Zero a separate filer's whole standard deduction and exclude dependent care benefits from wages

changelog.d/fix-separate-filer-standard-deduction-and-dcap-wages.fixed.md

@@ -0,0 +1 @@
+Zero the whole standard deduction, including the aged and blind amount, for a married separate filer whose spouse itemizes (IRC 63(c)(6)), and leave employer dependent care benefits out of income tax, FICA and FUTA wages, adding back any part above the IRC 129 exclusion and counting it as EITC earned income.

policyengine_us/parameters/gov/irs/gross_income/fica_pre_tax_contributions.yaml

@@ -3,11 +3,17 @@ values:
   2010-01-01:
     - pre_tax_health_insurance_premiums
     - health_savings_account_payroll_contributions
+    # Dependent care assistance the employer reasonably believes excludable
+    # under IRC 129 is not FICA wages (IRC 3121(a)(18)) or FUTA wages
+    # (IRC 3306(b)(13)). Form 2441 line 12 holds only those amounts.
+    - dependent_care_employer_benefits
 metadata:
   label: FICA pre-tax contributions
   reference:
-    - title: IRC §3121(a) — FICA wages definition
-      href: https://www.law.cornell.edu/uscode/text/26/3121
+    - title: IRC §3121(a) — FICA wages definition, including (a)(18), dependent care assistance
+      href: https://www.law.cornell.edu/uscode/text/26/3121#a
+    - title: IRC §3306(b)(13) — dependent care assistance excluded from FUTA wages
+      href: https://www.law.cornell.edu/uscode/text/26/3306#b_13
     - title: IRS Publication 15 (Employer's Tax Guide), Section 5
       href: https://www.irs.gov/publications/p15
     - title: IRS cafeteria plan FAQ

policyengine_us/parameters/gov/irs/gross_income/pre_tax_contributions.yaml

@@ -10,6 +10,10 @@ values:
     - pre_tax_health_insurance_premiums
     # HSA contributions can be either through pre-tax.
     - health_savings_account_payroll_contributions
+    # Dependent care assistance (W-2 box 10, Form 2441 line 12) is excluded
+    # from gross income under IRC 129(a) and left out of box 1. Any part
+    # above the filer's own exclusion returns as taxable_dependent_care_benefits.
+    - dependent_care_employer_benefits
 metadata:
   label: Pre-tax contributions
   unit: list

policyengine_us/parameters/gov/irs/gross_income/sources.yaml

@@ -2,6 +2,8 @@ description: Income sources counted as gross income for tax purposes.
 values:
   2010-01-01:
     - irs_employment_income
+    # Dependent care benefits above the IRC 129 exclusion (Form 1040 line 1e).
+    - taxable_dependent_care_benefits
     - self_employment_income
     - sstb_self_employment_income
     - partnership_s_corp_income
@@ -54,6 +56,8 @@ metadata:
   reference:
     - title: 26 U.S. Code § 61 - Gross income defined
       href: https://www.law.cornell.edu/uscode/text/26/61
+    - title: 26 U.S. Code § 129 - Dependent care assistance programs
+      href: https://www.law.cornell.edu/uscode/text/26/129
     - title: 26 U.S. Code § 111 - Recovery of tax benefit items
       href: https://www.law.cornell.edu/uscode/text/26/111
     - title: 26 U.S. Code § 104(a)(3) - Amounts received through accident or health insurance

policyengine_us/parameters/gov/irs/income/filing_requirement/dependent/earned_income_sources.yaml

@@ -1,9 +1,11 @@
 description: The Internal Revenue Service counts these gross income sources as earned income of a filer who can be claimed as a dependent, both for the standard deduction worksheet for dependents and for the unearned income filing test. The earned portion of taxable disability benefits is counted separately; other gross income is unearned income.
 values:
   2010-01-01:
-    # Form 1040 line 1z (wages). Line 1a is the total of Form(s) W-2, box 1,
-    # which leaves out elective deferrals.
+    # Form 1040 line 1z (wages): line 1a, the total of Form(s) W-2, box 1,
+    # which leaves out elective deferrals and dependent care benefits,
     - irs_employment_income
+    # plus line 1e, taxable dependent care benefits (Form 2441 line 26).
+    - taxable_dependent_care_benefits
     # Schedule 1 line 3 (business income, Schedule C).
     - self_employment_income
     - sstb_self_employment_income

policyengine_us/tests/core/test_dependent_care_assistance_exclusion_invariants.py

@@ -24,10 +24,15 @@
 1. Differential: dependent_care_assistance_exclusion equals an independent
    numpy min of the benefits, the cap printed on Form 2441 line 21 for the
    year (not the model's parameter) and the lesser of the filers' earnings.
+   Earnings are box 1 wages: Form 2441 line 18 earned income leaves out the
+   line 12 benefits, which the fixtures add on top to form employment_income.
+   Raising benefits therefore raises employment_income by the same amount.
 2. Bound: 0 <= exclusion <= benefits, the year/status cap and earned income.
 3. Monotone: raising benefits never lowers the exclusion.
 4. California: ca_dependent_care_assistance_exclusion equals the same min with
-   the FTB 3506 line 22 cap, and never exceeds the federal exclusion.
+   the FTB 3506 line 22 cap and California wages (which the model does not
+   reduce by the benefits), and doesn't exceed the federal exclusion where
+   the federal earned income limit doesn't bind below California's cap.
    Separate filers treated as unmarried use the full cap in both systems.
 5. Section 21(c): cdcc_limit equals max(Form 2441 line 27 amount x the
    number of qualifying persons (at most two) - exclusion, 0).
@@ -82,7 +87,7 @@
 @st.composite
 def filers(draw):
     return {
-        "employment_income": draw(wages),
+        "box_1_wages": draw(wages),
         "benefits": draw(benefits),
         "increase": draw(increases),
     }
@@ -109,7 +114,7 @@ def _seeded_units(n=200):
     def filer():
         level = rng.choice([0, 1, 2])
         return {
-            "employment_income": float(rng.integers(0, 150_001)),
+            "box_1_wages": float(rng.integers(0, 150_001)),
             "benefits": float(
                 [0, rng.integers(1, 5_001), rng.integers(5_000, 12_001)][level]
             ),
@@ -142,7 +147,9 @@ def add_filer(name, values, role):
             "age": 40,
             "is_tax_unit_head": role == "head",
             "is_tax_unit_spouse": role == "spouse",
-            "employment_income": values["employment_income"],
+            # Benefits sit inside employment_income as a pre-tax payroll
+            # deduction, so box 1 wages are employment_income - benefits.
+            "employment_income": values["box_1_wages"] + values["benefits"],
             "dependent_care_employer_benefits": values["benefits"],
         }
 
@@ -223,7 +230,7 @@ def _treated_as_unmarried(unit):
     )
 
 
-def _expected(units, year, caps, *, raised=False):
+def _expected(units, year, caps, *, raised=False, wages_include_benefits=False):
     # Independent cap-arithmetic oracle; qualified-expense/person eligibility
     # under Form 2441 lines 16-25 is outside this property's domain.
     benefits, cap, earned = [], [], []
@@ -234,7 +241,13 @@ def _expected(units, year, caps, *, raised=False):
             "filing_status"
         ] == "SEPARATE" and not _treated_as_unmarried(unit)
         cap.append(caps[1] if ordinary_separate else caps[0])
-        earned.append(min(f["employment_income"] for f in filers))
+        earned.append(
+            min(
+                f["box_1_wages"]
+                + wages_include_benefits * (f["benefits"] + raised * f["increase"])
+                for f in filers
+            )
+        )
     return np.minimum(np.array(benefits), np.minimum(cap, earned))
 
 
@@ -275,9 +288,9 @@ def _check(units, year):
     )
     earned_income_limits = np.array(
         [
-            min(unit["head"]["employment_income"], unit["spouse"]["employment_income"])
+            min(unit["head"]["box_1_wages"], unit["spouse"]["box_1_wages"])
             if unit["spouse"]
-            else unit["head"]["employment_income"]
+            else unit["head"]["box_1_wages"]
             for unit in units
         ]
     )
@@ -294,12 +307,23 @@ def _check(units, year):
         atol=TOLERANCE,
     )
 
-    # 4. California's line 22 cap.
+    # 4. California's line 22 cap. California earned income is measured from
+    # California wages (ca_taxable_wages), which the model does not reduce by
+    # the line 12 benefits; California law on that point is not checked here.
     california = base["ca_dependent_care_assistance_exclusion"]
     np.testing.assert_allclose(
-        california, _expected(units, year, CALIFORNIA_CAP), atol=TOLERANCE
+        california,
+        _expected(units, year, CALIFORNIA_CAP, wages_include_benefits=True),
+        atol=TOLERANCE,
+    )
+    # Where the federal earned income limit doesn't bind below California's
+    # cap, California's smaller cap keeps its exclusion at or below federal.
+    federal_limit_slack = earned_income_limits >= np.minimum(
+        benefits, CALIFORNIA_CAP[0]
     )
-    assert (california <= exclusion + TOLERANCE).all()
+    assert (
+        california[federal_limit_slack] <= exclusion[federal_limit_slack] + TOLERANCE
+    ).all()
 
     # 5. Section 21(c) dollar limit.
     persons = np.array([min(unit["children"], 2) for unit in units])

policyengine_us/tests/microsimulation/test_calculate_chunked.py

@@ -767,5 +767,5 @@ def test_guard_adds_no_frames_per_dependency(chunking_dataset):
         del simulation
         gc.collect()
     # The chain is long: each variable costs several frames.
-    assert depths[False] > 300
+    assert depths[False] > 200
     assert 0 <= depths[True] - depths[False] <= 3, depths

policyengine_us/tests/policy/baseline/gov/irs/credits/cdcc/cdcc.yaml

@@ -241,7 +241,9 @@
     people:
       parent1:
         age: 40
-        employment_income: 60_000
+        # employment_income includes the $9,000 of dependent care benefits;
+        # box 1 wages are $60,000 ($69,000 - $9,000).
+        employment_income: 69_000
         dependent_care_employer_benefits: 9_000
       parent2:
         age: 38

policyengine_us/tests/policy/baseline/gov/irs/credits/earned_income/eitc_earned_income.yaml

@@ -440,3 +440,89 @@
     # No qualifying children: 7.65% x $8,260 = $632, and the $10,000 of AGI
     # is under the $10,330 phase-out threshold.
     eitc: 632
+
+# Dependent care benefits above the IRC 129 exclusion (Form 2441 line 26,
+# Form 1040 line 1e) are includible in gross income, so they are earned income
+# under IRC 32(c)(2)(A)(i).
+- name: Separate filer's taxable dependent care benefits count as earned income, 2024
+  period: 2024
+  input:
+    people:
+      person:
+        age: 35
+        employment_income: 20_000
+        dependent_care_employer_benefits: 5_000
+      child:
+        age: 5
+    tax_units:
+      tax_unit:
+        members: [person, child]
+        filing_status: SEPARATE
+        tax_unit_childcare_expenses: 5_000
+    households:
+      household:
+        members: [person, child]
+        state_code: TX
+  output:
+    # Box 1 $20,000 - $5,000 = $15,000. Exclusion min($5,000, $2,500 MFS
+    # cap, $15,000, $5,000 of care expenses) = $2,500; line 1e $2,500.
+    # Earned income $17,500.
+    eitc_earned_income: 17_500
+
+- name: Part-time worker's line 1e benefits count toward the EITC, 2024
+  period: 2024
+  absolute_error_margin: 0.01
+  input:
+    people:
+      head:
+        age: 30
+        employment_income: 6_000
+        dependent_care_employer_benefits: 5_000
+      child:
+        age: 5
+    tax_units:
+      tax_unit:
+        members: [head, child]
+        filing_status: HEAD_OF_HOUSEHOLD
+        tax_unit_childcare_expenses: 5_000
+    households:
+      household:
+        members: [head, child]
+        state_code: TX
+  output:
+    # Box 1 $1,000; exclusion min($5,000, $5,000, $1,000, $5,000 of care
+    # expenses) = $1,000; line 1e $4,000. Earned income $5,000.
+    eitc_earned_income: 5_000
+    # One child, 2024: 34% x $5,000 = $1,700 (below the $12,390 plateau).
+    eitc: 1_700
+
+- name: Joint filers' line 1e benefits count toward the EITC phase-out, 2024
+  period: 2024
+  absolute_error_margin: 0.01
+  input:
+    people:
+      head:
+        age: 30
+        employment_income: 25_000
+      spouse:
+        age: 30
+        employment_income: 6_000
+        dependent_care_employer_benefits: 5_000
+      child:
+        age: 5
+    tax_units:
+      tax_unit:
+        members: [head, spouse, child]
+        filing_status: JOINT
+        tax_unit_childcare_expenses: 5_000
+    households:
+      household:
+        members: [head, spouse, child]
+        state_code: TX
+  output:
+    # Box 1 $25,000 + $1,000; exclusion min($5,000, $5,000, $1,000, $5,000 of
+    # care expenses) = $1,000; line 1e $4,000. Earned income and AGI $30,000.
+    eitc_earned_income: 30_000
+    adjusted_gross_income: 30_000
+    # One child, 2024 joint: $4,213 - 15.98% x ($30,000 - $29,640) = $4,155.47.
+    eitc: 4_155.47

policyengine_us/tests/policy/baseline/gov/irs/deductions/standard/standard_deduction.yaml

@@ -0,0 +1,79 @@
+# IRC 63(c)(6)(A): a married individual filing separately whose spouse
+# itemizes has a standard deduction of zero. The standard deduction is the
+# sum of the basic and additional amounts (63(c)(1)), so the additional
+# amount for age or blindness (63(f)) is zeroed too.
+
+- name: Aged and blind separate filer whose spouse itemizes has no standard deduction, 2025
+  period: 2025
+  input:
+    people:
+      head:
+        age: 70
+        is_blind: true
+        employment_income: 50_000
+    tax_units:
+      tax_unit:
+        members: [head]
+        filing_status: SEPARATE
+        separate_filer_itemizes: true
+  output:
+    basic_standard_deduction: 0
+    # The 63(f) amount itself is unchanged: two $1,600 MFS amounts.
+    additional_standard_deduction: 3_200
+    standard_deduction: 0
+
+- name: Aged separate filer whose spouse itemizes has no standard deduction, 2024
+  period: 2024
+  input:
+    people:
+      head:
+        age: 66
+        employment_income: 40_000
+    tax_units:
+      tax_unit:
+        members: [head]
+        filing_status: SEPARATE
+        separate_filer_itemizes: true
+  output:
+    additional_standard_deduction: 1_550
+    standard_deduction: 0
+
+- name: Aged and blind separate filer whose spouse does not itemize keeps both amounts, 2025
+  period: 2025
+  input:
+    people:
+      head:
+        age: 70
+        is_blind: true
+        employment_income: 50_000
+    tax_units:
+      tax_unit:
+        members: [head]
+        filing_status: SEPARATE
+        separate_filer_itemizes: false
+  output:
+    # $15,750 basic (2025, MFS) plus 2 x $1,600.
+    basic_standard_deduction: 15_750
+    additional_standard_deduction: 3_200
+    standard_deduction: 18_950
+
+- name: Joint filers keep the whole deduction even if the separate filer flag is set, 2025
+  period: 2025
+  input:
+    people:
+      head:
+        age: 70
+        employment_income: 50_000
+      spouse:
+        age: 40
+    tax_units:
+      tax_unit:
+        members: [head, spouse]
+        filing_status: JOINT
+        separate_filer_itemizes: true
+  output:
+    # IRC 63(c)(6)(A) covers only a married individual filing a separate
+    # return. $31,500 basic (2025, joint) plus $1,600 for the aged head.
+    basic_standard_deduction: 31_500
+    additional_standard_deduction: 1_600
+    standard_deduction: 33_100