Leave dependents' own items out of DC, Delaware and Ohio subtractions

changelog.d/dependent-capital-income-state-lines.fixed.md

@@ -0,0 +1 @@
+Leave tax unit dependents' interest, dividends and capital gains out of the state lines that adjust the filers' federal adjusted gross income or taxable income (AZ, DC, DE, IA, IL, MA, MD, ME, MN, MT, ND, NH, OH, PA, SC, UT, VA, VT, WA, WI and WV), and out of the U.S. government interest that most states subtract.

changelog.d/dependent-state-subtractions-dc-de-oh.fixed.md

@@ -0,0 +1 @@
+Leave a tax unit dependent's own items (unemployment compensation, state tax refunds, disability exclusions, Pell grants, disability benefits, Ohio section 179, uniformed services retirement and educator deductions, and Delaware 529 contributions) out of the DC, Delaware and Ohio subtractions pooled into the filers' state AGI. Count the DC disability income exclusion and the Ohio insured medical expense deduction once per return instead of once per member.

policyengine_us/parameters/gov/states/oh/tax/income/deductions/filer_amounts_recorded_on_dependents.yaml

@@ -0,0 +1,24 @@
+description: Ohio deducts these per-person amounts from the filer's federal adjusted gross income even when they are recorded on a tax unit dependent. Other deductions on a dependent are the dependent's own and belong on their own return.
+values:
+  2021-01-01:
+    # A modelling convention: oh_529_plan_deduction caps the contributions
+    # recorded on every tax unit member at $4,000 per beneficiary, as the
+    # other states' 529 deductions pool them, and each member's share of
+    # that tax-unit deduction follows their contributions. Masking a
+    # dependent's share would leave the shares short of the tax-unit amount.
+    # investment_in_529_plan_indv is documented per contributor, so what an
+    # amount on a dependent means is an open question across states.
+    - oh_529_plan_deduction_person
+    # Premiums and medical care the taxpayer paid "for the taxpayer, the
+    # taxpayer's spouse, and dependents" (R.C. 5747.01(A)(10)), recorded on
+    # the person they covered.
+    - oh_unreimbursed_medical_care_expense_deduction_person
+metadata:
+  unit: list
+  period: year
+  label: Ohio deductions summed over dependents
+  reference:
+    - title: Ohio Revised Code 5747.01(A)(9) and (A)(10)
+      href: https://codes.ohio.gov/ohio-revised-code/section-5747.01
+    - title: Ohio 2025 IT 1040 Instructions, Schedule of Adjustments lines 37 and 44
+      href: https://dam.assets.ohio.gov/image/upload/v1767095693/tax.ohio.gov/forms/ohio_individual/individual/2025/it1040-booklet.pdf#page=24

policyengine_us/tests/core/test_dependent_capital_income_state_tax_invariants.py

@@ -0,0 +1,315 @@
+"""Property tests: a dependent's capital income stays off the filers' North
+Dakota and Vermont returns.
+
+Federal adjusted gross income leaves out a tax unit dependent's income
+(irs_gross_income), which the dependent reports on their own return (2025
+Form 8814, line 4; the model does not implement the Form 8814 election). Both
+states start from the filers' federal return:
+
+- N.D.C.C. 57-38-30.3(2) defines North Dakota taxable income as "the federal
+  taxable income of an individual", reduced by 40% of "the taxpayer's net
+  long-term capital gain" ((d)(1); Form ND-1 line 6, from the filer's
+  Schedule D lines 15 and 16, "If zero or less ... no exclusion is allowed")
+  and of qualified dividends ((d)(2); Form ND-1 line 13, from Form 1040 line
+  3a), and by interest on U.S. obligations ((a)).
+- 32 V.S.A. 5811(21) defines Vermont taxable income as the individual's
+  federal adjusted gross income, increased by interest on non-Vermont state
+  and local obligations ((A)(i)) and decreased, "to the extent such income is
+  included in federal adjusted gross income", by interest on U.S. government
+  obligations ((B)(i)) and by 40% of gains on "assets held by the taxpayer for
+  more than three years" ((B)(ii)).
+
+So for every tax unit in either state, and any capital income its dependents
+have (qualified and other dividends, long- and short-term gains and losses,
+capital gain distributions, taxable, tax-exempt and U.S. government interest,
+and Vermont-eligible long-term gains):
+
+1. nd_income_tax and vt_income_tax are the same as when the dependents have
+   none. So are federal adjusted gross income and taxable income, the base
+   both states start from.
+2. nd_qdiv_subtraction is 40% of the filers' qualified dividends, and
+   nd_ltcg_subtraction is 40% of max(0, min(line 15, line 16)) of the filers'
+   own Schedule D, with capital gain distributions on line 15.
+3. vt_percentage_capital_gains_exclusion is 40% of the filers' eligible gains,
+   up to the cap, vt_additions is the filers' tax-exempt interest, and
+   us_govt_interest is the filers' U.S. government interest.
+
+Two restrictions keep effects that are outside this check out of the draws:
+
+- The filers earn at least $80,000, so no earned income tax credit is at
+  stake. Vermont's is a share of the federal credit, whose investment income
+  test (eitc_relevant_investment_income) is not changed here.
+- Vermont filers have at least $50,000 of their own long-term gain and no
+  short-term loss, and Vermont dependents have gains, not losses. Until
+  PolicyEngine/policyengine-us#9855 is merged, the $5,000 flat part of
+  vt_capital_gains_exclusion reads the federal adjusted net capital gain,
+  which on main still counts a dependent's gains and losses. With these
+  amounts the flat part is at its cap either way.
+
+Amounts are whole dollars of at most $400,000, so every sum is exact in single
+precision and twins are compared to the cent.
+"""
+
+import numpy as np
+from hypothesis import HealthCheck, given, settings
+from hypothesis import strategies as st
+
+from policyengine_us import Simulation
+
+YEAR = 2025
+TOLERANCE = 0.01
+
+# Each person's capital income inputs.
+CAPITAL_INPUTS = [
+    "qualified_dividend_income",
+    "non_qualified_dividend_income",
+    "long_term_capital_gains",
+    "short_term_capital_gains",
+    "non_sch_d_capital_gains",
+    "taxable_interest_income",
+    "us_govt_interest_person",
+    "tax_exempt_interest_income",
+    "long_term_capital_gains_on_assets_eligible_for_vt_exclusion",
+]
+SAME_AS_WITHOUT_DEPENDENT_INCOME = [
+    "adjusted_gross_income",
+    "taxable_income",
+    "nd_income_tax",
+    "vt_income_tax",
+]
+UNIT_OUTPUTS = SAME_AS_WITHOUT_DEPENDENT_INCOME + [
+    "nd_qdiv_subtraction",
+    "nd_ltcg_subtraction",
+    "vt_percentage_capital_gains_exclusion",
+    "vt_additions",
+    "us_govt_interest",
+]
+
+
+def amount(low, high):
+    return st.integers(low, high).map(float)
+
+
+@st.composite
+def capital_income(draw, vermont, filer):
+    """One person's capital income. U.S. government interest is part of
+    taxable interest, and Vermont-eligible gains are part of long-term
+    gains."""
+    if vermont and filer:
+        long_term = draw(amount(50_000, 300_000))
+        short_term = draw(amount(0, 20_000))
+    elif vermont:
+        long_term = draw(amount(0, 300_000))
+        short_term = draw(amount(0, 50_000))
+    else:
+        long_term = draw(amount(-30_000, 300_000))
+        short_term = draw(amount(-20_000, 50_000))
+    taxable_interest = draw(amount(0, 50_000))
+    return {
+        "qualified_dividend_income": draw(amount(0, 50_000)),
+        "non_qualified_dividend_income": draw(amount(0, 20_000)),
+        "long_term_capital_gains": long_term,
+        "short_term_capital_gains": short_term,
+        "non_sch_d_capital_gains": draw(amount(0, 20_000)),
+        "taxable_interest_income": taxable_interest,
+        "us_govt_interest_person": draw(amount(0, int(taxable_interest))),
+        "tax_exempt_interest_income": draw(amount(0, 50_000)),
+        "long_term_capital_gains_on_assets_eligible_for_vt_exclusion": (
+            draw(amount(0, int(long_term))) if long_term > 0 else 0.0
+        ),
+    }
+
+
+@st.composite
+def tax_units(draw):
+    state = draw(st.sampled_from(["ND", "VT"]))
+    vermont = state == "VT"
+    n_filers = draw(st.integers(1, 2))
+    filers = [
+        {
+            "age": draw(st.integers(30, 64)),
+            "employment_income": draw(amount(80_000, 400_000)) if i == 0 else 0.0,
+            **draw(capital_income(vermont, filer=True)),
+        }
+        for i in range(n_filers)
+    ]
+    dependents = [
+        {
+            "age": draw(st.integers(1, 17)),
+            **draw(capital_income(vermont, filer=False)),
+        }
+        for _ in range(draw(st.integers(1, 2)))
+    ]
+    return {"state": state, "filers": filers, "dependents": dependents}
+
+
+def without_dependent_income(unit):
+    zero = {name: 0.0 for name in CAPITAL_INPUTS}
+    return {**unit, "dependents": [{**d, **zero} for d in unit["dependents"]]}
+
+
+def build_situation(units):
+    """One tax unit per household: the head, an optional spouse and the
+    dependents, each dependent in a marital unit of their own."""
+    people, tax_units_out, marital_units, households = {}, {}, {}, {}
+    for i, unit in enumerate(units):
+        members = []
+        for j, person in enumerate(unit["filers"] + unit["dependents"]):
+            name = f"person_{i}_{j}"
+            filer = j < len(unit["filers"])
+            people[name] = {
+                "is_tax_unit_head": {YEAR: j == 0},
+                "is_tax_unit_spouse": {YEAR: j == 1 and filer},
+                "is_tax_unit_dependent": {YEAR: not filer},
+                **{key: {YEAR: value} for key, value in person.items()},
+            }
+            members.append(name)
+            if not filer:
+                marital_units[f"dependent_{i}_{j}"] = {"members": [name]}
+        tax_units_out[f"tax_unit_{i}"] = {"members": members}
+        marital_units[f"filers_{i}"] = {"members": members[: len(unit["filers"])]}
+        households[f"household_{i}"] = {
+            "members": members,
+            "state_code": {YEAR: unit["state"]},
+        }
+    return {
+        "people": people,
+        "tax_units": tax_units_out,
+        "marital_units": marital_units,
+        "households": households,
+    }
+
+
+def calculate(units):
+    simulation = Simulation(situation=build_situation(units))
+    results = {
+        variable: np.asarray(simulation.calculate(variable, YEAR))
+        for variable in UNIT_OUTPUTS
+    }
+    p = simulation.tax_benefit_system.parameters(YEAR).gov.states
+    return results, p
+
+
+def filer_total(unit, name):
+    return sum(person[name] for person in unit["filers"])
+
+
+def check(units):
+    twins = [without_dependent_income(unit) for unit in units]
+    results, p = calculate(units + twins)
+    n = len(units)
+
+    # 1. The same taxes and federal base as without the dependents' income.
+    for variable in SAME_AS_WITHOUT_DEPENDENT_INCOME:
+        np.testing.assert_allclose(
+            results[variable][:n],
+            results[variable][n:],
+            atol=TOLERANCE,
+            err_msg=variable,
+        )
+
+    nd = p.nd.tax.income.taxable_income.subtractions
+    vt = p.vt.tax.income.agi.exclusions.capital_gain.percentage
+    is_nd = np.array([unit["state"] == "ND" for unit in units])
+    is_vt = ~is_nd
+    long_term = np.array(
+        [
+            filer_total(u, "long_term_capital_gains")
+            + filer_total(u, "non_sch_d_capital_gains")
+            for u in units
+        ]
+    )
+    short_term = np.array([filer_total(u, "short_term_capital_gains") for u in units])
+    reference = {
+        # 2. North Dakota, from the filers' own amounts.
+        "nd_qdiv_subtraction": nd.qdiv_fraction
+        * np.array([filer_total(u, "qualified_dividend_income") for u in units]),
+        "nd_ltcg_subtraction": nd.ltcg_fraction
+        * np.maximum(0, np.minimum(long_term, long_term + short_term)),
+        # 3. Vermont, from the filers' own amounts.
+        "vt_percentage_capital_gains_exclusion": np.minimum(
+            vt.rate
+            * np.array(
+                [
+                    filer_total(
+                        u, "long_term_capital_gains_on_assets_eligible_for_vt_exclusion"
+                    )
+                    for u in units
+                ]
+            ),
+            vt.cap,
+        ),
+        "vt_additions": np.array(
+            [filer_total(u, "tax_exempt_interest_income") for u in units]
+        ),
+    }
+    for variable, expected in reference.items():
+        in_state = is_nd if variable.startswith("nd_") else is_vt
+        np.testing.assert_allclose(
+            results[variable][:n][in_state],
+            expected[in_state],
+            atol=TOLERANCE,
+            err_msg=variable,
+        )
+    np.testing.assert_allclose(
+        results["us_govt_interest"][:n],
+        [filer_total(u, "us_govt_interest_person") for u in units],
+        atol=TOLERANCE,
+    )
+
+
+# A simulation's cost is mostly fixed, so each example is a batch of tax
+# units and there are few examples.
+@settings(
+    max_examples=5,
+    deadline=None,
+    derandomize=True,
+    suppress_health_check=[HealthCheck.too_slow, HealthCheck.data_too_large],
+)
+@given(st.lists(tax_units(), min_size=10, max_size=30))
+def test_dependent_capital_income_stays_off_nd_and_vt_returns(units):
+    check(units)
+
+
+def test_reported_examples():
+    """The two households that showed the leak (TY2025): in North Dakota a
+    head with $50,000 of wages and $1,000 of qualified dividends, and in
+    Vermont a head with $150,000 of wages and a $10,000 long-term gain, each
+    with a dependent child who has dividends or a Vermont-eligible gain."""
+    zero = {name: 0.0 for name in CAPITAL_INPUTS}
+    nd = {
+        "state": "ND",
+        "filers": [
+            {
+                "age": 40,
+                "employment_income": 50_000.0,
+                **zero,
+                "qualified_dividend_income": 1_000.0,
+            }
+        ],
+        "dependents": [{"age": 10, **zero, "qualified_dividend_income": 5_000.0}],
+    }
+    vt = {
+        "state": "VT",
+        "filers": [
+            {
+                "age": 40,
+                "employment_income": 150_000.0,
+                **zero,
+                "long_term_capital_gains": 10_000.0,
+            }
+        ],
+        "dependents": [
+            {
+                "age": 10,
+                **zero,
+                "long_term_capital_gains": 100_000.0,
+                "long_term_capital_gains_on_assets_eligible_for_vt_exclusion": 100_000.0,
+            }
+        ],
+    }
+    check([nd, vt])
+    results, _ = calculate([nd, vt])
+    assert results["nd_qdiv_subtraction"][0] == 400
+    assert results["vt_percentage_capital_gains_exclusion"][1] == 0
+    np.testing.assert_allclose(results["vt_income_tax"][1], 6_623.20, atol=TOLERANCE)