Fix VT capital gains exclusion for financial instruments

changelog_entry.yaml

@@ -0,0 +1,10 @@
+- bump: patch
+  changes:
+    changed:
+      - title: Fix VT capital gains exclusion for financial instruments
+        description: >
+          Vermont's 40% capital gains exclusion now correctly excludes financial
+          instruments (stocks, bonds) from eligibility. Only the flat $5,000
+          exclusion applies to these gains. Added new input variable
+          long_term_capital_gains_on_assets_eligible_for_vt_exclusion for
+          modeling the 40% exclusion on qualifying assets.

policyengine_us/tests/policy/baseline/gov/states/vt/tax/income/agi/vt_capital_gains_exclusion.yaml

@@ -1,60 +1,86 @@
-- name: VT capital gain exclusion amount unit test 1
+# Vermont capital gains exclusion:
+# - Flat $5,000 exclusion applies to ALL capital gains
+# - 40% exclusion (capped at $350k) ONLY applies to eligible assets
+#   (excludes stocks, bonds, financial instruments, real estate)
+# - Final exclusion cannot exceed 40% of federal taxable income
+
+- name: VT exclusion is zero when not in VT
   period: 2022
   input:
-    state_code: ME # Test state definition other than VT
+    state_code: ME
     adjusted_net_capital_gain: 1_000
     taxable_income: 1_000
-    vt_percentage_capital_gains_exclusion: 1_000
   output:
-    vt_capital_gains_exclusion: 0  
+    vt_capital_gains_exclusion: 0
 
-- name: VT capital gain exclusion amount unit test 2
+- name: VT flat exclusion capped by 40% of taxable income
   period: 2022
   input:
     state_code: VT
     adjusted_net_capital_gain: 6_000
     taxable_income: 1_000
-    vt_percentage_capital_gains_exclusion: 1_000
+    # No eligible gains, so percentage exclusion is 0
   output:
-    vt_capital_gains_exclusion: 400  # # min(5000,1000*0.4) = 400
+    vt_capital_gains_exclusion: 400  # min(5000, 1000*0.4) = 400
 
-- name: VT capital gain exclusion amount unit test 3
+- name: VT flat exclusion of 5k when no percentage exclusion
   period: 2022
   input:
     state_code: VT
     adjusted_net_capital_gain: 6_000
     taxable_income: 12_600
-    vt_percentage_capital_gains_exclusion: 1_000
+    # No eligible gains specified, so only flat exclusion applies
   output:
-    vt_capital_gains_exclusion: 5_000  # min(5000,12600*0.4) = 4000
+    vt_capital_gains_exclusion: 5_000  # flat $5k, under 40% cap
 
-- name: VT capital gain exclusion amount unit test 4
+- name: VT percentage exclusion beats flat when eligible gains are high
   period: 2022
   input:
     state_code: VT
     adjusted_net_capital_gain: 12_600
     taxable_income: 12_700
-    vt_percentage_capital_gains_exclusion: 5_040
+    long_term_capital_gains_on_assets_eligible_for_vt_exclusion: 12_600
   output:
-    vt_capital_gains_exclusion: 5_040 # min(5040,5080) = 5040
+    # Flat: min(12600, 5000) = 5000
+    # Percentage: min(12600 * 0.4, 350000) = 5040
+    # Chosen: max(5000, 5040) = 5040
+    # Cap: 12700 * 0.4 = 5080
+    # Final: min(5040, 5080) = 5040
+    vt_capital_gains_exclusion: 5_040
 
-- name: VT capital gain exclusion amount unit test 5
+- name: VT exclusion capped at 40% of taxable income
   period: 2022
   input:
     state_code: VT
     adjusted_net_capital_gain: 12_600
     taxable_income: 12_500
-    vt_percentage_capital_gains_exclusion: 5_040
+    long_term_capital_gains_on_assets_eligible_for_vt_exclusion: 12_600
   output:
-    vt_capital_gains_exclusion: 5_000 # min(5040,5000) = 5000
+    # Flat: 5000, Percentage: 5040, Chosen: 5040
+    # Cap: 12500 * 0.4 = 5000
+    # Final: min(5040, 5000) = 5000
+    vt_capital_gains_exclusion: 5_000
 
-- name: Adjusted net capital gain is reduced by the dividend income
+- name: Adjusted net capital gain is reduced by dividend income for flat exclusion
   period: 2022
   input:
     state_code: VT
     adjusted_net_capital_gain: 6_000
     taxable_income: 12_600
-    vt_percentage_capital_gains_exclusion: 1_000
     qualified_dividend_income: 4_000
+    # No eligible gains, so percentage exclusion is 0
   output:
+    # Reduced ANCG: max(6000 - 4000, 0) = 2000
+    # Flat: min(2000, 5000) = 2000
     vt_capital_gains_exclusion: 2_000
+
+- name: Financial instrument gains only get flat exclusion
+  period: 2024
+  input:
+    state_code: VT
+    long_term_capital_gains: 137_498  # Financial instruments
+    taxable_income: 140_418
+    # No long_term_capital_gains_on_assets_eligible_for_vt_exclusion
+  output:
+    # Only flat $5,000 applies (financial instruments are NOT eligible for 40%)
+    vt_capital_gains_exclusion: 5_000

policyengine_us/tests/policy/baseline/gov/states/vt/tax/income/agi/vt_percentage_capital_gains_exclusion.yaml

@@ -1,40 +1,45 @@
-- name: VT percentage capital gain exclusion amount unit test 1
+# The 40% percentage exclusion only applies to capital gains from eligible assets.
+# Eligible assets EXCLUDE: stocks, bonds, financial instruments, real estate.
+# Since standard capital gains inputs represent financial instruments (ineligible),
+# users must specify long_term_capital_gains_on_assets_eligible_for_vt_exclusion.
+
+- name: VT percentage exclusion is zero when not in VT
   period: 2022
   input:
-    state_code: ME # Test state definition other than VT
-    adjusted_net_capital_gain: 1_000
+    state_code: ME
+    long_term_capital_gains_on_assets_eligible_for_vt_exclusion: 1_000
   output:
     vt_percentage_capital_gains_exclusion: 0
 
-- name: VT percentage capital gain exclusion amount unit test 2
+- name: VT percentage exclusion is zero when no eligible gains specified
   period: 2022
   input:
     state_code: VT
-    adjusted_net_capital_gain: 0
+    long_term_capital_gains: 100_000  # Financial instruments - NOT eligible
   output:
-    vt_percentage_capital_gains_exclusion: 0 
+    vt_percentage_capital_gains_exclusion: 0
 
-- name: VT percentage capital gain exclusion amount unit test 3
+- name: VT percentage exclusion is 40% of eligible gains
   period: 2022
   input:
     state_code: VT
-    adjusted_net_capital_gain: 1_000
+    long_term_capital_gains_on_assets_eligible_for_vt_exclusion: 1_000
   output:
-    vt_percentage_capital_gains_exclusion: 400 
+    vt_percentage_capital_gains_exclusion: 400
 
-- name: VT percentage capital gain exclusion amount unit test 4
+- name: VT percentage exclusion is capped at 350k
   period: 2022
   input:
     state_code: VT
-    adjusted_net_capital_gain: 900_000
+    long_term_capital_gains_on_assets_eligible_for_vt_exclusion: 900_000
   output:
-    vt_percentage_capital_gains_exclusion: 350_000      
+    vt_percentage_capital_gains_exclusion: 350_000
 
-- name: Adjusted net capital reduced by dividend income
+- name: VT percentage exclusion only counts eligible gains, not all LTCG
   period: 2022
   input:
     state_code: VT
-    adjusted_net_capital_gain: 900_000
-    qualified_dividend_income: 1_000_000
+    long_term_capital_gains: 500_000  # Financial instruments - NOT eligible
+    long_term_capital_gains_on_assets_eligible_for_vt_exclusion: 10_000
   output:
-    vt_percentage_capital_gains_exclusion: 0
+    vt_percentage_capital_gains_exclusion: 4_000  # 40% of 10k eligible only

policyengine_us/tests/policy/baseline/gov/states/vt/tax/income/integration.yaml

@@ -25,3 +25,37 @@
         state_fips: 50
   output:
     vt_income_tax: 7_963
+
+# From GitHub issue #7291: VT capital gains exclusion incorrectly applies to financial instruments
+# Financial instrument gains (stocks/bonds) are NOT eligible for the 40% exclusion.
+# Only the flat $5,000 exclusion applies.
+- name: VT capital gains exclusion - financial instruments get flat exclusion only
+  period: 2024
+  absolute_error_margin: 10
+  input:
+    people:
+      person1:
+        age: 40
+        employment_income: 2_576
+        taxable_interest_income: 344
+        long_term_capital_gains: 137_498  # Financial instruments - NOT eligible for 40%
+        is_tax_unit_head: true
+      dependent1:
+        age: 10
+        is_tax_unit_dependent: true
+    tax_units:
+      tax_unit:
+        members: [person1, dependent1]
+        premium_tax_credit: 0
+    spm_units:
+      spm_unit:
+        members: [person1, dependent1]
+    households:
+      household:
+        members: [person1, dependent1]
+        state_fips: 50  # Vermont
+  output:
+    # Federal AGI: 2576 + 344 + 137498 = 140418
+    # Only $5,000 flat exclusion applies since gains are from financial instruments
+    # VT AGI: 140418 - 5000 = 135418
+    vt_agi: 135_418

policyengine_us/variables/gov/states/vt/tax/income/adjusted_gross_income/subtractions/vt_capital_gain_exclusion/vt_capital_gains_exclusion.py

@@ -6,17 +6,21 @@ class vt_capital_gains_exclusion(Variable):
     entity = TaxUnit
     label = "Vermont capital gains exclusion"
     unit = USD
-    documentation = "Vermont excludes a portion of capital gains, calculated either as a flat amount or as a fraction of adjusted net capital gains, and limited by a fraction of federal taxable income."
+    documentation = (
+        "Vermont offers two capital gains exclusions: a flat $5,000 exclusion for all "
+        "capital gains, and a 40% exclusion (up to $350,000) only for gains from eligible "
+        "assets. Stocks, bonds, financial instruments, and real estate are NOT eligible "
+        "for the 40% exclusion. The exclusion is capped at 40% of federal taxable income."
+    )
     definition_period = YEAR
     defined_for = StateCode.VT
     reference = (
-        "https://tax.vermont.gov/sites/tax/files/documents/IN-153-2022.pdf#page=1"  # 2022 Schedule IN-153 Vermont Capital Gains Exclusion Calculation
-        "https://legislature.vermont.gov/statutes/section/32/151/05811"  # Titl. 32 V.S.A. § 5811(21)(B)(ii)
-        "https://tax.vermont.gov/sites/tax/files/documents/IN-153%20Instr-2022.pdf"
+        "https://tax.vermont.gov/sites/tax/files/documents/IN-153-2024.pdf#page=1",
+        "https://legislature.vermont.gov/statutes/section/32/151/05811",
     )
 
     def formula(tax_unit, period, parameters):
-        # Get adjusted net capital gains, which is capped at 0
+        # Get adjusted net capital gains (used for flat exclusion)
         adjusted_net_capital_gain = tax_unit(
             "adjusted_net_capital_gain", period
         )
@@ -29,17 +33,20 @@ def formula(tax_unit, period, parameters):
         p = parameters(
             period
         ).gov.states.vt.tax.income.agi.exclusions.capital_gain
-        # The flat exclusion is the less of a capped amount
-        # or the actual amount of net adjusted capital gains
+
+        # Flat $5,000 exclusion applies to ALL capital gains (including financial instruments)
         flat_exclusion = min_(reduced_adjusted_net_capital_gain, p.flat.cap)
-        # Get percentage exclusion
+
+        # 40% exclusion only applies to explicitly eligible capital gains
+        # (excludes stocks, bonds, financial instruments, real estate)
         percentage_exclusion = tax_unit(
             "vt_percentage_capital_gains_exclusion", period
         )
-        # Filer can choose from flat or percentage exclusion.
-        # Assume the filer will always choose the larger one
+
+        # Filer chooses the larger exclusion
         chosen_exclusion = max_(flat_exclusion, percentage_exclusion)
-        # The chosen exclusion should not exceed 40% of federal taxable income
+
+        # The chosen exclusion cannot exceed 40% of federal taxable income
         federal_taxable_income = tax_unit("taxable_income", period)
         cap = federal_taxable_income * p.income_share_cap
         return min_(chosen_exclusion, cap)

policyengine_us/variables/gov/states/vt/tax/income/adjusted_gross_income/subtractions/vt_capital_gain_exclusion/vt_percentage_capital_gains_exclusion.py

@@ -6,32 +6,33 @@ class vt_percentage_capital_gains_exclusion(Variable):
     entity = TaxUnit
     label = "Vermont percentage capital gains exclusion"
     unit = USD
-    documentation = "This can be selected to be subtracted from federal adjusted gross income in Vermont as percentage capital gains exclusion."
+    documentation = (
+        "Vermont's 40% capital gains exclusion only applies to gains from qualifying "
+        "assets held more than 3 years. Stocks, bonds, financial instruments, and real "
+        "estate are NOT eligible. Only gains from explicitly eligible assets (e.g., farms, "
+        "businesses) qualify for this exclusion."
+    )
     definition_period = YEAR
     defined_for = StateCode.VT
     reference = (
-        "https://tax.vermont.gov/sites/tax/files/documents/IN-153-2022.pdf#page=1"  # 2022 Schedule IN-153 Vermont Capital Gains Exclusion Calculation
-        "https://legislature.vermont.gov/statutes/section/32/151/05811"  # Titl. 32 V.S.A. § 5811(21)(B)(ii)
-        "https://tax.vermont.gov/sites/tax/files/documents/IN-153%20Instr-2022.pdf"
+        "https://tax.vermont.gov/sites/tax/files/documents/IN-153-2024.pdf#page=2",
+        "https://legislature.vermont.gov/statutes/section/32/151/05811",
     )
 
     def formula(tax_unit, period, parameters):
-        # Get adjusted net capital gain, which is capped at 0
-        adjusted_net_capital_gain = tax_unit(
-            "adjusted_net_capital_gain", period
-        )
-        qualified_dividend_income = add(
-            tax_unit, period, ["qualified_dividend_income"]
-        )
-        reduced_adjusted_net_capital_gain = max_(
-            adjusted_net_capital_gain - qualified_dividend_income, 0
+        # Per VT Schedule IN-153: The 40% exclusion only applies to eligible assets.
+        # Eligible assets exclude: stocks/bonds traded on exchanges, financial instruments,
+        # depreciable personal property (except farm property/timber), and real estate.
+        # Since standard capital gains inputs map to financial instruments (ineligible),
+        # we only use explicitly designated VT-eligible capital gains.
+        eligible_gains = add(
+            tax_unit,
+            period,
+            ["long_term_capital_gains_on_assets_eligible_for_vt_exclusion"],
         )
         p = parameters(
             period
         ).gov.states.vt.tax.income.agi.exclusions.capital_gain
-        # The percentage exclusion equals to a percentage of
-        # the adjusted net capital gain and has a maximum value
-        percentage_exclusion = (
-            reduced_adjusted_net_capital_gain * p.percentage.rate
-        )
+        # The percentage exclusion equals 40% of eligible gains, capped at $350,000
+        percentage_exclusion = eligible_gains * p.percentage.rate
         return min_(percentage_exclusion, p.percentage.cap)

policyengine_us/variables/household/income/person/capital_gains/long_term_capital_gains_on_assets_eligible_for_vt_exclusion.py

@@ -0,0 +1,20 @@
+from policyengine_us.model_api import *
+
+
+class long_term_capital_gains_on_assets_eligible_for_vt_exclusion(Variable):
+    value_type = float
+    entity = Person
+    label = "Long-term capital gains on assets eligible for Vermont's 40% exclusion"
+    unit = USD
+    documentation = (
+        "Vermont's 40% capital gains exclusion only applies to gains from qualifying "
+        "assets held more than 3 years, excluding: stocks and bonds publicly traded or "
+        "traded on an exchange, any other financial instruments, depreciable personal "
+        "property (other than farm property and standing timber), and real estate. "
+        "Qualifying assets typically include: farms, businesses, and certain timber."
+    )
+    definition_period = YEAR
+    reference = (
+        "https://tax.vermont.gov/sites/tax/files/documents/IN-153-2024.pdf#page=2",
+        "https://legislature.vermont.gov/statutes/section/32/151/05811",
+    )