Net losses against 28 percent rate gain and unrecaptured section 1250 gain (26 U.S.C. 1(h)(4), 1(h)(6))

changelog.d/fix-dwks-28-1250-netting.fixed.md

@@ -0,0 +1 @@
+Net collectibles loss, the net short-term capital loss and the long-term capital loss carryover against 28 percent rate gain, and the rest against unrecaptured section 1250 gain, per 26 U.S.C. 1(h)(4) and 1(h)(6), through new inputs for those amounts before netting; amounts entered as reported on Schedule D lines 18 and 19 pass through unchanged.

policyengine_us/tests/core/test_uprating_series.py

@@ -43,6 +43,10 @@
     "self_employed_pension_contributions_desired": SELF_EMPLOYMENT,
     # Components of capital gains.
     "long_term_capital_gains_on_collectibles": CAPITAL_GAINS,
+    "long_term_capital_loss_carryover": CAPITAL_GAINS,
+    "collectibles_gain_or_loss": CAPITAL_GAINS,
+    "section_1202_gain": CAPITAL_GAINS,
+    "unrecaptured_section_1250_gain_before_losses": CAPITAL_GAINS,
     "unrecaptured_section_1250_gain": CAPITAL_GAINS,
     "non_sch_d_capital_gains": CAPITAL_GAINS,
     "schedule_d_capital_gain_distributions": CAPITAL_GAINS,

policyengine_us/tests/policy/baseline/gov/irs/tax/federal_income/capital_gains/capital_gains_28_percent_rate_gain.yaml

@@ -0,0 +1,181 @@
+# 26 U.S.C. 1(h)(4): collectibles gain and section 1202 gain less collectibles
+# loss, the net short-term capital loss and the long-term capital loss carried
+# to the year, if more than zero. Line references are to the 2025 28% Rate
+# Gain Worksheet (Instructions for Schedule D, page 11); line 7 is Schedule D
+# line 18. Amounts before netting are collectibles_gain_or_loss and
+# section_1202_gain; amounts already netted, as the microdata carry Schedule D
+# line 18, are long_term_capital_gains_on_collectibles and
+# long_term_capital_gains_on_small_business_stock and pass through.
+- name: Without losses the 28 percent rate gain is the collectibles gain
+  period: 2025
+  input:
+    long_term_capital_gains: 50_000
+    collectibles_gain_or_loss: 10_000
+  output:
+    capital_gains_28_percent_rate_gain: 10_000
+
+- name: A short-term loss reduces the 28 percent rate gain
+  period: 2025
+  input:
+    long_term_capital_gains: 50_000
+    collectibles_gain_or_loss: 10_000
+    short_term_capital_gains: -8_000
+  output:
+    # Line 1 = 10,000, line 6 = (8,000), line 7 = 2,000.
+    capital_gains_28_percent_rate_gain: 2_000
+
+- name: A short-term loss larger than the gain leaves none
+  period: 2025
+  input:
+    long_term_capital_gains: 50_000
+    collectibles_gain_or_loss: 10_000
+    short_term_capital_gains: -15_000
+  output:
+    # Line 7 = 10,000 - 15,000, zero or less, so 0.
+    capital_gains_28_percent_rate_gain: 0
+
+- name: A short-term gain does not reduce it
+  period: 2025
+  input:
+    long_term_capital_gains: 50_000
+    collectibles_gain_or_loss: 10_000
+    short_term_capital_gains: 5_000
+  output:
+    # Line 6 is zero when Schedule D line 7 is a gain.
+    capital_gains_28_percent_rate_gain: 10_000
+
+- name: A long-term capital loss carryover reduces it
+  period: 2025
+  input:
+    long_term_capital_gains: 47_000
+    collectibles_gain_or_loss: 10_000
+    long_term_capital_loss_carryover: 3_000
+  output:
+    # Line 5 = (3,000), line 7 = 7,000. long_term_capital_gains is net of the
+    # carryover, as Schedule D line 15 is.
+    capital_gains_28_percent_rate_gain: 7_000
+
+- name: Section 1202 gain, a short-term loss and a carryover together
+  period: 2025
+  input:
+    long_term_capital_gains: 47_000
+    collectibles_gain_or_loss: 10_000
+    section_1202_gain: 4_000
+    long_term_capital_loss_carryover: 3_000
+    short_term_capital_gains: -5_000
+  output:
+    # Lines 1 + 2 = 14,000, line 5 = (3,000), line 6 = (5,000), line 7 =
+    # 6,000.
+    capital_gains_28_percent_rate_gain: 6_000
+
+- name: A collectibles loss offsets section 1202 gain
+  period: 2025
+  input:
+    long_term_capital_gains: 20_000
+    collectibles_gain_or_loss: -2_000
+    section_1202_gain: 5_000
+  output:
+    # Line 1 = (2,000), line 2 = 5,000, line 7 = 3,000.
+    capital_gains_28_percent_rate_gain: 3_000
+
+- name: A net collectibles loss leaves no 28 percent rate gain
+  period: 2025
+  input:
+    long_term_capital_gains: 20_000
+    collectibles_gain_or_loss: -4_000
+  output:
+    capital_gains_28_percent_rate_gain: 0
+
+- name: Spouses' gains and losses are netted on the joint return
+  period: 2025
+  input:
+    people:
+      head:
+        age: 50
+        long_term_capital_gains: 30_000
+        collectibles_gain_or_loss: 6_000
+      spouse:
+        age: 50
+        short_term_capital_gains: -2_000
+        long_term_capital_gains: -1_000
+        long_term_capital_loss_carryover: 1_000
+    tax_units:
+      tax_unit:
+        members: [head, spouse]
+    marital_units:
+      marital_unit:
+        members: [head, spouse]
+    households:
+      household:
+        members: [head, spouse]
+        state_code: TX
+  output:
+    # Line 1 = 6,000, line 5 = (1,000), line 6 = (2,000), line 7 = 3,000.
+    capital_gains_28_percent_rate_gain: 3_000
+
+- name: Section 1202 gain and collectibles gain net together against a short-term loss
+  period: 2025
+  input:
+    long_term_capital_gains: 60_000
+    collectibles_gain_or_loss: 10_000
+    section_1202_gain: 15_000
+    short_term_capital_gains: -8_000
+  output:
+    # Line 1 = 10,000, line 2 = 15,000, line 6 = (8,000), line 7 = 17,000.
+    capital_gains_28_percent_rate_gain: 17_000
+
+- name: A spouse's short-term gain offsets the other's short-term loss first
+  period: 2025
+  input:
+    people:
+      head:
+        age: 50
+        long_term_capital_gains: 30_000
+        short_term_capital_gains: -3_000
+      spouse:
+        age: 50
+        long_term_capital_gains: 10_000
+        collectibles_gain_or_loss: 10_000
+        short_term_capital_gains: 1_000
+    tax_units:
+      tax_unit:
+        members: [head, spouse]
+    marital_units:
+      marital_unit:
+        members: [head, spouse]
+    households:
+      household:
+        members: [head, spouse]
+        state_code: TX
+  output:
+    # Schedule D line 7 = -3,000 + 1,000 = (2,000); line 7 = 10,000 - 2,000.
+    capital_gains_28_percent_rate_gain: 8_000
+
+- name: A negative section 1202 gain or carryover entry counts as zero
+  period: 2025
+  input:
+    long_term_capital_gains: 50_000
+    collectibles_gain_or_loss: 10_000
+    section_1202_gain: -1_000
+    long_term_capital_loss_carryover: -2_000
+  output:
+    # Section 1202 gain is an excess of gain over excluded gain, and the
+    # carryover is a positive amount (Schedule D line 14).
+    capital_gains_28_percent_rate_gain: 10_000
+
+- name: Default dataset unit 1053056 (2025) is unchanged without losses
+  absolute_error_margin: 0.01
+  period: 2025
+  input:
+    filing_status: JOINT
+    taxable_income: 1_215_443.5
+    net_capital_gain: 1_110_012.88
+    long_term_capital_gains_on_collectibles: 610_988.38
+    unrecaptured_section_1250_gain: 208_514.11
+    foreign_earned_income_exclusion: 0
+  output:
+    # The dataset carries Schedule D lines 18 and 19 (PUF E24518 and E24515)
+    # and no capital losses, so netting leaves them as they are.
+    capital_gains_28_percent_rate_gain: 610_988.38
+    schedule_d_unrecaptured_section_1250_gain: 208_514.11
+    adjusted_net_capital_gain: 290_510.39

policyengine_us/tests/policy/baseline/gov/irs/tax/federal_income/capital_gains/capital_gains_tax.yaml

@@ -91,3 +91,121 @@
     foreign_earned_income_exclusion: 130_000
   output:
     capital_gains_tax: 0
+
+# 26 U.S.C. 1(h)(4) and 1(h)(6): losses net against 28 percent rate gain, then
+# unrecaptured section 1250 gain, before the 2025 Schedule D Tax Worksheet
+# uses them (lines 11 to 13). 2025 single rates: 22 percent to 103,350, 24
+# percent to 197,300, 32 percent to 250,525, 35 percent to 626,350; the 15
+# percent capital gains rate starts at 48,350.
+- name: A short-term loss moves collectibles gain to the 15 percent rate
+  absolute_error_margin: 0.01
+  period: 2025
+  input:
+    filing_status: SINGLE
+    state_code: TX
+    employment_income: 100_000
+    long_term_capital_gains: 50_000
+    collectibles_gain_or_loss: 10_000
+    short_term_capital_gains: -8_000
+  output:
+    # Taxable income 142,000 - 15,750 = 126,250; line 10 = 42,000; Schedule
+    # D line 18 = 2,000 (not 10,000); line 13 = 40,000; line 14 = 86,250;
+    # line 18 = 84,250; line 20 = 86,250 = line 21. Tax on 86,250 at the
+    # rate schedule is 1,192.50 + 4,386 + 8,310.50 = 13,889 (the model uses
+    # the schedule; line 44's Tax Table row gives 13,895); 40,000 at 15% =
+    # 6,000. Without the netting line 21 is 94,250 and the tax 15,649 +
+    # 4,800.
+    capital_gains_28_percent_rate_gain: 2_000
+    adjusted_net_capital_gain: 40_000
+    dwks13: 40_000
+    income_tax_main_rates: 13_889
+    capital_gains_tax: 6_000
+
+- name: A short-term loss reduces unrecaptured section 1250 gain
+  absolute_error_margin: 0.01
+  period: 2025
+  input:
+    filing_status: SINGLE
+    state_code: TX
+    employment_income: 100_000
+    long_term_capital_gains: 50_000
+    unrecaptured_section_1250_gain_before_losses: 20_000
+    short_term_capital_gains: -6_000
+  output:
+    # Taxable income 128,250; line 10 = 44,000; Schedule D line 19 = 14,000;
+    # line 13 = 30,000; line 21 = line 14 = 98,250, which takes the 1250
+    # gain at the regular rates (below the top of the 24% bracket). Tax on
+    # 98,250 at the rate schedule = 13,889 + 2,640 = 16,529 (Tax Table row:
+    # 16,535); 30,000 at 15% = 4,500.
+    schedule_d_unrecaptured_section_1250_gain: 14_000
+    adjusted_net_capital_gain: 30_000
+    income_tax_main_rates: 16_529
+    capital_gains_tax: 4_500
+
+- name: A short-term loss halves the gain taxed at 28 percent
+  absolute_error_margin: 0.01
+  period: 2025
+  input:
+    filing_status: SINGLE
+    state_code: TX
+    employment_income: 300_000
+    long_term_capital_gains: 50_000
+    collectibles_gain_or_loss: 20_000
+    short_term_capital_gains: -10_000
+  output:
+    # Taxable income 340,000 - 15,750 = 324,250; net capital gain 40,000;
+    # Schedule D line 18 = 10,000 (not 20,000); line 13 = 30,000. Line 21 =
+    # 284,250, above the top of the 24% bracket. 30,000 at 15% = 4,500 and
+    # 10,000 at 28% = 2,800. Without the netting: 20,000 at 15% and 20,000
+    # at 28%, 8,600.
+    capital_gains_28_percent_rate_gain: 10_000
+    adjusted_net_capital_gain: 30_000
+    dwks13: 30_000
+    capital_gains_tax: 7_300
+
+- name: Above the 24 percent bracket losses move gain from 28 and 25 percent
+  absolute_error_margin: 0.01
+  period: 2025
+  input:
+    filing_status: SINGLE
+    state_code: TX
+    employment_income: 300_000
+    long_term_capital_gains: 100_000
+    collectibles_gain_or_loss: 30_000
+    unrecaptured_section_1250_gain_before_losses: 40_000
+    short_term_capital_gains: -35_000
+  output:
+    # Taxable income 349,250; line 10 = 65,000. Schedule D line 18 = 0 and
+    # line 19 = 40,000 - 5,000 = 35,000; line 13 = 30,000; line 21 =
+    # 284,250. 30,000 at 15% = 4,500; 35,000 at 25% = 8,750; nothing at
+    # 28%. Tax on 284,250 = 57,231 + 11,803.75 = 69,034.75. Without the
+    # netting the gains tax is 10,000 at 25% and 7,000 at 28%, 17,000.
+    capital_gains_28_percent_rate_gain: 0
+    schedule_d_unrecaptured_section_1250_gain: 35_000
+    adjusted_net_capital_gain: 30_000
+    income_tax_main_rates: 69_034.75
+    capital_gains_tax: 13_250
+
+- name: 2026, losses move gain from 28 and 25 percent (Axiom companion N10)
+  absolute_error_margin: 0.01
+  period: 2026
+  input:
+    filing_status: SINGLE
+    state_code: TX
+    taxable_income: 349_250
+    long_term_capital_gains: 100_000
+    collectibles_gain_or_loss: 30_000
+    unrecaptured_section_1250_gain_before_losses: 40_000
+    short_term_capital_gains: -35_000
+  output:
+    # Net capital gain 65,000; 28 percent rate gain 0; unrecaptured section
+    # 1250 gain 35,000; adjusted net capital gain 30,000. Section 1(h)(1):
+    # (A) = max(284,250, min(201,775, 319,250)) = 284,250 (Rev. Proc.
+    # 2025-32 section 4.01, single); (C) 15% x 30,000 = 4,500 (below the
+    # 545,500 maximum 15-percent rate amount, section 4.03); (E) 25% x 35,000
+    # = 8,750; (F) 0.
+    capital_gains_28_percent_rate_gain: 0
+    schedule_d_unrecaptured_section_1250_gain: 35_000
+    adjusted_net_capital_gain: 30_000
+    capital_gains_excluded_from_taxable_income: 65_000
+    capital_gains_tax: 13_250