Apply the 2026 section 68 reduction in Maryland, Maine and New Mexico itemized deductions

changelog.d/section-68-2026-md-me-nm.fixed.md

@@ -0,0 +1 @@
+Apply the 2026 federal section 68 itemized deduction reduction in Maryland, Maine and New Mexico itemized deductions.

policyengine_us/tests/policy/baseline/gov/states/md/tax/income/deductions/md_itemized_deductions.yaml

@@ -129,3 +129,91 @@
     # Phase-out reduction: $150,000 * 7.5% = $11,250
     # Final deductions: $38,000 - $11,250 = $26,750
     md_itemized_deductions: 26_750
+
+- name: Maryland applies the 2026 federal section 68 reduction before its own phaseout.
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    state_code: MD
+    filing_status: SINGLE
+    adjusted_gross_income: 1_000_000
+    total_itemized_taxable_income_deductions: 100_000
+    itemized_deductions_less_salt: 100_000
+    itemized_taxable_income_deductions_reduction: 5_405.405405
+    salt_deduction: 0
+    capped_property_taxes: 0
+  output:
+    # Tax-General 10-218(b)(1): federal itemized deductions after section 68.
+    # No income taxes to remove, so the whole reduction stays.
+    # $100,000 - $5,405.41 = $94,594.59.
+    # Maryland phaseout: ($1,000,000 - $200,000) * 7.5% = $60,000.
+    # $94,594.59 - $60,000 = $34,594.59.
+    md_itemized_deductions: 34_594.594595
+
+- name: Maryland restores the income-tax share of the 2026 section 68 reduction.
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    state_code: MD
+    filing_status: SINGLE
+    adjusted_gross_income: 1_000_000
+    total_itemized_taxable_income_deductions: 110_000
+    itemized_deductions_less_salt: 100_000
+    itemized_taxable_income_deductions_reduction: 5_945.945946
+    salt_deduction: 10_000
+    capped_property_taxes: 0
+  output:
+    # Tax-General 10-218(b)(3): the $10,000 of SALT is all income tax.
+    # Pro rata restoration: $5,945.95 * $10,000 / $110,000 = $540.54.
+    # $110,000 - $5,945.95 - $10,000 + $540.54 = $94,594.59.
+    # Less the $60,000 Maryland phaseout = $34,594.59.
+    md_itemized_deductions: 34_594.594595
+
+- name: Maryland deduction is unchanged in 2026 when the section 68 reduction is zero.
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    state_code: MD
+    filing_status: SINGLE
+    adjusted_gross_income: 150_000
+    total_itemized_taxable_income_deductions: 40_000
+    itemized_deductions_less_salt: 30_000
+    itemized_taxable_income_deductions_reduction: 0
+    salt_deduction: 10_000
+    capped_property_taxes: 4_000
+  output:
+    # $30,000 + $4,000 property taxes; AGI is below the $200,000 phaseout.
+    md_itemized_deductions: 34_000
+
+- name: Maryland keeps property taxes but scales them by the 2026 section 68 reduction.
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    state_code: MD
+    filing_status: JOINT
+    adjusted_gross_income: 400_000
+    total_itemized_taxable_income_deductions: 74_000
+    itemized_deductions_less_salt: 34_000
+    itemized_taxable_income_deductions_reduction: 3_700
+    salt_deduction: 40_000
+    capped_property_taxes: 15_000
+  output:
+    # Income-tax component: $74,000 - $34,000 - $15,000 = $25,000.
+    # $74,000 - $3,700 - $25,000 + $3,700 * $25,000 / $74,000 = $46,550.
+    # Equivalently $49,000 * (1 - $3,700 / $74,000) = $46,550.
+    # Phaseout: ($400,000 - $200,000) * 7.5% = $15,000; $46,550 - $15,000.
+    md_itemized_deductions: 31_550
+
+- name: Maryland 2026 deduction is zero when there are no itemized deductions.
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    state_code: MD
+    filing_status: SINGLE
+    adjusted_gross_income: 1_000_000
+    total_itemized_taxable_income_deductions: 0
+    itemized_deductions_less_salt: 0
+    itemized_taxable_income_deductions_reduction: 0
+    capped_property_taxes: 0
+  output:
+    md_itemized_deductions: 0

policyengine_us/tests/policy/baseline/gov/states/me/tax/income/taxable_income/deductions/me_itemized_deductions_pre_phaseout.yaml

@@ -102,3 +102,90 @@
         state_code: ME
   output:
     me_itemized_deductions_pre_phaseout: 36_150 # cap of $31,150 + $5,000 medical expenses
+
+- name: Maine starts with the federally limited itemized deduction in 2026.
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    state_code: ME
+    filing_status: SINGLE
+    adjusted_gross_income: 1_000_000
+    me_agi: 100_000
+    tax_unit_itemizes: true
+    total_itemized_taxable_income_deductions: 20_000
+    itemized_deductions_less_salt: 20_000
+    itemized_taxable_income_deductions_reduction: 1_081.081081
+    salt_deduction: 0
+    medical_expense_deduction: 0
+    real_estate_taxes: 0
+  output:
+    # 36 M.R.S. 5125(1): deductions claimed federally, after section 68.
+    # $20,000 - $20,000 * 2/37 = $18,918.92, below the cap and above the
+    # $15,700 standard deduction; Maine AGI is below the $102,250 phaseout.
+    me_itemized_deductions_pre_phaseout: 18_918.918919
+    me_deductions: 18_918.918919
+
+- name: An additional federal deduction keeps the section 68 reduction in Maine.
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    state_code: ME
+    filing_status: SINGLE
+    adjusted_gross_income: 1_000_000
+    me_agi: 100_000
+    tax_unit_itemizes: true
+    total_itemized_taxable_income_deductions: 30_000
+    itemized_deductions_less_salt: 30_000
+    itemized_taxable_income_deductions_reduction: 1_621.621622
+    salt_deduction: 0
+    medical_expense_deduction: 0
+    real_estate_taxes: 0
+  output:
+    # $30,000 - $30,000 * 2/37 = $28,378.38.
+    me_itemized_deductions_pre_phaseout: 28_378.378378
+    me_deductions: 28_378.378378
+
+- name: Maine scales SALT, property and medical components by the 2026 section 68 ratio.
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    state_code: ME
+    filing_status: SINGLE
+    tax_unit_itemizes: true
+    total_itemized_taxable_income_deductions: 50_000
+    itemized_deductions_less_salt: 40_000
+    itemized_taxable_income_deductions_reduction: 2_702.702703
+    salt_deduction: 10_000
+    state_and_local_sales_or_income_tax: 6_000
+    medical_expense_deduction: 10_000
+    real_estate_taxes: 4_000
+  output:
+    # Deduced proportional allocation: q = $47,297.30 / $50,000 = 35/37.
+    # Non-SALT deductions after section 68: $40,000 * q = $37,837.84.
+    # Less medical $10,000 * q = $9,459.46, giving $28,378.38.
+    # Property taxes: all $4,000 was within the SALT deduction, so the
+    # add-back keeps the section 68 share: $4,000 * q = $3,783.78.
+    # Capped part: $32,162.16 (below the cap); plus medical $9,459.46.
+    me_itemized_deductions_pre_phaseout: 41_621.621622
+
+- name: Maine adds back property taxes the federal SALT cap excluded in full in 2026.
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    state_code: ME
+    filing_status: SINGLE
+    tax_unit_itemizes: true
+    total_itemized_taxable_income_deductions: 27_000
+    itemized_deductions_less_salt: 17_000
+    itemized_taxable_income_deductions_reduction: 1_000
+    salt_deduction: 10_000
+    state_and_local_sales_or_income_tax: 0
+    medical_expense_deduction: 0
+    real_estate_taxes: 12_000
+  output:
+    # q = $26,000 / $27,000. Non-SALT: $17,000 * q = $16,370.37.
+    # Property in the SALT deduction, pro rata: $10,000 * $12,000 / $12,000
+    # = $10,000, kept at $10,000 * q = $9,629.63. The $2,000 the SALT cap
+    # excluded is added back in full under 5125(3)(A-1).
+    # $16,370.37 + $9,629.63 + $2,000 = $28,000, below the cap.
+    me_itemized_deductions_pre_phaseout: 28_000

policyengine_us/tests/policy/baseline/gov/states/nm/tax/income/deductions/nm_itemized_deductions.yaml

@@ -45,3 +45,40 @@
     total_itemized_taxable_income_deductions: 19_500
     nm_itemized_deductions: 19_500
     state_itemized_deductions: 19_500
+
+- name: NM uses deductions after the full 2026 federal section 68 limitation.
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    state_code: NM
+    filing_status: SINGLE
+    adjusted_gross_income: 2_000_000
+    taxable_income_before_itemized_deductions: 2_000_000
+    total_itemized_taxable_income_deductions: 37_000
+    tax_unit_itemizes: true
+    state_and_local_sales_or_income_tax: 0
+    real_estate_taxes: 0
+  output:
+    # NMSA 7-2-2(N)(2): itemized deductions allowed under the IRC.
+    # $37,000 * 2/37 = $2,000 section 68 reduction, leaving $35,000.
+    itemized_taxable_income_deductions_reduction: 2_000
+    itemized_taxable_income_deductions: 35_000
+    nm_itemized_deductions: 35_000
+    nm_salt_add_back: 0
+
+- name: NM keeps the full deduction when the 2026 federal limitation is zero.
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    state_code: NM
+    filing_status: SINGLE
+    adjusted_gross_income: 100_000
+    taxable_income_before_itemized_deductions: 100_000
+    total_itemized_taxable_income_deductions: 37_000
+    tax_unit_itemizes: true
+    state_and_local_sales_or_income_tax: 0
+    real_estate_taxes: 0
+  output:
+    itemized_taxable_income_deductions_reduction: 0
+    nm_itemized_deductions: 37_000
+    nm_salt_add_back: 0

policyengine_us/tests/policy/baseline/gov/states/nm/tax/income/deductions/nm_salt_add_back.yaml

@@ -62,3 +62,24 @@
     state_code: NM
   output:
     nm_salt_add_back: 0
+
+- name: NM SALT addback compares the federally allowed 2026 total with the standard deduction.
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    state_code: NM
+    filing_status: SINGLE
+    tax_unit_itemizes: true
+    adjusted_gross_income: 2_000_000
+    taxable_income_before_itemized_deductions: 2_000_000
+    total_itemized_taxable_income_deductions: 17_000
+    itemized_deductions_less_salt: 7_000
+    state_and_local_sales_or_income_tax: 10_000
+    real_estate_taxes: 0
+    standard_deduction: 16_000
+  output:
+    # Section 68: $17,000 * 2/37 = $918.92; allowed total $16,081.08.
+    # Excess over the standard deduction: $16,081.08 - $16,000 = $81.08.
+    # SALT is all income tax ($10,000), so the addback is the lesser: $81.08.
+    itemized_taxable_income_deductions: 16_081.081081
+    nm_salt_add_back: 81.081081

policyengine_us/tests/test_state_itemized_section_68_2026.py

@@ -0,0 +1,131 @@
+"""Property tests: Maryland, Maine and New Mexico itemized deductions in 2026
+carry the federal section 68 reduction (P.L. 119-21, sec. 70111).
+
+Each state starts from the federal itemized deductions allowed after section
+68. For a pre-reduction federal total T > 0 and reduction 0 <= R <= T, write
+q = (T - R) / T. With every input drawn independently and R > 0, these hold:
+
+1. Maryland (Tax-General 10-218(b)(1), (b)(3)), below its phaseout threshold:
+   md_itemized_deductions = q * (non-SALT deductions + capped property
+   taxes). This equals T - R - I + R * I / T for income taxes
+   I = T - base, the pro rata restoration of 10-218(b)(3).
+2. Maine (36 M.R.S. 5125(1)), with no SALT or medical deduction:
+   me_itemized_deductions_pre_phaseout = min(T - R, cap).
+3. New Mexico (NMSA 7-2-2(N)(2)): nm_itemized_deductions = T - R, and the
+   SALT addback lies between zero and the excess of T - R over the standard
+   deduction.
+
+Each identity fails on main whenever R > 0, so none passes trivially: main
+uses T (or the unreduced base) and ignores R. All households share one
+simulation per example, which keeps the test to a few model builds.
+"""
+
+import numpy as np
+from hypothesis import HealthCheck, given, settings
+from hypothesis import strategies as st
+
+from policyengine_us import Simulation
+
+YEAR = 2026
+TOLERANCE = 0.05
+
+
+def amount(low=0, high=60_000):
+    return st.integers(min_value=low, max_value=high)
+
+
+@st.composite
+def unit(draw):
+    base = draw(amount(1_000))
+    income_tax = draw(amount(0, 30_000))
+    total = base + income_tax
+    # Section 68 reduction: up to 2/37 of the total, drawn positive.
+    reduction = draw(st.integers(min_value=1, max_value=total * 2 // 37 + 1))
+    return dict(
+        base=base,
+        income_tax=income_tax,
+        total=total,
+        reduction=min(reduction, total),
+        standard=draw(amount(5_000, 40_000)),
+    )
+
+
+def build(units):
+    people, tax_units, households = {}, {}, {}
+    for state in ["MD", "ME", "NM"]:
+        for i, u in enumerate(units):
+            key = f"{state}{i}"
+            people[key] = {"age": {YEAR: 40}}
+            common = {
+                "members": [key],
+                "filing_status": {YEAR: "SINGLE"},
+                "tax_unit_itemizes": {YEAR: True},
+                "adjusted_gross_income": {YEAR: 100_000},
+                "itemized_taxable_income_deductions_reduction": {YEAR: u["reduction"]},
+                "medical_expense_deduction": {YEAR: 0},
+            }
+            if state == "MD":
+                common.update(
+                    total_itemized_taxable_income_deductions={YEAR: u["total"]},
+                    itemized_deductions_less_salt={YEAR: u["base"]},
+                    capped_property_taxes={YEAR: 0},
+                    salt_deduction={YEAR: u["income_tax"]},
+                )
+            elif state == "ME":
+                common.update(
+                    total_itemized_taxable_income_deductions={YEAR: u["total"]},
+                    itemized_deductions_less_salt={YEAR: u["total"]},
+                    salt_deduction={YEAR: 0},
+                    me_agi={YEAR: 50_000},
+                )
+            else:
+                common.update(
+                    total_itemized_taxable_income_deductions={YEAR: u["total"]},
+                    itemized_deductions_less_salt={YEAR: u["base"]},
+                    standard_deduction={YEAR: u["standard"]},
+                    state_and_local_sales_or_income_tax={YEAR: u["income_tax"]},
+                )
+            tax_units[f"t{key}"] = common
+            households[f"h{key}"] = {"members": [key], "state_code": {YEAR: state}}
+    return Simulation(
+        situation={
+            "people": people,
+            "tax_units": tax_units,
+            "households": households,
+        }
+    )
+
+
+@settings(
+    max_examples=15,
+    deadline=None,
+    suppress_health_check=[HealthCheck.too_slow],
+)
+@given(st.lists(unit(), min_size=1, max_size=6))
+def test_state_itemized_deductions_carry_section_68(units):
+    n = len(units)
+    sim = build(units)
+    total = np.array([u["total"] for u in units], dtype=float)
+    reduction = np.array([u["reduction"] for u in units], dtype=float)
+    base = np.array([u["base"] for u in units], dtype=float)
+    standard = np.array([u["standard"] for u in units], dtype=float)
+    allowed = total - reduction
+    q = allowed / total
+
+    md = sim.calculate("md_itemized_deductions", YEAR)[:n]
+    me = sim.calculate("me_itemized_deductions_pre_phaseout", YEAR)[n : 2 * n]
+    nm = sim.calculate("nm_itemized_deductions", YEAR)[2 * n :]
+    nm_add_back = sim.calculate("nm_salt_add_back", YEAR)[2 * n :]
+    me_cap = sim.tax_benefit_system.parameters(
+        YEAR
+    ).gov.states.me.tax.income.deductions.itemized.cap
+
+    # 1. Maryland: base scaled by q, the pro rata income-tax restoration.
+    np.testing.assert_allclose(md, base * q, atol=TOLERANCE)
+    assert np.all(md < base)
+    # 2. Maine: the federally allowed total, capped.
+    np.testing.assert_allclose(me, np.minimum(allowed, me_cap), atol=TOLERANCE)
+    # 3. New Mexico: the allowed total, and an addback within its bounds.
+    np.testing.assert_allclose(nm, allowed, atol=TOLERANCE)
+    assert np.all(nm_add_back >= -TOLERANCE)
+    assert np.all(nm_add_back <= np.maximum(allowed - standard, 0) + TOLERANCE)