Model the claim of right repayment deduction and credit (26 U.S.C. 1341) and North Carolina's rules that depend on it

changelog.d/federal-claim-of-right-1341.added.md

@@ -0,0 +1 @@
+Add the federal claim of right repayment deduction and section 1341 credit (26 U.S.C. 1341), North Carolina's bar on its claim of right deduction when federal tax is computed under section 1341(a)(5), and North Carolina's tax payment for restored income (G.S. 105-266.2). Carry the federal claim of right deduction into California itemized deductions by default through Schedule CA column A. Require section 1341 eligibility for North Carolina's payment and deduction bar, including when the federal method is supplied as an input. Keep North Carolina's refundable payment in the state and household accounting totals. Apply statute-first federal-tax deduction treatment in Alabama, Missouri and Oregon, retain qualifying repayments in Wisconsin's itemized credit base, and complete Montana and Virginia repayment and historical miscellaneous-deduction treatment.

changelog.d/mt-taxable-income-adjustment-order.fixed.md

@@ -0,0 +1 @@
+Apply Montana's capped state-income-tax adjustment before flooring the federal taxable-income base at zero.

policyengine_us/parameters/gov/household/household_refundable_credits.yaml

@@ -27,7 +27,7 @@ values:
     - mo_refundable_credits  # Missouri.
     - ms_refundable_credits  # Mississippi.
     - mt_refundable_credits  # Montana.
-    # Skip NC which has no refundable credits.
+    - nc_refundable_credits  # North Carolina.
     - nd_refundable_credits  # North Dakota.
     - ne_refundable_credits  # Nebraska.
     - nh_refundable_credits  # New Hampshire.

policyengine_us/parameters/gov/household/household_refundable_state_credits.yaml

@@ -26,7 +26,7 @@ values:
     - mo_refundable_credits  # Missouri.
     - ms_refundable_credits  # Mississippi.
     - mt_refundable_credits  # Montana.
-    # Skip NC which has no refundable credits.
+    - nc_refundable_credits  # North Carolina.
     - nd_refundable_credits  # North Dakota.
     - ne_refundable_credits  # Nebraska.
     - nh_refundable_credits  # New Hampshire.

policyengine_us/parameters/gov/household/household_tax_before_refundable_credits.yaml

@@ -29,7 +29,7 @@ values:
     - mo_income_tax_before_refundable_credits
     - ms_income_tax_before_credits_unit
     - mt_income_tax_before_refundable_credits_unit
-    - nc_income_tax  # NC has no refundable credits.
+    - nc_income_tax_before_refundable_credits
     - nd_income_tax_before_refundable_credits
     - ne_income_tax_before_refundable_credits
     - nh_income_tax_before_refundable_credits

policyengine_us/parameters/gov/irs/credits/refundable.yaml

@@ -6,6 +6,7 @@ values:
     - refundable_ctc
     - recovery_rebate_credit
     - refundable_payroll_tax_credit
+    - claim_of_right_credit
     # Currently, the premium tax credit is not included in the refundable tax credits.
   # Add CDCC in 2021.
   2021-01-01:
@@ -14,6 +15,7 @@ values:
     - refundable_ctc
     - recovery_rebate_credit
     - refundable_payroll_tax_credit
+    - claim_of_right_credit
     # Currently, the premium tax credit is not included in the refundable tax credits.
     - cdcc
   # Remove CDCC in 2022.
@@ -23,6 +25,7 @@ values:
     - refundable_ctc
     - recovery_rebate_credit
     - refundable_payroll_tax_credit
+    - claim_of_right_credit
     # Currently, the premium tax credit is not included in the refundable tax credits.
 metadata:
   unit: list

policyengine_us/parameters/gov/irs/deductions/itemized/claim_of_right/threshold.yaml

@@ -0,0 +1,14 @@
+description: The IRS computes tax for the year of repayment as the lesser of the tax with a deduction for the repayment and the tax without it less the resulting decrease in prior-year tax, when the repayment of income held under a claim of right exceeds this amount.
+values:
+  1954-01-01: 3_000
+metadata:
+  unit: currency-USD
+  period: year
+  label: Claim of right repayment threshold
+  reference:
+    - title: 26 U.S. Code § 1341(a)(3)
+      href: https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleA-chap1-subchapQ-partV-sec1341.htm
+    - title: 26 CFR 1.1341-1(a)(3)
+      href: https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR4c74bc8cf7c11fb/section-1.1341-1
+    - title: "Publication 525 (2025), Repayments #page 36-37"
+      href: https://www.irs.gov/pub/irs-prior/p525--2025.pdf#page=36

policyengine_us/parameters/gov/irs/deductions/itemized_deductions.yaml

@@ -7,6 +7,7 @@ values:
     - medical_expense_deduction
     - casualty_loss_deduction
     - misc_deduction
+    - claim_of_right_deduction
 metadata:
   unit: list
   label: itemized deductions

policyengine_us/parameters/gov/states/al/tax/income/deductions/federal_tax/credits.yaml

@@ -1,17 +1,29 @@
 description: Alabama subtracts the following credits for the federal tax deduction.
 values:
-  2021-01-01:
+  # Preserve the model's historical list until pre-2021 sources are verified.
+  # An explicit date prevents the system's automatic 2015 backdating from
+  # extending the verified 2021 correction to earlier years.
+  2015-01-01:
     - eitc
     - american_opportunity_credit
     - refundable_ctc
+  2021-01-01:
+    - eitc
+    - refundable_american_opportunity_credit
+    - refundable_ctc
+    - claim_of_right_credit
+    - net_premium_tax_credit
+    - al_other_federal_payment_credits
 
 metadata:
   unit: list
   period: year
   label: Alabama federal tax deduction subtractable credits
   reference:
-    - title: Alabama Code Title 40. Revenue and Taxation § 40-18-21
-      href: https://law.justia.com/codes/alabama/title-40/chapter-18/article-1/section-40-18-21/
+    - title: Alabama Code § 40-18-15(c)
+      href: https://alison.legislature.state.al.us/code-of-alabama?section=40-18-15
+    - title: Alabama Administrative Code r. 810-3-15-.20(1)(d)2
+      href: https://www.revenue.alabama.gov/wp-content/uploads/2021/12/810-3-15-.20.pdf#page=2
     - title: 2021 Alabama Form 40A Instructions
       href: https://www.revenue.alabama.gov/wp-content/uploads/2022/06/21f40abk.pdf#page=20
     - title: 2022 Alabama Form 40A Instructions

policyengine_us/parameters/gov/states/household/state_income_tax_before_refundable_credits.yaml

@@ -29,7 +29,7 @@ values:
     - mo_income_tax_before_refundable_credits
     - ms_income_tax_before_refundable_credits
     - mt_income_tax_before_refundable_credits_unit
-    - nc_income_tax
+    - nc_income_tax_before_refundable_credits
     - nd_income_tax_before_refundable_credits
     - ne_income_tax_before_refundable_credits
     - nh_income_tax_before_refundable_credits

policyengine_us/parameters/gov/states/household/state_refundable_credits.yaml

@@ -26,7 +26,7 @@ values:
     - mo_refundable_credits  # Missouri.
     - ms_refundable_credits  # Mississippi.
     - mt_refundable_credits  # Montana.
-    # Skip NC which has no refundable credits.
+    - nc_refundable_credits  # North Carolina.
     - nd_refundable_credits  # North Dakota.
     - ne_refundable_credits  # Nebraska.
     - nh_refundable_credits  # New Hampshire.

policyengine_us/parameters/gov/states/mo/tax/income/deductions/federal_income_tax/ignored_credits.yaml

@@ -7,6 +7,8 @@ description: Missouri ignores the following credits in federal income tax deduct
 # are added back here. The EIC is not added back: the Line 9 instructions say
 # "If you have an earned income credit, you must subtract the credit from the
 # tax on your federal return."
+# Section 143.171 reduces the base for all credits except its listed exceptions;
+# the section 1341 credit is not added back.
 values:
   2018-01-01:
     - recovery_rebate_credit

policyengine_us/parameters/gov/states/mt/tax/income/deductions/itemized/misc_deductions.yaml

@@ -6,13 +6,20 @@ description: Montana counts these sources as miscellaneous deductions.
 values:
   2021-01-01:
     - casualty_loss_deduction
+    # Form 2 itemized deductions line 18 follows federal Schedule A line 16.
+    - mt_claim_of_right_deduction
+  # From 2024 mt_federal_deductions takes the full federal deduction.
   2024-01-01: []
-    
+
 metadata:
   unit: list
-  label: Montana miscellaneous deductions 
+  label: Montana miscellaneous deductions
   period: year
   reference:
+    - title: 2023 Montana Form 2 instructions, itemized deductions line 18
+      href: https://revenue.mt.gov/files/forms/Montana-Individual-Income-Tax-Return-Form-2-Instructions/2023_Montana_Individual_Income_Tax_Return_Form_2_Instructions.pdf#page=39
+    - title: 2024 Montana Form 2 instructions, line 2 and Worksheet A
+      href: https://revenue.mt.gov/files/forms/Montana-Individual-Income-Tax-Return-Form-2-Instructions/2024_Montana_Individual_Income_Tax_Return_Form_2_Instructions.pdf#page=15
     - title: Montana Individual Income Tax Return (Form 2) 2024
       href: https://revenuefiles.mt.gov/files/Forms/Montana-Individual-Income-Tax-Return-Form-2-Instructions/2024_Montana_Individual_Income_Tax_Return_Form_2_Instructions.pdf#page=8
     - title: Montana Individual Income Tax Return (Form 2) 2022

policyengine_us/parameters/gov/states/mt/tax/income/deductions/itemized/misc_floor.yaml

@@ -0,0 +1,10 @@
+description: Montana subtracts this share of Montana adjusted gross income from the combined pool of floor-subject miscellaneous itemized deductions.
+values:
+  2017-01-01: 0.02
+metadata:
+  unit: /1
+  period: year
+  label: Montana miscellaneous itemized deduction AGI floor
+  reference:
+    - title: 2017 Montana Form 2 with Legal References, Schedule III lines 21-26
+      href: https://mtrevenue.gov/wp-content/uploads/2018/02/2017-Form2-with-Legal-References.pdf#page=6

policyengine_us/parameters/gov/states/mt/tax/income/deductions/itemized/misc_floor_applies.yaml

@@ -0,0 +1,14 @@
+description: Montana applies the modeled historical floor-subject miscellaneous itemized deduction component if this is true.
+values:
+  2015-01-01: false
+  2017-01-01: true
+  2018-01-01: false
+metadata:
+  unit: bool
+  period: year
+  label: Montana historical miscellaneous itemized deduction applies
+  reference:
+    - title: 2017 Montana Form 2 with Legal References, Schedule III lines 21-26
+      href: https://mtrevenue.gov/wp-content/uploads/2018/02/2017-Form2-with-Legal-References.pdf#page=6
+    - title: 26 U.S.C. 67, suspension of miscellaneous itemized deductions
+      href: https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleA-chap1-subchapB-partI-sec67.htm

policyengine_us/parameters/gov/states/nc/tax/income/credits/refundable.yaml

@@ -0,0 +1,13 @@
+description: North Carolina provides these refundable income tax credits and payments.
+values:
+  1995-01-01:
+    - nc_claim_of_right_payment
+metadata:
+  unit: list
+  period: year
+  label: North Carolina refundable income tax credits
+  reference:
+    - title: N.C. Gen. Stat. § 105-266.2
+      href: https://www.ncleg.gov/EnactedLegislation/Statutes/HTML/BySection/Chapter_105/GS_105-266.2.html
+    - title: S.L. 1997-213, Section 2 (effective for taxable years beginning on or after January 1, 1995)
+      href: https://www.ncleg.gov/EnactedLegislation/SessionLaws/HTML/1997-1998/SL1997-213.html

policyengine_us/parameters/gov/states/va/tax/income/deductions/itemized/reduction/applicable.yaml

@@ -7,11 +7,23 @@ values:
     - real_estate_taxes
     - casualty_loss_deduction
     - va_capped_state_and_local_sales_or_income_tax
+    # Schedule A line 16b, other itemized deductions.
+    - claim_of_right_deduction
+    # Already reduced by the federal AGI floor; zero from 2018.
+    - misc_deduction
 metadata:
   unit: list
   period: year
   label: Virginia itemized deductions reduction applicable deduction sources
   reference:
+    - title: Virginia Code Section 58.1-322.03(1)(a)
+      href: https://law.lis.virginia.gov/vacode/title58.1/chapter3/section58.1-322.03/
+    - title: Virginia Code Section 58.1-301(B)(5)
+      href: https://law.lis.virginia.gov/vacode/title58.1/chapter3/section58.1-301/
+    - title: 26 U.S.C. Section 68(a), (c), and (d), 2024 edition
+      href: https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleA-chap1-subchapB-partI-sec68.htm
+    - title: "2025 Virginia Schedule A Itemized Deductions, line 16b and Limited Itemized Deduction Worksheet line 1 #page 1-2"
+      href: https://www.tax.virginia.gov/sites/default/files/taxforms/individual-income-tax/2025/schedule-2025.pdf#page=1
     - title: 2024 Virginia Schedule A Itemized Deductions
       href: https://www.tax.virginia.gov/sites/default/files/taxforms/individual-income-tax/2024/schedule-2024.pdf#page=2
     - title: 2023 Virginia Schedule A Itemized Deductions

policyengine_us/reforms/states/nc/cdcc/nc_cdcc_reform.py

@@ -23,41 +23,35 @@ class nc_refundable_credits(Variable):
         unit = USD
         definition_period = YEAR
         defined_for = StateCode.NC
+        # Baseline computes this via `adds`; replacing it with a
+        # formula requires clearing the inherited computation mode
+        # (the core engine rejects `formula` + `adds`/`subtracts`).
+        adds = None
+        subtracts = None
 
         def formula(tax_unit, period, parameters):
+            # Preserve the baseline refundable credits and ADD the new
+            # CDCC (see #8775). Baseline nc_income_tax subtracts
+            # nc_refundable_credits and excludes nc_use_tax, which
+            # state_use_tax already counts, so no override of it is needed.
+            baseline_credits = parameters(
+                period
+            ).gov.states.nc.tax.income.credits.refundable
+            total = add(tax_unit, period, list(baseline_credits)) + tax_unit(
+                "nc_cdcc", period
+            )
             # Stack with nc_eitc when the NC EITC contrib reform is also
             # active, so enabling both NC contrib credits sums rather than
             # overwrites.
-            total = tax_unit("nc_cdcc", period)
             variables = tax_unit.simulation.tax_benefit_system.variables
             if "nc_eitc" in variables:
                 total = total + tax_unit("nc_eitc", period)
             return total
 
-    class nc_income_tax(Variable):
-        value_type = float
-        entity = TaxUnit
-        label = "North Carolina income tax"
-        unit = USD
-        definition_period = YEAR
-        defined_for = StateCode.NC
-
-        def formula(tax_unit, period, parameters):
-            tax_before_credits = add(
-                tax_unit, period, ["nc_income_tax_before_credits", "nc_use_tax"]
-            )
-            non_refundable_credits = tax_unit("nc_non_refundable_credits", period)
-            tax_before_refundable = max_(0, tax_before_credits - non_refundable_credits)
-
-            refundable_credits = tax_unit("nc_refundable_credits", period)
-
-            return tax_before_refundable - refundable_credits
-
     class reform(Reform):
         def apply(self):
             self.update_variable(nc_cdcc)
             self.update_variable(nc_refundable_credits)
-            self.update_variable(nc_income_tax)
 
     return reform
 

policyengine_us/reforms/states/nc/eitc/nc_eitc_reform.py

@@ -23,35 +23,28 @@ class nc_refundable_credits(Variable):
         unit = USD
         definition_period = YEAR
         defined_for = StateCode.NC
+        # Baseline computes this via `adds`; replacing it with a
+        # formula requires clearing the inherited computation mode
+        # (the core engine rejects `formula` + `adds`/`subtracts`).
+        adds = None
+        subtracts = None
 
         def formula(tax_unit, period, parameters):
-            return tax_unit("nc_eitc", period)
-
-    class nc_income_tax(Variable):
-        value_type = float
-        entity = TaxUnit
-        label = "North Carolina income tax"
-        unit = USD
-        definition_period = YEAR
-        defined_for = StateCode.NC
-
-        def formula(tax_unit, period, parameters):
-            # Mirror baseline nc_income_tax, which uses
-            # nc_income_tax_before_credits and does NOT add nc_use_tax. This
-            # reform's only change is subtracting the new refundable EITC;
-            # adding use tax here would raise tax for every filer (even those
-            # with no EITC). See #8775.
-            tax_before_credits = tax_unit("nc_income_tax_before_credits", period)
-            non_refundable_credits = tax_unit("nc_non_refundable_credits", period)
-            tax_before_refundable = max_(0, tax_before_credits - non_refundable_credits)
-            refundable_credits = tax_unit("nc_refundable_credits", period)
-            return tax_before_refundable - refundable_credits
+            # Preserve the baseline refundable credits and ADD the new
+            # EITC. Baseline nc_income_tax subtracts nc_refundable_credits
+            # and excludes nc_use_tax, so no override of it is needed.
+            # See #8775.
+            baseline_credits = parameters(
+                period
+            ).gov.states.nc.tax.income.credits.refundable
+            return add(tax_unit, period, list(baseline_credits)) + tax_unit(
+                "nc_eitc", period
+            )
 
     class reform(Reform):
         def apply(self):
             self.update_variable(nc_eitc)
             self.update_variable(nc_refundable_credits)
-            self.update_variable(nc_income_tax)
 
     return reform
 

policyengine_us/tests/core/test_override_branches.py

@@ -29,7 +29,10 @@
    on the seeded sample and on random households (Hypothesis).
 3. Each comparison branch equals a fresh simulation that sets the overridden
    input before anything is calculated (a differential test of the branch
-   against the reference path).
+   against the reference path). These households repay no claim of right
+   income; with a qualifying repayment the itemizing branches also fix the
+   claim of right method, so a reference must fix it too
+   (``test_claim_of_right_section_1341_properties.py`` covers that case).
 4. The same holds when the parent has already calculated the overridden
    input, and when an earlier year was calculated first.
 5. When the branch drops what it copied, it keeps exactly the values set as

policyengine_us/tests/core/test_state_income_tax_accounting_invariants.py

@@ -67,11 +67,6 @@
     # Lower of the joint return and separate returns on one form, each after
     # refundable credits.
     "MT",
-    # No refundable credits in baseline, so the before-refundable list holds
-    # nc_income_tax itself. The contributed EITC and child care credit reforms
-    # net their refundable credits inside nc_income_tax, which keeps NC out of
-    # the refundable list.
-    "NC",
     # No tax at or below the filing threshold. The zero-out is in both
     # nj_income_tax_before_refundable_credits and nj_income_tax; the second
     # copy keeps tests that set the first as an input right.

policyengine_us/tests/policy/baseline/gov/irs/credits/claim_of_right/claim_of_right_credit.yaml

@@ -0,0 +1,26 @@
+- name: Case 1, the credit is the prior-year decrease when tax is computed under section 1341(a)(5).
+  period: 2025
+  input:
+    claim_of_right_section_1341_eligible: true
+    claim_of_right_credit_applies: true
+    claim_of_right_prior_year_tax_decrease: 1_234
+  output:
+    claim_of_right_credit: 1_234
+
+- name: Case 2, no credit under section 1341(a)(4).
+  period: 2025
+  input:
+    claim_of_right_section_1341_eligible: true
+    claim_of_right_credit_applies: false
+    claim_of_right_prior_year_tax_decrease: 1_234
+  output:
+    claim_of_right_credit: 0
+
+- name: Case 3, no credit without a qualifying repayment.
+  period: 2025
+  input:
+    claim_of_right_section_1341_eligible: false
+    claim_of_right_credit_applies: true
+    claim_of_right_prior_year_tax_decrease: 1_234
+  output:
+    claim_of_right_credit: 0