Reduce Colorado's federal deduction addback by the state income tax already added back

changelog.d/co-federal-deduction-addback-coordination.fixed.md

@@ -0,0 +1 @@
+Reduce Colorado's federal deduction addback by the Schedule A state income tax already added back on DR 0104 line 2.

policyengine_us/tests/policy/baseline/gov/states/co/tax/income/additions/federal_deduction/co_federal_deduction_addback.yaml

@@ -370,3 +370,132 @@
     standard_deduction: 2_000
   output:
     co_federal_deduction_addback: 1_000
+
+# Rule 39-22-104(3)(p), paragraph (3) (2022), Rule 39-22-104(3)(p.5),
+# paragraph (3)(a)(i), and the DR 0104 line 4 instructions (2023 to 2025): the
+# addback is reduced by the Schedule A state income tax already added back on
+# DR 0104 line 2. The same reduction carries to 2026.
+- name: Case 36, 2025 single itemizer, addback reduced by the state income tax addback.
+  period: 2025
+  input:
+    state_code: CO
+    co_federal_deduction_addback_required: true
+    filing_status: SINGLE
+    tax_unit_itemizes: true
+    itemized_taxable_income_deductions: 20_000
+    co_state_addback: 5_000
+  output:
+    # 20,000 - 12,000 - 5,000
+    co_federal_deduction_addback: 3_000
+
+- name: Case 37, 2025 joint itemizer, state income tax addback above the excess leaves no addback.
+  period: 2025
+  input:
+    state_code: CO
+    co_federal_deduction_addback_required: true
+    filing_status: JOINT
+    tax_unit_itemizes: true
+    itemized_taxable_income_deductions: 30_000
+    co_state_addback: 20_000
+  output:
+    # max(0, 30,000 - 16,000 - 20,000)
+    co_federal_deduction_addback: 0
+
+- name: Case 38, 2022 single itemizer, addback reduced by the state income tax addback.
+  period: 2022
+  input:
+    state_code: CO
+    co_federal_deduction_addback_required: true
+    filing_status: SINGLE
+    tax_unit_itemizes: true
+    itemized_taxable_income_deductions: 40_000
+    co_state_addback: 4_000
+  output:
+    # 40,000 - 30,000 - 4,000
+    co_federal_deduction_addback: 6_000
+
+- name: Case 39, 2026 single itemizer, addback reduced by the state income tax addback.
+  period: 2026
+  input:
+    state_code: CO
+    co_federal_deduction_addback_required: true
+    filing_status: SINGLE
+    tax_unit_itemizes: true
+    itemized_taxable_income_deductions: 20_000
+    co_state_addback: 5_000
+  output:
+    # 20,000 - 1,000 - 5,000
+    co_federal_deduction_addback: 14_000
+
+- name: Case 40, 2022 single itemizer, computed state income tax addback above the excess leaves no addback.
+  period: 2022
+  input:
+    people:
+      head:
+        age: 45
+        employment_income: 450_000
+        real_estate_taxes: 2_000
+        deductible_mortgage_interest: 25_000
+    tax_units:
+      tax_unit:
+        members: [head]
+        state_withheld_income_tax: 8_000
+    households:
+      household:
+        members: [head]
+        state_code: CO
+  output:
+    # SALT min(8,000 + 2,000, 10,000) + mortgage interest 25,000
+    itemized_taxable_income_deductions: 35_000
+    # min(8,000 state income tax, 35,000 - 12,950 standard deduction)
+    co_state_addback: 8_000
+    # max(0, 35,000 - 30,000 - 8,000)
+    co_federal_deduction_addback: 0
+
+- name: Case 41, 2025 single filer claiming the standard deduction with state withholding has no state income tax addback to subtract.
+  period: 2025
+  input:
+    people:
+      head:
+        age: 45
+        employment_income: 450_000
+    tax_units:
+      tax_unit:
+        members: [head]
+        state_withheld_income_tax: 20_000
+        tax_unit_itemizes: false
+    households:
+      household:
+        members: [head]
+        state_code: CO
+  output:
+    standard_deduction: 15_750
+    # Only an itemizer adds back state income tax on DR 0104 line 2.
+    co_state_addback: 0
+    # 15,750 - 12,000
+    co_federal_deduction_addback: 3_750
+
+- name: Case 42, 2026 single filer whose section 68 limitation makes the standard deduction larger has no state income tax addback to subtract.
+  period: 2026
+  input:
+    people:
+      head:
+        age: 45
+        employment_income: 1_000_000
+        deductible_mortgage_interest: 6_500
+    tax_units:
+      tax_unit:
+        members: [head]
+        state_withheld_income_tax: 10_000
+    households:
+      household:
+        members: [head]
+        state_code: CO
+  output:
+    # SALT 10,000 + mortgage interest 6,500 = 16,500 before the limitation,
+    # above the 16,100 standard deduction; the limitation leaves 15,608, so
+    # the unit takes the standard deduction.
+    tax_unit_itemizes: false
+    co_state_addback: 0
+    # 16,100 - 1,000
+    co_federal_deduction_addback: 15_100

policyengine_us/variables/gov/states/co/tax/income/additions/federal_deductions/co_federal_deduction_addback.py

@@ -17,6 +17,15 @@ class co_federal_deduction_addback(Variable):
         "https://tax.colorado.gov/sites/tax/files/documents/DR_104_Book_2022.pdf#page=5",
         # Individual Income Tax Guide - Part 3 Additions to Taxable Income - Federal itemized or standard deductions
         "https://tax.colorado.gov/individual-income-tax-guide",
+        # 1 CCR 201-2, Rule 39-22-104(3)(p), paragraph (3) (2022), and
+        # Rule 39-22-104(3)(p.5), paragraph (3)(a)(i) (2023 to 2025):
+        # coordination with other addbacks.
+        # PDF pages 12-13
+        "https://www.sos.state.co.us/CCR/GenerateRulePdf.do?ruleVersionId=12424&fileName=1%20CCR%20201-2#page=12",
+        # DR 0104 line 4 instructions, 2023 to 2025.
+        "https://tax.colorado.gov/sites/tax/files/documents/Book0104_2023.pdf#page=6",
+        "https://tax.colorado.gov/sites/tax/files/documents/DR0104_book_2024.pdf#page=9",
+        "https://tax.colorado.gov/sites/tax/files/documents/Book104_2025.pdf#page=9",
     )
     defined_for = "co_federal_deduction_addback_required"
 
@@ -32,4 +41,12 @@ def formula(tax_unit, period, parameters):
             )
         filing_status = tax_unit("filing_status", period)
         exemption = p.exemption[filing_status]
-        return max_(deductions - exemption, 0)
+        # Rule 39-22-104(3)(p), paragraph (3) (2022), Rule 39-22-104(3)(p.5),
+        # paragraph (3)(a)(i), and the DR 0104 line 4 instructions (2023 to
+        # 2025) reduce this addition by the state income tax already added back
+        # under C.R.S. 39-22-104(3)(d)(I) (DR 0104 line 2), so the same dollars
+        # are not added back twice. The reduction applies from 2022 on, 2026
+        # included. It excludes a share of state income tax deducted by a
+        # partnership or S corporation, which co_state_addback does not include.
+        state_income_tax_addback = tax_unit("co_state_addback", period)
+        return max_(deductions - exemption - state_income_tax_addback, 0)

source_conflicts/candidates.yaml

@@ -1734,6 +1734,53 @@ candidates:
     prs: []
   state: unreviewed
   note: Verify the guide's year coverage and the model's comparison operator.
+- id: us-co:federal-deduction-addback-net-of-state-tax-addback
+  program: income-tax
+  years:
+    from: 2022
+    type: tax
+  question: Is Colorado's high-income federal deductions addback reduced by the state income tax already added back
+    under C.R.S. 39-22-104(3)(d)(I), or are the two additions made separately?
+  sources:
+  - kind: statute
+    citation: C.R.S. 39-22-104(3)(d)(I), (3)(p), (3)(p.5) and (3)(p.7)
+    url: https://olls.info/crs/crs2025-title-39.pdf#page=382
+  - kind: regulation
+    citation: 1 CCR 201-2, Rule 39-22-104(3)(p), paragraph (3)
+    url: https://www.sos.state.co.us/CCR/GenerateRulePdf.do?ruleVersionId=12424&fileName=1%20CCR%20201-2#page=12
+  - kind: regulation
+    citation: 1 CCR 201-2, Rule 39-22-104(3)(p.5), paragraph (3)(a)(i)
+    url: https://www.sos.state.co.us/CCR/GenerateRulePdf.do?ruleVersionId=12424&fileName=1%20CCR%20201-2#page=13
+  - kind: instructions
+    citation: 2023 DR 0104 booklet, line 4
+    url: https://tax.colorado.gov/sites/tax/files/documents/Book0104_2023.pdf#page=6
+  - kind: instructions
+    citation: 2024 DR 0104 booklet, line 4
+    url: https://tax.colorado.gov/sites/tax/files/documents/DR0104_book_2024.pdf#page=9
+  - kind: instructions
+    citation: 2025 DR 0104 booklet, line 4
+    url: https://tax.colorado.gov/sites/tax/files/documents/Book104_2025.pdf#page=9
+  - kind: instructions
+    citation: 2022 DR 0104 booklet, line 4
+    url: https://tax.colorado.gov/sites/tax/files/documents/DR_104_Book_2022.pdf#page=6
+  readings:
+    statute: Read literally, (3)(d)(I) and (3)(p), (p.5) or (p.7) are two separate additions, so state income tax
+      deducted on Schedule A is added back once on DR 0104 line 2 and again inside the line 4 excess.
+    other: The two rules and the 2023 to 2025 booklets reduce the line 4 addition by the state income tax already
+      added back on line 2, excluding a share of state income tax deducted by a partnership or S corporation.
+  example: A 2025 single itemizer with $30,000 of itemized deductions, including $5,000 of state income tax added back
+    on line 2, adds back $13,000 on line 4 under the net reading and $18,000 under the literal one.
+  pe_us:
+    follows: gap-fill
+    code:
+    - policyengine_us/variables/gov/states/co/tax/income/additions/federal_deductions/co_federal_deduction_addback.py
+    prs:
+    - https://github.com/PolicyEngine/policyengine-us/pull/10094
+  state: ruled
+  note: The statute does not say how the additions coordinate; the code nets them in every year from 2022, following
+    the rules, the booklets and the canon against counting a dollar twice. The 2022 booklet subtracts only the $30,000
+    or $60,000 limit, with no reduction for state income tax, and no rule or booklet yet covers 2026, where the same
+    reading carries to (p.7).
 - id: us-co:joint-childless-eitc-dependent-question
   program: income-tax
   years: