Keep federally excluded income in Michigan household resources (MI-1040CR line 30)

changelog.d/mi-household-resources-schedule-1-adjustments.fixed.md

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+Michigan household resources (MI-1040CR line 30) subtract only the claimant's and spouse's U.S. Schedule 1 adjustments to income, so income excluded under IRC 135, 137, 931 and 933 (savings bond interest for higher education, employer adoption benefits, possession and Puerto Rico income) stays in household resources, and a dependent's own IRA deduction, early withdrawal penalty or educator expenses no longer come off. Educator expenses use the federal deduction capped per eligible educator.

policyengine_us/parameters/gov/states/mi/tax/income/household_resources_adjustments.yaml

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+description: Michigan subtracts the following federal above-the-line deductions, the U.S. Schedule 1 adjustments to income, from household resources.
+values:
+  # MI-1040CR line 30: "Enter total adjustments from your U.S. Form 1040,
+  # Schedule 1." Each entry is a Schedule 1 Part II line. Federal
+  # above-the-line deductions that are not Part II adjustments stay off this
+  # list: loss_ald (business, rental and capital losses, which are income
+  # items) and the exclusions from gross income under IRC 135, 137, 931 and
+  # 933 (us_bonds_for_higher_ed, qualified_adoption_assistance_expense,
+  # specified_possession_income and puerto_rico_income).
+  2021-01-01:
+    - educator_expense_ald # line 11, capped per eligible educator
+    - health_savings_account_ald # line 13
+    - self_employment_tax_ald # line 15
+    - self_employed_pension_contribution_ald # line 16
+    - self_employed_health_insurance_ald # line 17
+    - early_withdrawal_penalty # line 18
+    - alimony_expense_ald # line 19a
+    - traditional_ira_contributions # line 20
+    - student_loan_interest_ald # line 21
+metadata:
+  unit: list
+  period: year
+  label: Michigan household resources adjustments
+  reference:
+  - title: Michigan 2024 Individual Income Tax Instructions, MI-1040CR line 30
+    href: https://www.michigan.gov/taxes/-/media/Project/Websites/taxes/Forms/IIT/TY2024/MI-1040-Instructions.pdf#page=33
+  - title: Michigan 2025 Individual Income Tax Instructions, MI-1040CR line 30
+    href: https://www.michigan.gov/taxes/-/media/Project/Websites/taxes/Forms/IIT/TY2025/MI-1040-Book.pdf#page=32
+  - title: 2025 Schedule 1 (Form 1040), Part II, Adjustments to Income
+    href: https://www.irs.gov/pub/irs-prior/f1040s1--2025.pdf#page=2

policyengine_us/tests/policy/baseline/gov/states/mi/tax/income/mi_household_resources.yaml

@@ -48,6 +48,146 @@
     # Line 33: 10,000 - (1,000 + 3,000) = 6,000.
     mi_household_resources: 6_000
 
+- name: Savings bond interest excluded under IRC 135 stays in household resources
+  period: 2025
+  input:
+    people:
+      person1:
+        age: 45
+        employment_income_before_lsr: 30_000
+        taxable_interest_income: 2_000
+        us_bonds_for_higher_ed: 1_500
+    tax_units:
+      tax_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: MI
+  output:
+    # Federal: Form 8815 excludes 1,500 of the 2,000 of interest (Schedule B
+    # line 3), so AGI is 30,000 + 500 = 30,500.
+    adjusted_gross_income: 30_500
+    # Line 14: 30,000.
+    # Line 15: "All interest and dividend income (including nontaxable
+    # interest)": 2,000.
+    # Line 30: 0. The Form 8815 exclusion is not a Schedule 1 adjustment.
+    # Line 33: 30,000 + 2,000 = 32,000.
+    mi_household_resources: 32_000
+
+- name: Employer adoption benefits excluded under IRC 137 stay in household resources
+  period: 2025
+  input:
+    people:
+      person1:
+        age: 45
+        # Includes 5,000 the employer paid for qualified adoption expenses.
+        employment_income_before_lsr: 60_000
+        qualified_adoption_assistance_expense: 5_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: MI
+  output:
+    # Federal: the 5,000 is excluded (Form 8839 Part III) and left out of
+    # W-2 box 1, so AGI is 55,000.
+    adjusted_gross_income: 55_000
+    # Line 14: "all compensation received as an employee ... and any other
+    # amounts reported to you on Form W-2". The adoption benefits are
+    # reported in W-2 box 12 (code T): 55,000 + 5,000 = 60,000.
+    # Line 30: 0. The exclusion is not a Schedule 1 adjustment.
+    # Line 33: 60,000.
+    mi_household_resources: 60_000
+
+- name: Puerto Rico income excluded under IRC 933 stays in household resources
+  period: 2025
+  input:
+    people:
+      person1:
+        age: 45
+        # Includes 15,000 earned in Puerto Rico before moving to Michigan.
+        employment_income_before_lsr: 45_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+        puerto_rico_income: 15_000
+    households:
+      household:
+        members: [person1]
+        state_code: MI
+  output:
+    # Federal: section 933 excludes the 15,000, so AGI is 30,000.
+    adjusted_gross_income: 30_000
+    # Line 14: all wages, 45,000. Total household resources include "all
+    # income exempt or excluded from AGI" (book page 26).
+    # Line 30: 0. The exclusion is not a Schedule 1 adjustment.
+    # Line 33: 45,000.
+    mi_household_resources: 45_000
+
+- name: Possession income excluded under IRC 931 stays in household resources
+  period: 2025
+  input:
+    people:
+      person1:
+        age: 45
+        # Includes 8,000 of income from a specified possession.
+        employment_income_before_lsr: 40_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+        specified_possession_income: 8_000
+    households:
+      household:
+        members: [person1]
+        state_code: MI
+  output:
+    # Federal: section 931 excludes the 8,000, so AGI is 32,000.
+    adjusted_gross_income: 32_000
+    # Line 14: all wages, 40,000, as "all income exempt or excluded from AGI"
+    # counts (book page 26).
+    # Line 30: 0. The exclusion is not a Schedule 1 adjustment.
+    # Line 33: 40,000.
+    mi_household_resources: 40_000
+
+- name: Schedule 1 adjustments reduce household resources and federal exclusions do not
+  period: 2025
+  input:
+    people:
+      person1:
+        age: 45
+        # Includes 4,000 of employer adoption benefits (W-2 box 12, code T).
+        employment_income_before_lsr: 50_000
+        qualified_adoption_assistance_expense: 4_000
+        taxable_interest_income: 3_000
+        us_bonds_for_higher_ed: 1_000
+        traditional_ira_contributions: 2_000
+        early_withdrawal_penalty: 300
+        student_loan_interest: 1_000
+        health_insurance_premiums: 1_200
+    tax_units:
+      tax_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: MI
+  output:
+    # Federal: 50,000 + 3,000 - 4,000 (IRC 137) - 1,000 (IRC 135) = 48,000
+    # of gross income, less Schedule 1 line 26 (2,000 + 300 + 1,000 =
+    # 3,300): AGI 44,700, under the student loan interest phase-out.
+    adjusted_gross_income: 44_700
+    # Line 14: 50,000. Line 15: 3,000, including the excluded 1,000.
+    # Line 28: 53,000.
+    # Line 30: IRA deduction (Schedule 1 line 20) 2,000 + penalty on early
+    # withdrawal of savings (line 18) 300 + student loan interest deduction
+    # (line 21) 1,000 = 3,300.
+    # Line 31: 1,200.
+    # Line 33: 53,000 - (3,300 + 1,200) = 48,500.
+    mi_household_resources: 48_500
+
 - name: Negative business income floored at 0
   period: 2024
   input:
@@ -465,3 +605,122 @@
     # dependent's Schedule E income is not on line 16. Line 30: 0.
     # Line 33: 50,000.
     mi_household_resources: 50_000
+
+- name: A dependent's own Schedule 1 adjustments are not on the claimant's line 30
+  period: 2025
+  input:
+    people:
+      person1:
+        age: 45
+        is_tax_unit_head: true
+        is_tax_unit_spouse: false
+        is_tax_unit_dependent: false
+        employment_income_before_lsr: 50_000
+      person2:
+        age: 20
+        is_tax_unit_head: false
+        is_tax_unit_spouse: false
+        is_tax_unit_dependent: true
+        is_full_time_student: true
+        traditional_ira_contributions: 2_000
+        early_withdrawal_penalty: 100
+        educator_expense: 300
+    tax_units:
+      tax_unit:
+        members: [person1, person2]
+    marital_units:
+      marital_unit:
+        members: [person1]
+      dependent_marital_unit:
+        members: [person2]
+    households:
+      household:
+        members: [person1, person2]
+        state_code: MI
+  output:
+    # Line 14: 50,000. Line 30 is "your U.S. Form 1040, Schedule 1": the
+    # dependent's IRA deduction, early withdrawal penalty and educator
+    # expenses are on the dependent's own Schedule 1, so line 30 is 0.
+    # Line 33: 50,000.
+    mi_household_resources: 50_000
+
+- name: Claimant educator expenses reduce household resources through Schedule 1 line 11
+  period: 2025
+  input:
+    people:
+      claimant:
+        age: 45
+        employment_income_before_lsr: 50_000
+        educator_expense: 300
+    tax_units:
+      tax_unit:
+        members: [claimant]
+    households:
+      household:
+        members: [claimant]
+        state_code: MI
+  output:
+    educator_expense_ald: 300
+    above_the_line_deductions: 300
+    adjusted_gross_income: 49_700
+    # Line 14: 50,000. Line 30: Schedule 1 line 11, 300.
+    # Line 33: 50,000 - 300 = 49,700.
+    mi_household_resources: 49_700
+
+- name: Spouse educator expenses reduce household resources on a joint return
+  period: 2025
+  input:
+    people:
+      claimant:
+        age: 45
+        is_tax_unit_head: true
+        is_tax_unit_spouse: false
+        is_tax_unit_dependent: false
+        employment_income_before_lsr: 50_000
+      spouse:
+        age: 45
+        is_tax_unit_head: false
+        is_tax_unit_spouse: true
+        is_tax_unit_dependent: false
+        educator_expense: 300
+    tax_units:
+      tax_unit:
+        members: [claimant, spouse]
+        filing_status: JOINT
+    marital_units:
+      marital_unit:
+        members: [claimant, spouse]
+    households:
+      household:
+        members: [claimant, spouse]
+        state_code: MI
+  output:
+    educator_expense_ald: 300
+    above_the_line_deductions: 300
+    adjusted_gross_income: 49_700
+    # Line 30 includes the spouse's Schedule 1 line 11 deduction, 300.
+    # Line 33: 50,000 - 300 = 49,700.
+    mi_household_resources: 49_700
+
+- name: Educator expenses above the per-educator cap reduce household resources only by the capped deduction
+  period: 2025
+  input:
+    people:
+      claimant:
+        age: 45
+        employment_income_before_lsr: 50_000
+        educator_expense: 1_000
+    tax_units:
+      tax_unit:
+        members: [claimant]
+    households:
+      household:
+        members: [claimant]
+        state_code: MI
+  output:
+    educator_expense_ald: 300
+    above_the_line_deductions: 300
+    adjusted_gross_income: 49_700
+    # Schedule 1 line 11 and MI-1040CR line 30 use the 2025 cap of 300.
+    # Line 33: 50,000 - 300 = 49,700.
+    mi_household_resources: 49_700