Leave dependents' capital income out of state lines on the filers' return

[MaxGhenis]

What was wrong

irs_gross_income multiplies every income source by ~is_tax_unit_dependent, so a tax unit dependent's interest, dividends and capital gains never enter the filer's federal AGI or taxable income. The dependent reports them on their own return (2025 Form 8814, line 4; the model does not implement the Form 8814 election, 26 U.S.C. 1(g)(7)).

Many state lines that adjust the filers' federal AGI or taxable income summed a capital-income input over every tax unit member (add(tax_unit, ...) or adds = [...]). So a child's dividends, gains or interest moved the parents' state tax.

The two reported cases, on main:

TY2025	Without the child's income	With it, main	With it, this PR
ND. Head: wages 50,000, qualified dividends 1,000. Child: qualified dividends 5,000. nd_qdiv_subtraction	400	2,400	400
VT. Head: wages 150,000, long-term gain 10,000. Child: long-term gain 100,000, all VT-eligible. vt_percentage_capital_gains_exclusion	0	40,000	0
VT vt_capital_gains_exclusion	5,000	40,000	5,000
VT vt_income_tax (federal AGI 160,000 in every column)	6,623.20	4,800.00	6,623.20

How the leaks were found

1. Static scan. Every add, aggr and adds/subtracts aggregator over a tax unit in variables/gov/states, with parameter-driven source lists resolved over all their dated values. 50 tax-unit sums include a person-level capital-income input. Child-care and TANF spm_unit sums count family income by design and are out of scope.

2. Household sweep (every state, TY2021–2026). Five filer profiles: single worker at 60,000, a 70-year-old with Social Security and a pension, a 400,000 earner, an 82-year-old, and a 22,000 earner. Each has a dependent child aged 15 with 50,000 (300,000 for long-term gains) of one input:

   • qualified or other dividends;
   • long- or short-term gains;
   • collectibles gains;
   • capital gain distributions;
   • taxable, tax-exempt or U.S. government interest;
   • VT-eligible gains;
   • or wages, as a control.

   The sweep compares the filer's state_income_tax with and without the child's income, alongside federal AGI and federal tax. It ran on Use the filers' Schedule D for the tax on net capital gain #9855's head so the federal Schedule D leak Use the filers' Schedule D for the tax on net capital gain #9855 fixes stays out. A drill-down then listed every state variable that moved. Every change below was found this way. The same sweep, re-run on Use the filers' Schedule D for the tax on net capital gain #9855's head plus this PR, leaves only the cases under "Not in this PR".

What changes

All fixes count only the head and spouse, using tax_unit_non_dep_add for tax-unit sums and a dependent mask for per-person lines.

State	Dependent's income that moved the filer's tax	Where
Most states	U.S. government interest	us_govt_interest, which most states subtract. It was adds = ["us_govt_interest_person"] over every member; tax-unit lists (incl. #9699's) add it as is. In the sweep a dependent's U.S. government interest moved the filer's tax in 38 states; after this PR it moves none except AL and IA before 2023 (structural), KY (#9699), and the MN, NM and OK credit paths under "Not in this PR".
VA	U.S. government interest, plus the rest of the list	va_subtractions (whole list) and va_subtractions_person (dependents get none). The list's other person items are already head/spouse-masked or AGI-prorated; a dependent's unemployment, railroad benefits and state tax refunds also stop being subtracted.
DC, DE, OH	U.S. government interest	dc_income_subtractions, de_subtractions, oh_deductions (per-person, summed into the filers' state AGI). Only the dependent's U.S. government interest is dropped; see "Not in this PR".
ND	Qualified dividends; long-term gains; a short-term loss	nd_qdiv_subtraction, nd_ltcg_subtraction
VT	VT-eligible gains; non-Vermont municipal interest	vt_percentage_capital_gains_exclusion, vt_additions
AZ	Long-term gains; a short-term loss wiped the filer's subtraction	az_long_term_capital_gains_subtraction
SC	Gains	sc_net_capital_gain_deduction
WI	Gains and losses; tax-exempt interest	wi_capital_gain_loss_subtraction, wi_capital_loss, wi_additions
MD	Gains, triggering the 2% surtax	md_capital_gains_surtax
WA	Long-term gains (capital gains excise tax)	wa_capital_gains_tax, wa_millionaires_tax_base_income
MT	Gains (2024+ rates); 2021–23 capital gain credit, interest exemption shares, U.S. government interest and Social Security worksheet	mt_capital_gains_tax_joint, ..._applicable_threshold_joint, mt_regular_income_tax_joint, mt_capital_gain_credit, mt_interest_exemption_person, mt_agi_joint, mt_taxable_social_security_joint
MA	Dividends, interest and gains in Parts A and C. Part B starts from filer-only gross income, so a child's Part A income came off the parent's Part B.	ma_part_a_gross_income, ma_part_a_agi, ma_part_c_gross_income, the four Part A dividend and exemption lines, the bank interest exemption
IL	Tax-exempt interest	il_base_income_additions
NH (through 2024)	Interest and dividends	nh_taxable_income
IA (2021–22)	Tax-exempt interest and benefits in the Social Security worksheet	ia_reportable_social_security
MN	Tax-exempt interest and benefits in the Social Security worksheet	mn_social_security_subtraction
UT	Tax-exempt interest in the Social Security and retirement credits and the child tax credit	ut_ss_benefits_credit_max, ut_retirement_credit_max, ut_ctc_potential
WV	Tax-exempt interest in the low-income family credit	wv_low_income_family_tax_credit_agi
ME	Tax-exempt interest in the sales and property tax fairness credits	me_sales_and_property_tax_fairness_credit_income
PA	Tax-exempt interest in Tax Forgiveness eligibility income	pa_eligibility_income

Where one of these formulas also summed a dependent's other amounts on the same line, they get the same rule:

• Social Security benefits in the IA, MN and MT worksheets. A child's survivor benefits are the child's.
• Student loan interest in MN's worksheet.
• MT's other additions and subtractions in the joint AGI pool.

Three fixes in formulas edited anyway:

• ND nd_ltcg_subtraction floors at zero and includes capital gain distributions. The Form ND-1 line 6 worksheet says "If zero or less, stop here; no exclusion is allowed", and puts distributions without Schedule D on line 3. Before, a filer's net long-term loss made a negative subtraction.
• UT ut_retirement_credit_max counts only the head and spouse as claimants. An elderly dependent no longer adds a credit.
• WV wv_low_income_family_tax_credit_agi now cites W. Va. Code 11-21-22a(d), the definition it implements, instead of 11-21-12(b).

Legal basis

Each line adjusts the individual's own federal AGI or taxable income, or the claimant's and spouse's own income. I read these sources this session:

• ND. N.D.C.C. 57-38-30.3(2) defines North Dakota taxable income as "the federal taxable income of an individual". It is reduced by interest on U.S. obligations ((a)) and by forty percent of "the taxpayer's net long-term capital gain" ((d)(1)) and of qualified dividends ((d)(2)).
  • The task cited 57-38-01.33, which is an expired machinery credit.
  • 2025 ND-1 booklet, line 13: "multiply the qualified dividends from Form 1040 or 1040-SR, line 3a, by 40 percent". The line 6 worksheet takes Schedule D lines 15 and 16 (pp. 14–15).
• VT. 32 V.S.A. 5811(21): "in the case of an individual, federal adjusted gross income"
  • increased by "interest income from non-Vermont state and local obligations" ((A)(i));
  • decreased, "to the extent such income is included in federal adjusted gross income", by income from U.S. government obligations ((B)(i));
  • and decreased by 40% of gain on "assets held by the taxpayer for more than three years" ((B)(ii); Schedule IN-153).
• IA. 2022 IA 1040 instructions, Social Security worksheet:
  • line 1 "Box 5 of form(s) SSA-1099. If you filed a joint federal return, enter the totals for both spouses";
  • line 6 "Enter the amount from your federal 1040, line 2a".
• ME. 36 M.R.S. 5213-A(1)(B) and 5219-KK(1)(D): "federal adjusted gross income increased by ... (2) Interest received to the extent not included in federal adjusted gross income".
• WV. W. Va. Code 11-21-22a(d): "the federal adjusted gross income plus any applicable increasing West Virginia modifications plus any tax exempt interest income reported on the federal tax return".
• PA. Personal Income Tax Guide, Tax Forgiveness: "For a single claimant, only the claimant's eligibility income is considered". A married claimant counts "both the claimant and the claimant's spouse". A dependent child claims forgiveness separately.
• Other states. A read-only research lane checked the statutes for the remaining states: AZ 43-1022, SC 12-6-1150(A), WI 71.05(6), MD TB-58, WA RCW 82.87.040/.120, MT 15-30-2103 and former 15-30-2301, MA c.62 §2, IL 35 ILCS 5/203(a)(2)(A), NH Rev 906.02, MN 290.0132 subd. 26 (via IRC 86(b)(2)), UT 59-10-1019/1042/1047, and VA 58.1-322.02.
  • Each takes the taxpayer's own amounts ("included in federal adjusted gross income", "of the taxpayer", or spouses only).
  • None lets a parent include a child's income except through the federal Form 8814 election.
  • Its report: ~/reviews/pe-us-dep-capital-income-2026-10-06/legal_out.md.

Not in this PR

• AL, AR, MS, NJ, and IA before 2023. State gross income is built per person, so a dependent's wages are taxed on the parents' return too, not only capital income. That is a separate structural fix (follow-up chip).
• Federal EITC investment-income test. eitc_relevant_investment_income counts a dependent's investment income. That moves the federal EITC, every state EITC, and MN's Child and Working Families Credits (via eitc_investment_income_eligible) and NM's eligibility (follow-up chip).
• NM nm_net_capital_gains_deduction has the same pooling. Split the New Mexico net capital gains deduction between separate filers #9689, Fix AR, MT and NM income tax gaps found in TAXSIM comparison sweep #9585 and Require Arkansas joint filing with a negative spouse income and use tax table bands #9696 all rewrite the file, so it waits for them (follow-up chip).
• HI alternative tax and VT's qualified-dividend reduction are fixed in Use the filers' Schedule D for the tax on net capital gain #9855 / Exclude qualified dividends from the Hawaii alternative tax on capital gains #9864. KY per-person subtractions and the MA senior circuit breaker are fixed in Keep dependents' retirement income out of state subtractions #9699. KS's U.S. government interest is fixed here through us_govt_interest.
• DC, DE, OH: a dependent's other per-person items (unemployment, state tax refunds, Pell grants, disability) are still subtracted. OH's list also holds filer expenses recorded on a dependent, such as medical care, so it needs item-by-item review (follow-up chip).
• MD surtax base. It adds net short-term gains and may subtract the capital loss twice, unlike "net capital gain" (follow-up chip).
• Household-income definitions count other household members by design, and these lines also move with a dependent's wages: OK sales tax relief, NM modified gross income, VT renter credit, WV homestead, RI property tax relief, AZ property tax credit (Count capital gains once in Arizona property tax credit income #9762), WI homestead (Add back disqualified losses to Wisconsin homestead household income #9848).
• WA: a dependent's own capital gains excise tax, a separate individual's liability, is not modeled anywhere.

Tests

• 46 YAML cases in 33 files.
  • 35 cases put a capital-income amount on a dependent child and expect the head-and-spouse value. Each of the 35 gives a different value on main.
  • 9 twin cases show the same household without the child's income gets the same value.
  • 2 cases cover the ND floor and distributions.
  • Every expected value was checked by hand against the law (for example 40% of the filer's 1,000 = 400; 25%, 44% and 30% of the filer's 10,000 in AZ, SC and WI; 2% of 10,000 = 200 for the MD surtax).
• Property test policyengine_us/tests/core/test_dependent_capital_income_state_tax_invariants.py (Hypothesis, 5 derandomized examples of 10–30 ND and VT tax units, each run with and without its dependents' capital income).
  • nd_income_tax, vt_income_tax, federal AGI and federal taxable income match between the twins.
  • nd_qdiv_subtraction, nd_ltcg_subtraction (with its zero floor and distributions), vt_percentage_capital_gains_exclusion, vt_additions and us_govt_interest equal an independent reference over the filers' own amounts.
  • On main Hypothesis shrinks to a dependent with $1 of qualified dividends, giving a filer subtraction of $0.40.
  • Two documented restrictions keep out-of-scope paths out of the draws:
    • Filers earn at least $80,000, so no EITC is at stake.
    • VT filers have at least $50,000 of their own long-term gain, because until Use the filers' Schedule D for the tax on net capital gain #9855 merges the $5,000 flat part of vt_capital_gains_exclusion reads the federal adjusted net capital gain.
  • Cost (local, macOS arm64; not a Linux CI measurement): 3.8 s of test time in a 30 s process, about 20 s of which is the model load the core group already pays; 1.27 GB peak footprint.
• Local runs (heavy_run.sh lock): 132 targeted YAML files, covering every file that names a changed variable, plus the touched states' integration tests and all us_govt_interest tests. Queued for the shared heavy lock; results will be added here.

Microsim impact

Pending: a real 2026 microsimulation on the default dataset, base 1da311383b against this PR (9ea8aac872), is queued under lockrun.sh. Results will be added here.

Invariants

For every tax unit, and any capital income its dependents have, as checked by the property test, the YAML twins and the sweep:

• These state lines and the state income tax equal their values with the dependents' capital income set to zero.
• Federal AGI and taxable income are unchanged by this PR.
• Tax units without dependents get exactly what they got before. tax_unit_non_dep_add equals add when no member is a dependent.

axiom: TheAxiomFoundation/rulespec-us#1424 queued (extended with the state capital-income cases: TheAxiomFoundation/rulespec-us#1424 (comment)).

• Where rulespec-us encodes these lines, the inputs are the return's or the individual's own amounts:
  • us-nd:policies/income_tax/resident_core_liability_pipeline (N.D.C.C. 57-38-30.3(2)(d); inputs nd_pit_2026_federal_net_long_term_capital_gain and nd_pit_2026_allocated_qualified_dividends_taxed_below_regular_rates; companion test federal capital loss offset precedes north dakota allocation cap).
  • us-wa:statutes/82/82.87/82/87/040#washington_capital_gains_excise_tax (entity Person).
• So no module pools a dependent's income. Vermont's 32 V.S.A. 5811(21) is not encoded: us-vt:policies/income_tax/pilot_liability_pipeline takes completed normal tax.
• The missing piece is 26 U.S.C. 1(g)(7), which California integration test #1424 queues.

🤖 Generated with Claude Code

[MaxGhenis]

Overlap with #9898, which fixes the Maryland capital gains surtax base. It changes md_capital_gains_surtax to 2% of IRC 1222(11) net capital gain (via a new md_net_capital_gain), tests federal AGI against the threshold, and leaves dependents out of every input, as this PR does.

• This PR's MD case ("A dependent's gains are on the dependent's own return") gives 200 on Tax Maryland's capital gains surtax on net capital gain as the Internal Revenue Code defines it #9898 too.
• The two PRs conflict in policyengine_us/variables/gov/states/md/tax/income/capital_gains/md_capital_gains_surtax.py and policyengine_us/tests/policy/baseline/gov/states/md/tax/income/capital_gains/md_capital_gains_surtax.yaml. Whichever lands second should take Tax Maryland's capital gains surtax on net capital gain as the Internal Revenue Code defines it #9898's version of those two files. Nothing else overlaps.