Count dependents' medical bills in Montana's separate-filing medical deduction

changelog.d/fix-mt-separate-medical-dependents.fixed.md

@@ -0,0 +1 @@
+Count dependents' other medical expenses in Montana's 2021-2023 separate-filing medical deduction, allocating them between spouses filing separately on the same form to minimize the couple's tax; an unmarried filer's column holds all of them. The separate path now chooses between itemizing and the standard deduction by the couple's tax rather than by summed deductions.

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

@@ -1,13 +1,30 @@
-description: Share of tax unit itemized deductions allocated to each spouse when married filing separately on the same form. This is not a policy parameter but a mathematical representation of "divided equally".
+description: Montana itemized deductions paid jointly are split by this share between the spouses' columns when married couples file separately on the same form; this is a modeling convention, not a rate in law.
 values:
-  # 0.5 means each spouse gets 50% of joint deductions
+  # A modeling convention, not a rate in the law. On the same form (status
+  # 2a), ARM 42.15.524(3)(b) defers to the form, which lets the couple
+  # allocate payments from accounts both spouses own "in any proportional
+  # amount"; an equal division is required only on separate forms, absent a
+  # written agreement (ARM 42.15.524(3)(c)). Readers:
+  # - mt_non_medical_itemized_deductions_indiv and
+  #   mt_itemized_deductions_for_federal_itemization_indiv split the
+  #   charitable deduction equally by this rate;
+  # - mt_dependent_medical_expense_head_share uses it as the tie-break and
+  #   starting candidate for the tax-minimizing split of dependents' medical
+  #   bills;
+  # - mt_child_dependent_care_expense_deduction gives each spouse this share
+  #   of the deduction. There the equal split is the law's rule, not a
+  #   convention: each spouse enters one-half of Form 2441-M line 7.
+  # The federal rule for separate returns also treats payments from a joint
+  # account as paid equally.
   2021-01-01: 0.5
 metadata:
   label: Montana itemized deductions spouse allocation rate
   period: year
   unit: /1
   reference:
-    - title: Montana Administrative Rule 42.15.524 - Itemized Deductions of Married Taxpayers
-      href: https://rules.mt.gov/gateway/ruleno.asp?RN=42.15.524
-    - title: Montana Form 2 Instructions
-      href: https://revenue.mt.gov/publications/montana-form-2-individual-income-tax-return-forms-and-instructions-includes-form-2ec
+    - title: Montana Administrative Rule 42.15.524 - Itemized Deductions of Married Taxpayers (archived text, in effect until its repeal effective Jan. 25, 2025)
+      href: https://web.archive.org/web/20201030190413/http://www.mtrules.org/gateway/ruleno.asp?RN=42.15.524
+    - title: 2022 Montana Form 2 Instructions, Allocation of deductions
+      href: https://revenuefiles.mt.gov/files/Forms/Montana-Individual-Income-Tax-Return-Form-2-Instructions/2022_Montana_Individual_Income_Tax_Return_Form_2_Instructions.pdf#page=11
+    - title: IRS Publication 502, Separate returns
+      href: https://www.irs.gov/publications/p502

policyengine_us/tests/policy/baseline/gov/states/mt/tax/income/deductions/cdcc/mt_childcare_itemization_boundary.yaml

@@ -4,10 +4,11 @@
 # Worksheet lines 1-6 (PDF p. 7):
 # https://revenue.mt.gov/files/Forms/Montana-Individual-Income-Tax-Return-Form-2/2022_Montana_Individual_Income_Tax_Return_Form_2.pdf#page=7
 # Instructions for Form 2 line 15 require both spouses to use the same method
-# (PDF p. 16); the model retains the standard deduction when totals tie:
+# (PDF p. 16). The couple takes the method with the lower combined tax; the
+# summed deductions decide only when the taxes tie:
 # https://revenue.mt.gov/files/forms/Montana-Individual-Income-Tax-Return-Form-2-Instructions/2022_Montana_Individual_Income_Tax_Return_Form_2_Instructions.pdf#page=16
 
-- name: Combined-AGI care deduction leaves standard deductions at the itemization boundary
+- name: Combined-AGI care deduction at the summed-deduction boundary; itemizing lowers the tax
   period: 2022
   absolute_error_margin: 0.01
   input:
@@ -40,14 +41,19 @@
     # Care = min(3_000, 2_400) - 0.5 * (20_000 + 0 - 18_000)
     # = 1_400; each spouse gets 700. Itemized total = 4_860 + 700 + 700
     # = 6_260. Standard = max(20% * 20_000, 2_260) + 2_260 = 6_260.
-    # The unchanged tie rule selects standard deductions. Phasing out on
-    # each spouse's own AGI would incorrectly give 700 + 1_200 care and
-    # itemized total 6_760, crossing the choice boundary.
+    # Phasing out on each spouse's own AGI would incorrectly give 700 +
+    # 1_200 care and itemized total 6_760.
     mt_child_dependent_care_expense_deduction: [700, 700, 0]
     mt_itemized_deductions_indiv: [5_560, 700, 0]
     mt_standard_deduction_indiv: [4_000, 2_260, 0]
-    mt_tax_unit_itemizes: false
-    mt_deductions_indiv: [4_000, 2_260, 0]
+    # The totals tie, but the election goes by tax. The spouse's column has
+    # no income, so only the head's deduction matters (2,710 exemption, and
+    # the child's 2,710 in the head's column): itemizing, 20_000 - 2_710 -
+    # 5_560 - 2_710 = 9_020 gives 176 + 120 x 4% = 180.80; standard,
+    # 20_000 - 2_710 - 4_000 - 2_710 = 10_580 gives 176 + 1_680 x 4% =
+    # 243.20. So the couple itemizes.
+    mt_tax_unit_itemizes: true
+    mt_deductions_indiv: [5_560, 700, 0]
 
 - name: One more dollar of mortgage interest crosses the derived childcare itemization boundary
   period: 2022

policyengine_us/tests/policy/baseline/gov/states/mt/tax/income/deductions/itemized/mt_medical_and_dental_expenses_indiv.yaml

@@ -0,0 +1,127 @@
+- name: With no income, every split gives the same tax, so the tie goes to the equal split
+  # Two tax units with the same people label the first adult head and then
+  # spouse; the columns do not depend on the label. The couple has no income,
+  # so the combined tax is zero at every candidate share and the tie goes to
+  # the share closest to the equal split.
+  period: 2021
+  absolute_error_margin: 0.01
+  input:
+    people:
+      a_first:
+        age: 50
+        is_tax_unit_head: true
+      a_second:
+        age: 48
+        is_tax_unit_spouse: true
+        other_medical_expenses: 700
+      a_child1:
+        age: 17
+        is_tax_unit_dependent: true
+        other_medical_expenses: 3_000
+      a_child2:
+        age: 12
+        is_tax_unit_dependent: true
+        other_medical_expenses: 1_000
+      b_first:
+        age: 50
+        is_tax_unit_spouse: true
+      b_second:
+        age: 48
+        is_tax_unit_head: true
+        other_medical_expenses: 700
+      b_child1:
+        age: 17
+        is_tax_unit_dependent: true
+        other_medical_expenses: 3_000
+      b_child2:
+        age: 12
+        is_tax_unit_dependent: true
+        other_medical_expenses: 1_000
+    tax_units:
+      a:
+        members: [a_first, a_second, a_child1, a_child2]
+      b:
+        members: [b_second, b_first, b_child1, b_child2]
+    households:
+      a:
+        members: [a_first, a_second, a_child1, a_child2]
+        state_code: MT
+      b:
+        members: [b_second, b_first, b_child1, b_child2]
+        state_code: MT
+  output:
+    mt_dependent_medical_expense_head_share: [0.5, 0.5]
+    # The dependents' 4,000 is divided equally: 2,000 to each column. The
+    # columns hold 2,000 + 2,700 = 4,700, every member's expenses.
+    mt_medical_and_dental_expenses_indiv: [2_000, 2_700, 0, 0, 2_000, 2_700, 0, 0]
+
+- name: An unmarried filer's column holds the dependent's expenses
+  period: 2022
+  absolute_error_margin: 0.01
+  input:
+    people:
+      parent:
+        age: 35
+        other_medical_expenses: 100
+      child:
+        age: 6
+        is_tax_unit_dependent: true
+        other_medical_expenses: 900
+    tax_units:
+      tax_unit:
+        members: [parent, child]
+    households:
+      household:
+        members: [parent, child]
+        state_code: MT
+  output:
+    mt_medical_and_dental_expenses_indiv: [1_000, 0]
+
+- name: No column amount once Montana ends separate filing on the same form
+  period: 2024
+  input:
+    people:
+      parent:
+        age: 35
+        other_medical_expenses: 100
+      child:
+        age: 6
+        is_tax_unit_dependent: true
+        other_medical_expenses: 900
+    tax_units:
+      tax_unit:
+        members: [parent, child]
+    households:
+      household:
+        members: [parent, child]
+        state_code: MT
+  output:
+    mt_married_filing_separately_on_same_return_eligible: [false, false]
+    mt_medical_and_dental_expenses_indiv: [0, 0]
+
+- name: A member who is neither spouse nor a tax unit dependent is divided too
+  # The joint return's line 1 counts every member's other medical expenses,
+  # so the columns divide every member other than the head and spouse.
+  period: 2023
+  absolute_error_margin: 0.01
+  input:
+    people:
+      head:
+        age: 40
+        is_tax_unit_head: true
+      spouse:
+        age: 40
+        is_tax_unit_spouse: true
+      relative:
+        age: 70
+        is_tax_unit_dependent: false
+        other_medical_expenses: 1_000
+    tax_units:
+      tax_unit:
+        members: [head, spouse, relative]
+    households:
+      household:
+        members: [head, spouse, relative]
+        state_code: MT
+  output:
+    mt_medical_and_dental_expenses_indiv: [500, 500, 0]

policyengine_us/tests/policy/baseline/gov/states/mt/tax/income/deductions/itemized/mt_medical_expense_deduction_indiv.yaml

@@ -170,3 +170,153 @@
      # give 0 + 4,000 + 1,000 = 5,000.
      mt_married_filing_separately_on_same_return_eligible: true
      mt_medical_expense_deduction_indiv: 1_500
+
+- name: A dependent's medical expenses go to the column where they lower the couple's tax most
+  # Other medical expenses sit on the person cared for, so the child's 6,000
+  # is in neither spouse's own input. Two tax units with the same people label
+  # the earner head and then spouse; each column's amount does not depend on
+  # the label. The couple may divide the child's bills in any proportion, and
+  # the model takes the candidate share with the lowest combined tax.
+  period: 2022
+  absolute_error_margin: 0.01
+  input:
+    people:
+      a_earner:
+        age: 45
+        is_tax_unit_head: true
+        other_medical_expenses: 1_000
+        mt_agi_indiv: 60_000
+      a_partner:
+        age: 45
+        is_tax_unit_spouse: true
+        other_medical_expenses: 500
+        mt_agi_indiv: 20_000
+      a_child:
+        age: 10
+        is_tax_unit_dependent: true
+        other_medical_expenses: 6_000
+      b_earner:
+        age: 45
+        is_tax_unit_spouse: true
+        other_medical_expenses: 1_000
+        mt_agi_indiv: 60_000
+      b_partner:
+        age: 45
+        is_tax_unit_head: true
+        other_medical_expenses: 500
+        mt_agi_indiv: 20_000
+      b_child:
+        age: 10
+        is_tax_unit_dependent: true
+        other_medical_expenses: 6_000
+    tax_units:
+      a:
+        members: [a_earner, a_partner, a_child]
+      b:
+        members: [b_partner, b_earner, b_child]
+    households:
+      a:
+        members: [a_earner, a_partner, a_child]
+        state_code: MT
+      b:
+        members: [b_partner, b_earner, b_child]
+        state_code: MT
+  output:
+    # Floors: earner 7.5% x 60,000 = 4,500; partner 7.5% x 20,000 = 1,500.
+    # Taxable income before the medical deduction (2022 exemptions of 2,710
+    # each; the child's goes to the earner, the larger income): earner
+    # 60,000 - 5,420 = 54,580, at the 6.75% rate; partner 20,000 - 2,710 =
+    # 17,290, in the 6% bracket from 15,400 and 5% from 12,000.
+    # Tax saved by the medical deduction at each share to the earner:
+    #   all to the partner: partner 500 + 6,000 - 1,500 = 5,000, taking
+    #     17,290 to 12,290: 1,890 x 6% + 3,110 x 5% = 268.90;
+    #   all to the earner: earner 1,000 + 6,000 - 4,500 = 2,500 x 6.75% =
+    #     168.75;
+    #   equal split: partner 3,500 - 1,500 = 2,000: 1,890 x 6% + 110 x 5% =
+    #     118.90; earner 4,000 is under the floor;
+    #   the floors' kinks (shares 3,500 / 6,000 and 1 - 1,000 / 6,000): 90.00
+    #     and 101.25.
+    #   The incomes before the medical deduction differ by more than the
+    #   bills, so the balancing share clips to 1 (all to the earner).
+    # So all of the child's bills go to the partner's column.
+    mt_dependent_medical_expense_head_share: [0, 1]
+    mt_medical_and_dental_expenses_indiv: [1_000, 6_500, 0, 1_000, 6_500, 0]
+    # Earner: max(0, 1,000 - 4,500) = 0. Partner: 6,500 - 1,500 = 5,000.
+    # Leaving out the child's expenses would give max(0, 500 - 1,500) = 0.
+    mt_medical_expense_deduction_indiv: [0, 5_000, 0, 0, 5_000, 0]
+
+- name: An unmarried filer's column holds every dependent's medical expenses
+  period: 2023
+  absolute_error_margin: 0.01
+  input:
+    people:
+      parent:
+        age: 40
+        is_tax_unit_head: true
+        other_medical_expenses: 500
+        mt_agi_indiv: 30_000
+      child1:
+        age: 8
+        is_tax_unit_dependent: true
+        other_medical_expenses: 2_000
+      child2:
+        age: 5
+        is_tax_unit_dependent: true
+        other_medical_expenses: 1_500
+    tax_units:
+      tax_unit:
+        members: [parent, child1, child2]
+        mt_agi_joint: 30_000
+    households:
+      household:
+        members: [parent, child1, child2]
+        state_code: MT
+  output:
+    mt_medical_and_dental_expenses_indiv: [4_000, 0, 0]
+    # Line 1: (500 + 2,000 + 1,500) - 7.5% x 30,000 = 4,000 - 2,250 = 1,750,
+    # as on the single-column return. Leaving out the children's expenses
+    # would give max(0, 500 - 2,250) = 0.
+    mt_medical_expense_deduction_indiv: [1_750, 0, 0]
+    mt_medical_expense_deduction_joint: [1_750, 0, 0]
+
+- name: A reform that allows separate filing in 2024 also allocates a dependent's expenses
+  period: 2024
+  reforms: policyengine_us.tests.policy.baseline.gov.states.mt.tax.income.enable_mt_mfss_2024_reform.enable_mt_mfss_2024_reform
+  absolute_error_margin: 0.01
+  input:
+    people:
+      person1:
+        age: 45
+        is_tax_unit_head: true
+        health_insurance_premiums: 2_000
+        mt_agi_indiv: 40_000
+      person2:
+        age: 45
+        is_tax_unit_spouse: true
+        mt_agi_indiv: 10_000
+      person3:
+        age: 10
+        is_tax_unit_dependent: true
+        other_medical_expenses: 4_000
+    tax_units:
+      tax_unit:
+        members: [person1, person2, person3]
+    households:
+      household:
+        members: [person1, person2, person3]
+        state_code: MT
+  output:
+    # Premiums stay under the floor with the other expenses from 2024.
+    # Floors: head 7.5% x 40,000 = 3,000; spouse 7.5% x 10,000 = 750. 2024
+    # separate rates: 4.7% to 20,500 and 5.9% above, so the head's column is
+    # taxed at 5.9% and the spouse's at 4.7%. Tax saved at each share:
+    #   all to the head: (2,000 + 4,000) - 3,000 = 3,000 x 5.9% = 177.00;
+    #   all to the spouse: 4,000 - 750 = 3,250 x 4.7% = 152.75;
+    #   equal split: 1,000 x 5.9% + 1,250 x 4.7% = 117.75;
+    #   the floors' kinks (shares 1,000 / 4,000 and 1 - 750 / 4,000):
+    #   2,250 x 4.7% = 105.75 and 2,250 x 5.9% = 132.75.
+    #   The balancing share clips to 1: the incomes differ by more than the
+    #   bills.
+    mt_dependent_medical_expense_head_share: 1
+    mt_medical_and_dental_expenses_indiv: [4_000, 0, 0]
+    mt_medical_expense_deduction_indiv: [3_000, 0, 0]