Apply Massachusetts Schedule B capital losses to dividends before long-term gains

changelog.d/ma-schedule-b-loss-order.fixed.md

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+Apply Massachusetts Schedule B short-term and long-term losses to dividends before long-term gains, and tax Part A on the dividends left (lines 20, 22 and 33).

policyengine_us/tests/policy/baseline/gov/states/ma/tax/income/adjusted_gross_income/ma_schedule_b_capital_losses.yaml

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+# Massachusetts Schedule B applies a short-term loss first against up to
+# $2,000 of dividends (line 20), then against long-term gains (line 22).
+# Expected tax values in the first five cases match the NBER TAXSIM-35 MA
+# tax before credits (staxbc) for the same returns. The later cases are
+# computed line by line from the 2022 and 2023 Schedules B and D.
+# With 60,000 of wages and no other 5.0% income, Part B taxable income is
+# 60,000 - 2,000 (Form 1, line 11a) - 8,800 (joint exemption) = 49,200.
+
+- name: Short-term loss below the dividends leaves the net dividends as Part A income
+  period: 2022
+  absolute_error_margin: 0.01
+  input:
+    people:
+      head:
+        age: 40
+        employment_income: 60_000
+        qualified_dividend_income: 1_205
+        short_term_capital_gains: -1_106
+      spouse:
+        age: 40
+    tax_units:
+      tax_unit:
+        members: [head, spouse]
+    households:
+      household:
+        members: [head, spouse]
+        state_code: MA
+  output:
+    ma_short_term_loss_against_dividends: 1_106
+    ma_part_a_agi: 99
+    ma_part_a_adjusted_dividends: 99
+    ma_part_a_taxable_dividend_income: 99
+    ma_part_c_agi: 0
+    # 5% x (49,200 Part B + 99 Part A).
+    ma_income_tax_before_credits: 2_464.95
+
+- name: The short-term loss applied against dividends is capped at $2,000
+  period: 2022
+  absolute_error_margin: 0.01
+  input:
+    people:
+      head:
+        age: 40
+        employment_income: 60_000
+        qualified_dividend_income: 3_000
+        short_term_capital_gains: -2_500
+      spouse:
+        age: 40
+    tax_units:
+      tax_unit:
+        members: [head, spouse]
+    households:
+      household:
+        members: [head, spouse]
+        state_code: MA
+  output:
+    ma_short_term_loss_against_dividends: 2_000
+    ma_part_a_taxable_dividend_income: 1_000
+    ma_income_tax_before_credits: 2_510
+
+- name: A long-term loss also reduces the dividends taxed in Part A
+  period: 2022
+  absolute_error_margin: 0.01
+  input:
+    people:
+      head:
+        age: 40
+        employment_income: 60_000
+        qualified_dividend_income: 1_205
+        long_term_capital_gains: -1_000
+      spouse:
+        age: 40
+    tax_units:
+      tax_unit:
+        members: [head, spouse]
+    households:
+      household:
+        members: [head, spouse]
+        state_code: MA
+  output:
+    ma_long_term_loss_against_dividends: 1_000
+    ma_part_a_taxable_dividend_income: 205
+    ma_income_tax_before_credits: 2_470.25
+
+- name: Only the short-term loss left after the dividends offsets long-term gains
+  period: 2022
+  absolute_error_margin: 0.01
+  input:
+    people:
+      head:
+        age: 40
+        qualified_dividend_income: 10_000
+        short_term_capital_gains: -5_000
+        long_term_capital_gains: 50_000
+      spouse:
+        age: 40
+    tax_units:
+      tax_unit:
+        members: [head, spouse]
+    households:
+      household:
+        members: [head, spouse]
+        state_code: MA
+  output:
+    ma_short_term_loss_against_dividends: 2_000
+    ma_part_a_agi: 8_000
+    # The $8,800 exemption is unused in Part B: $8,000 goes to the dividends
+    # and $800 to the long-term gains.
+    ma_part_a_taxable_dividend_income: 0
+    ma_part_a_cg_excess_exemption: 800
+    # 50,000 - (5,000 - 2,000)
+    ma_part_c_agi: 47_000
+    ma_part_c_taxable_income: 46_200
+    ma_income_tax_before_credits: 2_310
+
+- name: Massachusetts bank interest does not absorb the short-term loss
+  period: 2022
+  absolute_error_margin: 0.01
+  input:
+    people:
+      head:
+        age: 40
+        employment_income: 60_000
+        taxable_interest_income: 10_000
+        qualified_dividend_income: 500
+        short_term_capital_gains: -1_500
+        long_term_capital_gains: 5_000
+      spouse:
+        age: 40
+    tax_units:
+      tax_unit:
+        members: [head, spouse]
+    households:
+      household:
+        members: [head, spouse]
+        state_code: MA
+  output:
+    ma_short_term_loss_against_dividends: 500
+    ma_part_a_agi: 0
+    # 5,000 - (1,500 - 500)
+    ma_part_c_agi: 4_000
+    # 5% x (59,000 Part B + 0 Part A + 4,000 Part C).
+    ma_income_tax_before_credits: 3_150
+
+- name: A short-term loss above the long-term gain leaves only the rest of the gain in Part C
+  period: 2022
+  absolute_error_margin: 0.01
+  input:
+    people:
+      head:
+        age: 40
+        employment_income: 60_000
+        qualified_dividend_income: 3_000
+        short_term_capital_gains: -5_000
+        long_term_capital_gains: 4_000
+      spouse:
+        age: 40
+    tax_units:
+      tax_unit:
+        members: [head, spouse]
+    households:
+      household:
+        members: [head, spouse]
+        state_code: MA
+  output:
+    # Schedule B: line 19c = -5,000; line 20 = min(3,000, 5,000, 2,000)
+    # = 2,000; line 21 = -5,000 + 2,000 = -3,000.
+    ma_short_term_loss_against_dividends: 2_000
+    # Schedule B, line 33 = 3,000 - 2,000 = 1,000 (line 38 = 1,000).
+    ma_part_a_taxable_dividend_income: 1_000
+    # Schedule D: line 13 = 4,000; line 14 = Schedule B, line 22
+    # = min(3,000, 4,000) = 3,000; line 15 = 4,000 - 3,000 = 1,000.
+    ma_part_c_agi: 1_000
+    # 5% x (49,200 + 1,000) + 5% x 1,000 = 2,510 + 50.
+    ma_income_tax_before_credits: 2_560
+
+- name: A short-term loss above a smaller long-term gain leaves no Part C income
+  period: 2022
+  absolute_error_margin: 0.01
+  input:
+    people:
+      head:
+        age: 40
+        employment_income: 60_000
+        qualified_dividend_income: 3_000
+        short_term_capital_gains: -5_000
+        long_term_capital_gains: 1_000
+      spouse:
+        age: 40
+    tax_units:
+      tax_unit:
+        members: [head, spouse]
+    households:
+      household:
+        members: [head, spouse]
+        state_code: MA
+  output:
+    # Schedule B: line 20 = 2,000; line 21 = -3,000.
+    ma_short_term_loss_against_dividends: 2_000
+    ma_part_a_taxable_dividend_income: 1_000
+    # Schedule D: line 14 = Schedule B, line 22 = min(3,000, 1,000)
+    # = 1,000; line 15 = 1,000 - 1,000 = 0. Schedule B, line 23
+    # carries over -3,000 + 1,000 = -2,000.
+    ma_part_c_agi: 0
+    # 5% x (49,200 + 1,000).
+    ma_income_tax_before_credits: 2_510
+
+- name: Short-term and long-term losses share the $2,000 cap against dividends
+  period: 2022
+  absolute_error_margin: 0.01
+  input:
+    people:
+      head:
+        age: 40
+        employment_income: 60_000
+        qualified_dividend_income: 3_000
+        short_term_capital_gains: -1_500
+        long_term_capital_gains: -1_000
+      spouse:
+        age: 40
+    tax_units:
+      tax_unit:
+        members: [head, spouse]
+    households:
+      household:
+        members: [head, spouse]
+        state_code: MA
+  output:
+    # Schedule B: line 20 = min(3,000, 1,500, 2,000) = 1,500; line 21 = 0.
+    ma_short_term_loss_against_dividends: 1_500
+    # Schedule D, line 15 = -1,000. Line 32 worksheet: line 2 =
+    # min(3,000, 2,000) = 2,000; line 4 = 2,000 - 1,500 = 500;
+    # line 5 = 1,000; line 6 = min(500, 1,000) = 500.
+    ma_long_term_loss_against_dividends: 500
+    # Schedule B, line 33 = 3,000 - 1,500 - 500 = 1,000.
+    ma_part_a_adjusted_dividends: 1_000
+    ma_part_a_taxable_dividend_income: 1_000
+    ma_part_c_agi: 0
+    # 5% x (49,200 + 1,000).
+    ma_income_tax_before_credits: 2_510
+
+- name: Short-term gains in 2023 are taxed at 8.5% and the long-term gain stays in Part C
+  period: 2023
+  absolute_error_margin: 0.01
+  input:
+    people:
+      head:
+        age: 40
+        employment_income: 60_000
+        qualified_dividend_income: 1_000
+        short_term_capital_gains: 2_000
+        long_term_capital_gains: 4_000
+      spouse:
+        age: 40
+    tax_units:
+      tax_unit:
+        members: [head, spouse]
+    households:
+      household:
+        members: [head, spouse]
+        state_code: MA
+  output:
+    # Schedule B: line 19c = 2,000, so lines 20 through 23 are omitted.
+    ma_short_term_loss_against_dividends: 0
+    ma_long_term_loss_against_dividends: 0
+    # Line 33 = 1,000; line 34 = line 28 = 2,000; line 37 = 3,000;
+    # line 38 = line 9 = 1,000; line 39 = 3,000 - 1,000 = 2,000.
+    ma_part_a_adjusted_dividends: 1_000
+    ma_part_a_taxable_dividend_income: 1_000
+    ma_part_a_taxable_capital_gains_income: 2_000
+    # Schedule D: line 14 = 0; line 15 = 4,000; line 21 = 4,000.
+    ma_part_c_agi: 4_000
+    # 5% x (49,200 + 1,000) + 8.5% x 2,000 + 5% x 4,000
+    # = 2,510 + 170 + 200.
+    ma_income_tax_before_credits: 2_880
+
+- name: Capital gain distributions that cover a long-term loss leave no loss for the dividends
+  period: 2023
+  absolute_error_margin: 0.01
+  input:
+    people:
+      head:
+        age: 40
+        employment_income: 60_000
+        qualified_dividend_income: 1_000
+        non_sch_d_capital_gains: 5_000
+        long_term_capital_gains: -3_000
+      spouse:
+        age: 40
+    tax_units:
+      tax_unit:
+        members: [head, spouse]
+    households:
+      household:
+        members: [head, spouse]
+        state_code: MA
+  output:
+    # Schedule D: line 1 = -3,000; line 6 = 5,000; line 9 = 2,000 = line 13
+    # = line 15. Line 15 is not a loss, so Schedule B, line 32 is omitted.
+    ma_long_term_loss_against_dividends: 0
+    # Schedule B, line 33 = line 31 = 1,000 = line 38.
+    ma_part_a_adjusted_dividends: 1_000
+    ma_part_a_taxable_dividend_income: 1_000
+    ma_part_c_agi: 2_000
+    # 5% x (49,200 + 1,000) + 5% x 2,000 = 2,510 + 100.
+    ma_income_tax_before_credits: 2_610

policyengine_us/variables/gov/states/ma/tax/income/adjusted_gross_income/ma_long_term_loss_against_dividends.py

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+from policyengine_us.model_api import *
+
+
+class ma_long_term_loss_against_dividends(Variable):
+    value_type = float
+    entity = TaxUnit
+    label = "MA long-term capital losses applied against dividends"
+    documentation = (
+        "Massachusetts Schedule B, line 32: long-term losses left after "
+        "short-term gains, up to $2,000 of dividends less the short-term "
+        "losses already applied in line 20."
+    )
+    unit = USD
+    definition_period = YEAR
+    reference = (
+        # (c)(2)(b) and (c)(4)
+        "https://malegislature.gov/Laws/GeneralLaws/PartI/TitleIX/Chapter62/Section2",
+        "https://taxsim.nber.org/historical_state_tax_forms/MA/2024/dor-2024-inc-sch-b-(form-1).pdf#page=2",
+        "https://www.mass.gov/doc/2024-form-1-instructions/download#page=25",
+    )
+    defined_for = StateCode.MA
+
+    def formula(tax_unit, period, parameters):
+        short_term_capital_gains = add(tax_unit, period, ["short_term_capital_gains"])
+        nonnegative_short_term_capital_gains = max_(0, short_term_capital_gains)
+        # Massachusetts Schedule D, line 13 includes capital gain
+        # distributions reported without a federal Schedule D (line 6).
+        long_term_capital_gains = add(
+            tax_unit, period, ["long_term_capital_gains", "non_sch_d_capital_gains"]
+        )
+        long_term_capital_loss = max_(0, -long_term_capital_gains)
+        # Schedule B, line 25: long-term losses first offset short-term gains.
+        remaining_long_term_loss = max_(
+            0, long_term_capital_loss - nonnegative_short_term_capital_gains
+        )
+        dividends = add(tax_unit, period, ["dividend_income"])
+        short_term_loss_applied = tax_unit(
+            "ma_short_term_loss_against_dividends", period
+        )
+        cap = parameters(
+            period
+        ).gov.states.ma.tax.income.capital_gains.deductible_against_interest_dividends
+        remaining_cap = max_(0, min_(dividends, cap) - short_term_loss_applied)
+        return min_(remaining_cap, remaining_long_term_loss)

policyengine_us/variables/gov/states/ma/tax/income/adjusted_gross_income/ma_part_a_adjusted_dividends.py

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+from policyengine_us.model_api import *
+
+
+class ma_part_a_adjusted_dividends(Variable):
+    value_type = float
+    entity = TaxUnit
+    label = "MA Part A adjusted dividends"
+    documentation = (
+        "Massachusetts Schedule B, line 33: dividends less the short-term "
+        "(line 20) and long-term (line 32) losses applied against them."
+    )
+    unit = USD
+    definition_period = YEAR
+    reference = "https://taxsim.nber.org/historical_state_tax_forms/MA/2024/dor-2024-inc-sch-b-(form-1).pdf#page=2"
+    defined_for = StateCode.MA
+
+    def formula(tax_unit, period, parameters):
+        dividends = add(tax_unit, period, ["dividend_income"])
+        losses_applied = add(
+            tax_unit,
+            period,
+            [
+                "ma_short_term_loss_against_dividends",
+                "ma_long_term_loss_against_dividends",
+            ],
+        )
+        return max_(0, dividends - losses_applied)