MaxGhenis · Oct 19, 2026 · Oct 18, 2026 · Oct 18, 2026 · Oct 18, 2026
diff --git a/changelog.d/fix-ky-irc-conformity-2026.fixed.md b/changelog.d/fix-ky-irc-conformity-2026.fixed.md
@@ -0,0 +1 @@
+Kentucky's household and dependent care service credit uses the federal credit as amended by the One Big Beautiful Bill Act from 2026, when 2026 Ky. Acts ch. 161 moved Kentucky's Internal Revenue Code reference date to December 31, 2025. A new parameter records Kentucky's conformity to the Act, and the pre-OBBBA federal credit variables now equal the live credit in years the Act does not change section 21.
diff --git a/policyengine_us/parameters/gov/states/ky/tax/income/irc_conformity/obbba.yaml b/policyengine_us/parameters/gov/states/ky/tax/income/irc_conformity/obbba.yaml
@@ -0,0 +1,25 @@
+description: Kentucky adopts the One Big Beautiful Bill Act (Public Law 119-21) amendments to the Internal Revenue Code if this is true.
+# KRS 141.010(21) defines Kentucky's "Internal Revenue Code" as the Code in
+# effect on a fixed reference date. The Act was enacted on July 4, 2025.
+# - Tax years 2018 to 2025: every reference date (December 31, 2017, 2018,
+#   2021, 2022, 2023 and 2024) predates the Act. For 2025, 2025 Ky. Acts
+#   ch. 98, sec. 30 set the date at December 31, 2024.
+# - Tax years 2026 on: 2026 Ky. Acts ch. 161, sec. 6 moved the date to
+#   December 31, 2025, which includes the Act.
+# Kentucky decouples from specific provisions of the Act in KRS 141.019 and
+# 141.0101 (for example sections 174A, 224 and 225); this parameter does not
+# govern those.
+values:
+  2018-01-01: false
+  2026-01-01: true
+metadata:
+  unit: bool
+  period: year
+  label: Kentucky Internal Revenue Code conformity to the One Big Beautiful Bill Act
+  reference:
+    - title: KRS 141.010(21)
+      href: https://apps.legislature.ky.gov/law/statutes/statute.aspx?id=57913#page=3
+    - title: 2026 Ky. Acts ch. 161 (HB 757), sec. 6
+      href: https://apps.legislature.ky.gov/law/acts/26RS/documents/0161.pdf#page=9
+    - title: 2025 Ky. Acts ch. 98, sec. 30
+      href: https://apps.legislature.ky.gov/law/acts/25RS/documents/0098.pdf#page=56
diff --git a/policyengine_us/tests/policy/baseline/gov/irs/credits/cdcc/pre_obbba_cdcc.yaml b/policyengine_us/tests/policy/baseline/gov/irs/credits/cdcc/pre_obbba_cdcc.yaml
@@ -1,12 +1,14 @@
 # The pre_obbba_cdcc family recomputes the federal section 21 credit on the
 # rate schedule as it stood before the One Big Beautiful Bill Act (OBBBA). For
-# 2025 it must equal the live cdcc (identical schedule); for 2026 it must hold
-# the pre-OBBBA rate (max 35%, min 20%, no amended second phase-out) while the
-# live cdcc reflects the OBBBA increase (max 50%, min 35%). Read by states whose
-# income tax statically conforms to a pre-2026 IRC (KY, ME, VT).
+# tax years before the Act's section 21 amendment applies (P.L. 119-21 sec.
+# 70405(b): years beginning after December 31, 2025) it must equal the live
+# cdcc, including 2021's refundable American Rescue Plan Act credit; for 2026 it must
+# hold the pre-OBBBA rate (max 35%, min 20%, no amended second phase-out) while
+# the live cdcc reflects the OBBBA increase (max 50%, min 35%). Read by states
+# whose income tax statically conforms to a pre-OBBBA IRC.
 
-# Low-income joint family, two children, $6,000 childcare, AGI below the first
-# phase-out start so the applicable rate is at its maximum.
+# Joint family, two children, $6,000 childcare, $50,000 AGI: $35,000 over the
+# $15,000 phase-out start is 18 increments, so the 2025 rate is the 20% floor.
 - name: 2025 pre-OBBBA CDCC equals the live CDCC (identical schedule)
   period: 2025
   absolute_error_margin: 0.01
@@ -65,3 +67,64 @@
     pre_obbba_cdcc_potential: 1_200
     pre_obbba_cdcc: 1_200
     pre_obbba_capped_cdcc: 1_200
+
+# 2021: the American Rescue Plan Act made the credit refundable with a 50% rate
+# below $125,000 of AGI and $8,000 / $16,000 expense limits (IRC 21(g)). The Act
+# did not change 2021, so the pre-OBBBA credit is the live refundable credit,
+# not the 2025 rate on 2021 expense limits ($1,200 before this fix).
+- name: 2021 pre-OBBBA CDCC equals the live refundable ARPA credit
+  period: 2021
+  absolute_error_margin: 0.01
+  input:
+    people:
+      head:
+        age: 35
+        employment_income: 25_000
+      spouse:
+        age: 35
+        employment_income: 25_000
+      child1:
+        age: 5
+      child2:
+        age: 7
+    tax_units:
+      tax_unit:
+        members: [head, spouse, child1, child2]
+        filing_status: JOINT
+        tax_unit_childcare_expenses: 6_000
+        premium_tax_credit: 0
+  output:
+    # 50% x $6,000 = $3,000, refundable, so not capped at liability.
+    cdcc_potential: 3_000
+    cdcc: 3_000
+    capped_cdcc: 3_000
+    pre_obbba_cdcc_potential: 3_000
+    pre_obbba_cdcc: 3_000
+    pre_obbba_capped_cdcc: 3_000
+
+# The mirrors key on the Act's effective date, not on a section 21 parameter.
+# A reform that switches off the amended second phase-out in 2026 leaves the
+# live 50% maximum and 35% floor in place, and must not move the mirrors.
+- name: 2026 pre-OBBBA CDCC stays frozen when a reform switches off the amended phase-out
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    gov.irs.credits.cdcc.phase_out.amended_structure.applies: false
+    people:
+      parent:
+        age: 30
+        employment_income: 50_000
+      child:
+        age: 5
+    tax_units:
+      tax_unit:
+        members: [parent, child]
+        tax_unit_childcare_expenses: 1_000
+        premium_tax_credit: 0
+  output:
+    # Live: 50% less 18 points = 32%, floored at 35%; no second phase-down.
+    cdcc: 350
+    # Pre-OBBBA: 35% less 18 points = 17%, floored at 20%.
+    pre_obbba_cdcc_potential: 200
+    pre_obbba_cdcc: 200
+    pre_obbba_capped_cdcc: 200
diff --git a/...tests/policy/baseline/gov/states/ky/tax/income/credits/dependent_care_credit/ky_cdcc.yaml b/...tests/policy/baseline/gov/states/ky/tax/income/credits/dependent_care_credit/ky_cdcc.yaml
@@ -21,10 +21,78 @@
   output:
     ky_cdcc: 0
 
-# KRS 141.010(21) freezes Kentucky's IRC at December 31, 2024, so from 2026 the
-# credit uses the pre-OBBBA federal section 21 credit (20% of $1,200 = $240),
-# not the OBBBA-inflated live credit (which would give 20% of $1,780 = $356).
-- name: 2026 uses the pre-OBBBA federal credit under static conformity
+# KRS 141.067 sets the credit at 20% of the federal credit allowed under IRC
+# section 21, and KRS 141.010(21) fixes Kentucky's Code at a reference date.
+# For 2025 that date is December 31, 2024, before the One Big Beautiful Bill
+# Act; from 2026 it is December 31, 2025 (2026 Ky. Acts ch. 161, sec. 6), so
+# Kentucky adopts the Act's section 21 rate schedule: 50% less one point per
+# $2,000 of AGI over $15,000, floored at 35%, then one point per $2,000 ($4,000
+# joint) of AGI over $75,000 ($150,000 joint), floored at 20%. The pre-OBBBA
+# schedule is 35% less one point per $2,000 over $15,000, floored at 20%.
+
+- name: 2025 single parent, $50,000 earnings, $1,000 care for a child of five
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    people:
+      parent:
+        age: 30
+        employment_income: 50_000
+      child:
+        age: 5
+    tax_units:
+      tax_unit:
+        members: [parent, child]
+        tax_unit_childcare_expenses: 1_000
+        premium_tax_credit: 0
+    households:
+      household:
+        members: [parent, child]
+        state_code: KY
+  output:
+    # 2025 is before the Act's section 21 change: 35% - 18 points = 17%,
+    # floored at 20%, so $200 federally, under the federal liability.
+    cdcc: 200
+    pre_obbba_cdcc: 200
+    ky_cdcc_potential: 40
+    ky_cdcc: 40
+    # ($50,000 - $3,270 standard deduction) x 4% = $1,869.20, less $40.
+    ky_income_tax: 1_829.2
+
+- name: 2026 single parent, $50,000 earnings, $1,000 care for a child of five
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    people:
+      parent:
+        age: 30
+        employment_income: 50_000
+      child:
+        age: 5
+    tax_units:
+      tax_unit:
+        members: [parent, child]
+        tax_unit_childcare_expenses: 1_000
+        premium_tax_credit: 0
+    households:
+      household:
+        members: [parent, child]
+        state_code: KY
+  output:
+    # The Act's schedule: 50% - 18 points = 32%, floored at 35%; AGI is under
+    # the $75,000 second phase-down. 35% x $1,000 = $350, under the federal
+    # liability. The pre-OBBBA schedule would give 20%, or $200.
+    cdcc: 350
+    pre_obbba_cdcc: 200
+    # 20% of $350.
+    ky_cdcc_potential: 70
+    ky_cdcc: 70
+    # ($50,000 - $3,360 standard deduction) x 3.5% = $1,632.40, less $70.
+    ky_income_tax: 1_562.4
+
+# The federal credit is capped at federal liability (IRC 26), and Kentucky
+# matches the capped "credit allowed".
+- name: 2026 joint filers with $50,000 earnings and $6,000 care get 20% of the capped federal credit
   period: 2026
   absolute_error_margin: 0.01
   input:
@@ -54,5 +122,128 @@
         members: [head, spouse, child1, child2]
         state_code: KY
   output:
-    # 20% of the pre-OBBBA $1,200 federal credit.
+    # 35% x $6,000 = $2,100, capped at the $1,780 federal liability.
+    cdcc_potential: 2_100
+    cdcc: 1_780
+    # 20% of $1,780.
+    ky_cdcc_potential: 356
+    ky_cdcc: 356
+
+- name: 2026 joint filers in the Act's second phase-down
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    people:
+      head:
+        age: 40
+        employment_income: 80_000
+      spouse:
+        age: 40
+        employment_income: 80_000
+      child1:
+        age: 3
+      child2:
+        age: 6
+    tax_units:
+      tax_unit:
+        members: [head, spouse, child1, child2]
+        filing_status: JOINT
+        tax_unit_childcare_expenses: 6_000
+        premium_tax_credit: 0
+    households:
+      household:
+        members: [head, spouse, child1, child2]
+        state_code: KY
+  output:
+    # 35% less one point per $4,000 (or part) over $150,000: $10,000 is three
+    # increments, so 32%. 32% x $6,000 = $1,920. Pre-OBBBA: 20%, or $1,200.
+    cdcc: 1_920
+    pre_obbba_cdcc: 1_200
+    # 20% of $1,920.
+    ky_cdcc_potential: 384
+    ky_cdcc: 384
+
+- name: 2026 joint filers at the bottom of the Act's second phase-down
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    people:
+      head:
+        age: 40
+        employment_income: 110_000
+      spouse:
+        age: 40
+        employment_income: 110_000
+      child1:
+        age: 3
+      child2:
+        age: 6
+    tax_units:
+      tax_unit:
+        members: [head, spouse, child1, child2]
+        filing_status: JOINT
+        tax_unit_childcare_expenses: 6_000
+        premium_tax_credit: 0
+    households:
+      household:
+        members: [head, spouse, child1, child2]
+        state_code: KY
+  output:
+    # $70,000 over $150,000 is 18 increments: 35% - 18 = 17%, floored at 20%,
+    # the same rate as the pre-OBBBA schedule. 20% x $6,000 = $1,200.
+    cdcc: 1_200
+    pre_obbba_cdcc: 1_200
+    ky_cdcc_potential: 240
     ky_cdcc: 240
+
+# The conformity parameter is the lever: with it off, Kentucky reads the
+# pre-OBBBA credit once the Act changes section 21.
+- name: 2026 single parent under a reform that keeps Kentucky's Code before the Act
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    gov.states.ky.tax.income.irc_conformity.obbba: false
+    people:
+      parent:
+        age: 30
+        employment_income: 50_000
+      child:
+        age: 5
+    tax_units:
+      tax_unit:
+        members: [parent, child]
+        tax_unit_childcare_expenses: 1_000
+        premium_tax_credit: 0
+    households:
+      household:
+        members: [parent, child]
+        state_code: KY
+  output:
+    cdcc: 350
+    # 20% of the $200 pre-OBBBA credit.
+    ky_cdcc_potential: 40
+
+# Before 2026 the Act does not change section 21, so the lever has no effect.
+- name: 2025 single parent under a reform that sets Kentucky's Code to include the Act
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    gov.states.ky.tax.income.irc_conformity.obbba: true
+    people:
+      parent:
+        age: 30
+        employment_income: 50_000
+      child:
+        age: 5
+    tax_units:
+      tax_unit:
+        members: [parent, child]
+        tax_unit_childcare_expenses: 1_000
+        premium_tax_credit: 0
+    households:
+      household:
+        members: [parent, child]
+        state_code: KY
+  output:
+    cdcc: 200
+    ky_cdcc_potential: 40
Original file line number	Diff line number	Diff line change
		@@ -0,0 +1 @@
		Kentucky's household and dependent care service credit uses the federal credit as amended by the One Big Beautiful Bill Act from 2026, when 2026 Ky. Acts ch. 161 moved Kentucky's Internal Revenue Code reference date to December 31, 2025. A new parameter records Kentucky's conformity to the Act, and the pre-OBBBA federal credit variables now equal the live credit in years the Act does not change section 21.