Follow the statute where IRS forms differ: refundable CTC housing deduction, joint filing test, EITC trust royalties, former 32(c)(1)(F)

changelog.d/statute-first-federal-income-tax.fixed.md

@@ -0,0 +1 @@
+Follow the statute where IRS forms differ: the refundable child tax credit bar applies only to a section 911 exclusion, not the housing deduction alone (with Form 2555 leaf inputs; a positive legacy aggregate still counts as an exclusion); a claimable spouse aged 65 or blind on a 2018-2025 joint return must file with income other than earned income over the section 63(c)(5)(A) amount; estate and trust royalties count as EITC investment income; and through 2020 former section 32(c)(1)(F) denies the EITC to a filer whose qualifying children all lack identification.

policyengine_us/parameters/gov/irs/credits/eitc/eligibility/qualifying_child_without_identification_bar.yaml

@@ -0,0 +1,17 @@
+description: The Internal Revenue Service denies the earned income tax credit to a filer who has qualifying children none of whom meets the identification requirement, when this is true.
+values:
+  # Former 26 U.S.C. 32(c)(1)(F), in the 2015 Code edition; earlier years
+  # are not separately verified.
+  0000-01-01: true
+  # American Rescue Plan Act section 9622 struck subparagraph (F) for
+  # taxable years beginning after December 31, 2020.
+  2021-01-01: false
+metadata:
+  unit: bool
+  period: year
+  label: EITC bar on filers whose qualifying children all lack identification
+  reference:
+    - title: 26 U.S.C. 32(c)(1)(F) (2015 edition)
+      href: https://www.govinfo.gov/content/pkg/USCODE-2015-title26/html/USCODE-2015-title26-subtitleA-chap1-subchapA-partIV-subpartC-sec32.htm
+    - title: Public Law 117-2, section 9622
+      href: https://www.congress.gov/117/plaws/publ2/PLAW-117publ2.pdf#page=151

policyengine_us/tests/core/test_dependent_eitc_investment_income_invariants.py

@@ -13,7 +13,11 @@
 Worksheet 1 lines 11 and 12 name (Schedule E lines 40, 34a column (d) and 34b
 column (c)). `passive_estate_income`, the passive subset of `estate_income`,
 defaults to zero; the draws leave it unset, or set it to all, half or none of
-`estate_income`, or to an unrelated signed amount.
+`estate_income`, or to an unrelated signed amount. Royalties received through
+an estate or trust and not derived in a trade or business
+(`estate_royalty_income`, Schedule K-1 (Form 1041) box 5) are their own
+basket under 32(i)(2)(C), floored at zero, which Worksheet 1 line 8 leaves out
+and the model counts under the statute.
 
 Hypothesis draws batches of tax units (single, head of household with
 dependents, joint with and without dependents), and a seeded population of 200
@@ -32,7 +36,8 @@
    interest and dividends, plus their Schedule D gain with capital gain
    distributions floored at zero (line 7), plus their net rental, farm rental,
    passive partnership and passive estate and trust income less the signed part
-   also in earned income, floored at zero (line 13).
+   also in earned income, floored at zero (line 13), plus the estate and trust
+   royalty basket floored at zero (section 32(i)(2)(C)).
 3. Bounds: it is at least the filers' interest and dividends (drawn
    nonnegative), so never negative, and at least that plus their capital gains
    floored at zero, so no passive loss (an estate or trust loss included)
@@ -81,6 +86,9 @@
 ESTATE = "estate_income"
 PASSIVE_ESTATE = "passive_estate_income"
 OVERLAP = "eitc_passive_income_also_in_earned_income"
+# Section 32(i)(2)(C) royalties received through an estate or trust: a basket
+# of their own, floored at zero.
+ROYALTY = "estate_royalty_income"
 SE_EARNINGS = "partnership_self_employment_net_earnings"
 # The filer's amounts, which a dependent's income must not change.
 FILER_OUTPUTS = [
@@ -129,6 +137,7 @@ def investment_amounts(draw, dependent=False):
             )
         ),
         SE_EARNINGS: draw(signed),
+        ROYALTY: draw(signed),
         **draw(estate_amounts()),
     }
 
@@ -240,6 +249,19 @@ def _seeded_units(n=200):
                 ],
             }
         )
+    # Royalties come from their own stream, so the draws above stay as they
+    # were before the royalty basket existed. The stream and the 30% rate
+    # leave every basket deciding eligibility for some units (the coverage
+    # assertions in test_seeded_population).
+    royalty_rng = np.random.default_rng(SEED + 5)
+    for unit in units:
+        for amounts in [unit["head"], unit["spouse"], *unit["dependents"]]:
+            if amounts is not None:
+                amounts[ROYALTY] = (
+                    float(round(royalty_rng.uniform(-12_000, 12_000)))
+                    if royalty_rng.random() < 0.3
+                    else 0.0
+                )
     return units
 
 
@@ -355,29 +377,36 @@ def filer_sum(names):
     )
     capital = np.maximum(0, filer_sum(CAPITAL_INPUTS) + distributions)
     passive = np.maximum(0, filer_sum(PASSIVE_INPUTS) - filer_sum([OVERLAP]))
-    expected = portfolio + capital + passive
+    royalties = np.maximum(0, filer_sum([ROYALTY]))
+    expected = portfolio + capital + passive + royalties
     # Units whose eligibility turns on farm rent alone, or on the overlap input
     # alone, so the seeded population shows each term is exercised.
     eligible = expected <= run["limit"]
     without_farm_rent = (
         portfolio
         + capital
+        + royalties
         + np.maximum(
             0,
             filer_sum([n for n in PASSIVE_INPUTS if n != "farm_rent_income"])
             - filer_sum([OVERLAP]),
         )
     )
-    without_overlap = portfolio + capital + np.maximum(0, filer_sum(PASSIVE_INPUTS))
+    without_overlap = (
+        portfolio + capital + royalties + np.maximum(0, filer_sum(PASSIVE_INPUTS))
+    )
     without_estate = (
         portfolio
         + capital
+        + royalties
         + np.maximum(
             0,
             filer_sum([n for n in PASSIVE_INPUTS if n != PASSIVE_ESTATE])
             - filer_sum([OVERLAP]),
         )
     )
+    without_royalties = portfolio + capital + passive
+    royalty_decides = eligible != (without_royalties <= run["limit"])
     farm_rent_decides = eligible != (without_farm_rent <= run["limit"])
     overlap_decides = eligible != (without_overlap <= run["limit"])
     estate_decides = eligible != (without_estate <= run["limit"])
@@ -422,11 +451,19 @@ def filer_sum(names):
                 - _by_person(units, OVERLAP),
             ),
         )
+        + np.maximum(0, _unit_sum(run, _by_person(units, ROYALTY)))
     )
     np.testing.assert_allclose(
         investment_income[unchanged], all_member[unchanged], atol=TOLERANCE
     )
-    return has_dependent, unchanged, farm_rent_decides, overlap_decides, estate_decides
+    return (
+        has_dependent,
+        unchanged,
+        farm_rent_decides,
+        overlap_decides,
+        estate_decides,
+        royalty_decides,
+    )
 
 
 # A batch's cost is mostly per-variable overhead, so each example is a large
@@ -453,10 +490,12 @@ def test_seeded_population(year):
         farm_rent_decides,
         overlap_decides,
         estate_decides,
+        royalty_decides,
     ) = _check(_seeded_units(), year)
     # The population exercises both branches of each property.
     assert has_dependent.sum() > 50
     assert unchanged.sum() > 20
     assert farm_rent_decides.sum() > 2
     assert overlap_decides.sum() > 2
     assert estate_decides.sum() > 2
+    assert royalty_decides.sum() > 2

policyengine_us/tests/core/test_filing_requirement_dependent_invariants.py

@@ -9,8 +9,11 @@
 unearned income test. YAML cases pin the published amounts one case at a time;
 these tests check what must hold for every input, which YAML cannot state.
 
-Where the statute and the IRS charts differ (decision d1395: the age and
-blindness addition in the 2018-2025 joint test, a dependent filing
+On a 2018-2025 joint return, section 6012(f)(2)(D) tests a claimable
+spouse's income other than earned income against the section 63(c)(5)(A)
+amount alone, while Table 2 adds the additional standard deduction for age or
+blindness; the model follows the statute, and property 10 states it. Where
+the statute and the IRS charts differ otherwise (a dependent filing
 separately, and in 2026 blindness and the exact dollar), the tests below
 assert nothing that depends on the difference.
 
@@ -29,10 +32,11 @@
 3. For a filer nobody can claim, the result depends on gross income alone: it
    is the same however that income is split between wages and interest.
 4. On a 2025 joint return with no other income, where the spouse who can be
-   claimed is under 65 and not blind, the result is the unearned income test
-   (over $1,350), whatever the other spouse's age and blindness. (For a
-   claimed spouse who is 65 or older or blind, section 6012(f)(2)(D) and
-   Table 2 differ; that is d1395.)
+   claimed has only interest, the result is section 6012(f)(2)(D)'s unearned
+   income test (over $1,350), whatever either spouse's age and blindness.
+   Table 2 would add $1,600 for each of the claimed spouse's age 65 and
+   blindness; the grid's amounts between $1,350 and those sums tell the two
+   apart.
 
 `test_filing_requirement_properties` draws batches of tax units with
 Hypothesis (single, head of household, surviving spouse, separate and joint;
@@ -54,11 +58,11 @@
    income belongs on the dependent's own return.
 9. Table 2 and the Medicaid implementation, as in 1 and 2, on the drawn
    single filers who can be claimed and have no self-employment income.
-10. Lower bound (2025): on a single, separate or joint return, a head or
-    spouse who can be claimed and whose interest and dividends are over
-    Table 2's unearned income amount for them always makes the return
-    required. Table 2's amount is never below the statute's, so this holds
-    under either reading of d1395.
+10. Lower bound (2025): on a single or separate return, a head or spouse
+    who can be claimed and whose interest and dividends are over Table 2's
+    unearned income amount for them always makes the return required. On a
+    joint return the amount is section 6012(f)(2)(D)'s: the section
+    63(c)(5)(A) amount, $1,350, with no addition for age or blindness.
 
 `test_earned_income_sources_are_gross_income_sources`:
 
@@ -215,16 +219,18 @@ def head_medicaid_requirement(simulation, units, year):
 
 
 def unearned_test_met(units):
-    """Whether Table 2's unearned income test is met by a head or spouse who
-    can be claimed, for single, separate and joint returns (2025 amounts)."""
+    """Whether the unearned income test is met by a head or spouse who can be
+    claimed (2025 amounts): Table 2's for single and separate returns, and
+    section 6012(f)(2)(D)'s, with no addition for age or blindness, for joint
+    returns."""
     met = []
     for unit in units:
-        married = unit["filing_status"] in ("SEPARATE", "JOINT")
-        per_condition = (
-            TABLE_2_MARRIED_AGED_OR_BLIND_ADDITION
-            if married
-            else TABLE_2_AGED_OR_BLIND_ADDITION
-        )
+        if unit["filing_status"] == "JOINT":
+            per_condition = 0
+        elif unit["filing_status"] == "SEPARATE":
+            per_condition = TABLE_2_MARRIED_AGED_OR_BLIND_ADDITION
+        else:
+            per_condition = TABLE_2_AGED_OR_BLIND_ADDITION
         met.append(
             unit["filing_status"] in ("SINGLE", "SEPARATE", "JOINT")
             and any(
@@ -292,8 +298,9 @@ def test_table_2_boundary_grid():
         single_filer(age, blind, False, wages, gross - wages)
         for age, blind, gross, wages in splits
     ]
-    # Joint returns whose younger spouse, under 65 and not blind, can be
-    # claimed and has only interest.
+    # Joint returns whose spouse can be claimed and has only interest, with
+    # and without age 65 and blindness: section 6012(f)(2)(D) tests every
+    # such spouse at the section 63(c)(5)(A) amount alone.
     joint = [
         {
             "filing_status": "JOINT",
@@ -305,8 +312,8 @@ def test_table_2_boundary_grid():
                     "taxable_interest_income": 0,
                 },
                 {
-                    "age": 40,
-                    "is_blind": False,
+                    "age": spouse_age,
+                    "is_blind": spouse_blind,
                     "claimed_as_dependent_on_another_return": True,
                     "taxable_interest_income": interest,
                 },
@@ -315,6 +322,8 @@ def test_table_2_boundary_grid():
         }
         for head_age in (45, 70, 80)
         for head_blind in (False, True)
+        for spouse_age in (40, 65)
+        for spouse_blind in (False, True)
         for interest in UNEARNED_GRID
     ]
     units = claimable + unclaimable + joint

policyengine_us/tests/policy/baseline/gov/irs/credits/ctc/refundable/ctc_credit_limit_worksheet_b_applies.yaml

@@ -30,15 +30,21 @@
     foreign_earned_income_exclusion: 0
     ctc_credit_limit_worksheet_b_applies: false
 
-- name: Housing deduction filer cannot use Worksheet B when worksheet deductions offset the stacking amount.
+- name: A filer claiming only the housing deduction is not barred, so Worksheet B applies.
+  # Section 24(d)(3) bars a taxpayer who "elects to exclude any amount from
+  # gross income under section 911"; the section 911(c)(4)(A) housing
+  # deduction is a deduction, not an exclusion. The Schedule 8812
+  # instructions would bar every Form 2555 filer; the model follows the
+  # statute, and Worksheet B reads the statutory bar.
   period: 2025
   input:
     ctc_qualifying_children: 2
     foreign_housing_deduction: 500
     foreign_earned_income_exclusion_disallowed_deductions: 500
   output:
     foreign_earned_income_exclusion: 0
-    ctc_credit_limit_worksheet_b_applies: false
+    refundable_ctc_barred_by_section_911_exclusion: false
+    ctc_credit_limit_worksheet_b_applies: true
 
 - name: Does not apply in 2021, when the CTC was fully refundable.
   period: 2021

policyengine_us/tests/policy/baseline/gov/irs/credits/ctc/refundable/refundable_ctc.yaml

@@ -206,3 +206,20 @@
     section_911_excluded_income: 0
     # Without the section 911 bar, the same phase-in gives a $3,400 refund.
     refundable_ctc: 0
+
+- name: A filer claiming only the foreign housing deduction gets the refundable credit
+  # Section 24(d)(3) bars only an election to exclude an amount under section
+  # 911; the section 911(c)(4)(A) housing deduction is not an exclusion.
+  # Phase-in: 15% x ($12,500 - $2,500) = $1,500, below the $1,700 refundable
+  # maximum and the $2,200 credit, with no tax to absorb the credit.
+  period: 2025
+  input:
+    foreign_earned_income_exclusion_amount: 0
+    foreign_housing_exclusion: 0
+    foreign_housing_deduction: 1_000
+    ctc: 2_200
+    ctc_refundable_maximum: 1_700
+    ctc_phase_in: 1_500
+    ctc_limiting_tax_liability: 0
+  output:
+    refundable_ctc: 1_500

policyengine_us/tests/policy/baseline/gov/irs/credits/ctc/refundable/refundable_ctc_barred_by_section_911_exclusion.yaml

@@ -92,3 +92,45 @@
   output:
     foreign_earned_income_exclusion: 0
     refundable_ctc_barred_by_section_911_exclusion: true
+
+# Section 911(c)(4)(A) treats the housing amount of a filer without
+# employer-provided housing as "a deduction allowable in computing adjusted
+# gross income". A filer who claims only that deduction (Form 2555 line 50)
+# excludes nothing, so section 24(d)(3) does not bar the refundable credit,
+# although the Schedule 8812 instructions bar every Form 2555 filer. The model
+# follows the statute.
+- name: A housing deduction alone does not bar the refundable credit
+  period: 2025
+  input:
+    foreign_earned_income_exclusion_amount: 0
+    foreign_housing_exclusion: 0
+    foreign_housing_deduction: 1_000
+  output:
+    refundable_ctc_barred_by_section_911_exclusion: false
+
+- name: A housing deduction alone did not bar the credit in 2015 either
+  period: 2015
+  input:
+    foreign_earned_income_exclusion_amount: 0
+    foreign_housing_exclusion: 0
+    foreign_housing_deduction: 1_000
+  output:
+    refundable_ctc_barred_by_section_911_exclusion: false
+
+- name: A housing exclusion with a housing deduction is still barred
+  period: 2025
+  input:
+    foreign_earned_income_exclusion_amount: 0
+    foreign_housing_exclusion: 2_000
+    foreign_housing_deduction: 1_000
+  output:
+    refundable_ctc_barred_by_section_911_exclusion: true
+
+# The legacy aggregates include the housing deduction, so without Form 2555
+# leaves a positive aggregate is treated as an exclusion.
+- name: A positive legacy aggregate is still treated as an exclusion
+  period: 2025
+  input:
+    foreign_earned_income_exclusion: 1_000
+  output:
+    refundable_ctc_barred_by_section_911_exclusion: true