net spouses' gains and losses on a joint return.

policyengine_us/parameters/gov/irs/gross_income/sources.yaml

@@ -9,8 +9,10 @@ values:
     - farm_rent_income
     - other_net_gain_gross_income
     - capital_gains
+    # Capital gain distributions reported on Form 1040 line 7a. With capital
+    # losses they go on Schedule D line 13; loss_ald nets the losses against
+    # them (capital_losses_allowed_against_gains).
     - non_sch_d_capital_gains
-    # Capital gain distributions received without filing Schedule D (Form 1040 line 7).
     - taxable_interest_income
     - rental_income
     # Royalties included in rental income

policyengine_us/parameters/gov/irs/investment/income/sources.yaml

@@ -20,11 +20,11 @@ values:
     # code H input says otherwise, and a dependent's amounts stay out of the
     # filer's net investment income.
     - estate_net_investment_income
-    # Schedule D gain or loss of the head and spouse, limited under § 1211(b)
-    # (the Schedule D part of Form 8960 line 5a).
+    # Form 8960 line 5a: the head and spouse's Form 1040 line 7a capital gain
+    # or loss, Schedule D gains and losses with capital gain distributions
+    # (line 13), limited under § 1211(b). Distributions reported without
+    # Schedule D are the same amount.
     - filer_loss_limited_net_capital_gains
-    - non_sch_d_capital_gains
-    # Capital gain distributions received without filing Schedule D (Form 1040 line 7).
 metadata:
   unit: currency-USD
   label: net investment income sources

policyengine_us/tests/core/test_dependent_losses_agi_invariants.py

@@ -20,9 +20,12 @@
 2. 0 <= limited_capital_loss <= the filing-status cap, and it never exceeds
    the non-dependents' own capital losses (26 USC 1211(b)).
 3. loss_ald >= limited_capital_loss >= 0.
-4. For tax units without dependents, both variables equal the pre-change
-   all-member formula (a reference implementation below), so filers without
-   dependents see no change.
+4. For tax units without dependents, both variables equal the all-member
+   formula (a reference implementation below), so leaving dependents out
+   changes nothing for filers without dependents. The capital part follows
+   26 USC 1211(b): losses are allowed up to the gains
+   (`capital_losses_allowed_against_gains`), plus the excess up to the cap
+   (`limited_capital_loss`).
 """
 
 import numpy as np
@@ -268,8 +271,8 @@ def test_loss_ald_at_least_limited_capital_loss(runs):
     )
 
 
-def test_units_without_dependents_match_pre_change_formula(runs, units):
-    """Differential check against the all-member formula used before."""
+def test_units_without_dependents_match_all_member_formula(runs, units):
+    """Differential check against the all-member formula."""
     p = runs["irs"]
     filing_status = runs["with"]["filing_status"]
     se = _by_person(units, "self_employment_income") + _by_person(
@@ -279,12 +282,13 @@ def test_units_without_dependents_match_pre_change_formula(runs, units):
     income = sum(_unit_sum(runs, np.maximum(x, 0)) for x in person_business)
     loss = sum(_unit_sum(runs, np.maximum(-x, 0)) for x in person_business)
     limited_business_loss = np.minimum(loss, income + p.ald.loss.max[filing_status])
-    capital_losses = _unit_sum(
-        runs,
-        np.maximum(0, -sum(_by_person(units, name) for name in CAPITAL_INPUTS)),
-    )
+    person_capital = sum(_by_person(units, name) for name in CAPITAL_INPUTS)
+    capital_losses = _unit_sum(runs, np.maximum(0, -person_capital))
+    capital_gains = _unit_sum(runs, np.maximum(0, person_capital))
+    allowed_against_gains = np.minimum(capital_losses, capital_gains)
     limited_capital_loss = np.minimum(
-        p.ald.loss.capital.max[filing_status], capital_losses
+        p.ald.loss.capital.max[filing_status],
+        capital_losses - allowed_against_gains,
     )
     no_dependents = np.array([not u["dependents"] for u in units])
     assert no_dependents.sum() > 100
@@ -295,6 +299,8 @@ def test_units_without_dependents_match_pre_change_formula(runs, units):
     )
     np.testing.assert_allclose(
         runs["with"]["loss_ald"][no_dependents],
-        (limited_business_loss + limited_capital_loss)[no_dependents],
+        (limited_business_loss + allowed_against_gains + limited_capital_loss)[
+            no_dependents
+        ],
         atol=TOLERANCE,
     )

policyengine_us/tests/core/test_dependent_net_investment_income_invariants.py

@@ -18,12 +18,14 @@
    AGI, NIIT MAGI or `net_investment_income_tax`.
 2. `net_investment_income` equals an independent numpy computation over the
    head and spouse: their interest, dividends, rents, passive pass-through,
-   estate and trust income and capital gain distributions, plus their netted
-   Schedule D gain or loss, limited under 26 USC 1211(b).
+   estate and trust income, plus their netted Schedule D gain or loss with
+   capital gain distributions on line 13, limited under 26 USC 1211(b).
 3. -loss limit <= `filer_loss_limited_net_capital_gains`, and it equals
    `loss_limited_net_capital_gains` when the unit has no dependents.
 4. For tax units without dependents, `net_investment_income` equals the
-   pre-change all-member formula, so filers without dependents see no change.
+   all-member formula (person-level sources plus
+   `loss_limited_net_capital_gains`), so leaving dependents out changes
+   nothing for filers without dependents.
 5. 0 <= NIIT = 3.8% x min(max(0, NII), max(0, MAGI - threshold)).
 """
 
@@ -56,7 +58,12 @@
     + NONNEGATIVE_INPUTS
     + ["partnership_s_corp_income", "passive_partnership_s_corp_income"]
 )
-CAPITAL_INPUTS = ["short_term_capital_gains", "long_term_capital_gains"]
+# Schedule D gains and losses, with capital gain distributions (line 13).
+CAPITAL_INPUTS = [
+    "short_term_capital_gains",
+    "long_term_capital_gains",
+    "non_sch_d_capital_gains",
+]
 # Every person-level amount Form 8960 counts, other than Schedule D gains.
 NII_PERSON_INPUTS = [
     "taxable_interest_income",
@@ -65,7 +72,6 @@
     "rental_income",
     "passive_partnership_s_corp_income",
     "estate_income",
-    "non_sch_d_capital_gains",
 ]
 OUTPUTS = [
     "net_investment_income",
@@ -305,8 +311,8 @@ def test_filer_capital_gains_within_loss_limit(runs, units):
     )
 
 
-def test_units_without_dependents_match_pre_change_formula(runs, units):
-    """Differential check against the all-member formula used before."""
+def test_units_without_dependents_match_all_member_formula(runs, units):
+    """Differential check against the all-member formula."""
     person_nii = sum(_by_person(units, name) for name in NII_PERSON_INPUTS)
     old = _unit_sum(runs, person_nii) + runs["with"]["loss_limited_net_capital_gains"]
     no_dependents = np.array([not u["dependents"] for u in units])