Use the federal itemized total and deduction type for Montana from 2024

changelog.d/mt-itemized-federal-total.fixed.md

@@ -0,0 +1 @@
+From 2024 Montana takes the federal itemized deductions (after the section 68 limitation, and including casualty losses) less the state income tax down to the federal standard deduction, uses the federal return's deduction type, and from 2026 gives standard deduction filers the federal charitable deduction for non-itemizers.

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

@@ -1,4 +1,4 @@
-description: Montana computes itemized deductions on its own Itemized Deductions Schedule, in lieu of adjusted federal itemized deductions, if this is true.
+description: Montana computes itemized deductions on its own Itemized Deductions Schedule and lets filers take the larger of those and the standard deduction, in lieu of following the federal return's deduction type and adjusted federal itemized deductions, if this is true.
 metadata:
   label: Montana state specific itemized deductions apply
   period: year
@@ -10,6 +10,8 @@ metadata:
       href: https://revenuefiles.mt.gov/files/Forms/Montana-Individual-Income-Tax-Return-Form-2-Instructions/2024_Montana_Individual_Income_Tax_Return_Form_2_Instructions.pdf#page=8
     - title: 2024 Montana Form 2 Instructions | Line 2 and Worksheet A, Adjusted Federal Itemized Deductions
       href: https://revenuefiles.mt.gov/files/Forms/Montana-Individual-Income-Tax-Return-Form-2-Instructions/2024_Montana_Individual_Income_Tax_Return_Form_2_Instructions.pdf#page=15
+    - title: MCA 15-30-2120(1) and (2)(j) | Adjustments to federal taxable income
+      href: https://mca.legmt.gov/bills/mca/title_0150/chapter_0300/part_0210/section_0200/0150-0300-0210-0200.html
 
 values:
   2021-01-01: true

policyengine_us/tests/core/test_mt_adjusted_federal_itemized_deductions_properties.py

@@ -0,0 +1,200 @@
+"""Montana's deduction from 2024 is the federal one, less state income tax.
+
+From 2024 Montana taxable income starts from federal taxable income (MCA
+15-30-2120(1)), so the return uses the federal deduction type. A federal
+itemizer deducts the federal itemized deductions (Form 1040, line 12) less the
+state income tax deducted on Schedule A, but MCA 15-30-2120(2)(j) adds the tax
+back only down to the federal standard deduction. A federal non-itemizer
+deducts the federal standard deduction and, from 2026, the section 170(p)
+charitable deduction (26 U.S.C. 63(b)(4)).
+
+The model computes the add-back in statutory form, itemized - min(tax,
+max(itemized - standard, 0)). This test restates it independently in the form
+of the 2024 Form 2 Worksheet A, the greater of itemized - tax and the standard
+deduction (for a total at or above the standard deduction), with the state
+income tax found as the 2025 Schedule I Worksheet B does: the capped SALT
+deduction less local income and real estate taxes, and nothing for a filer who
+deducts sales tax. Generated returns vary the filing status, dependents,
+wages, real estate taxes per spouse, mortgage interest, cash gifts, medical
+expenses, casualty losses and the state income and sales taxes.
+
+Invariants, for every generated return and year:
+1. The model equals the Worksheet A restatement (a differential check).
+2. min(itemized, standard) <= Montana amount <= itemized.
+3. The amount removed is at most the state income tax and the SALT deduction.
+4. Only the head carries the joint amount, once per return, whatever the
+   number of members.
+5. Montana taxable income uses the federal deduction type.
+6. More cash gifts never lower the Montana amount.
+"""
+
+import numpy as np
+import pytest
+from hypothesis import given, settings
+from hypothesis import strategies as st
+
+from policyengine_us import Simulation
+from policyengine_us.system import system
+
+YEARS = [2024, 2025, 2026]
+# Values are float32; sums near $1,000,000 can differ by a few cents.
+TOLERANCE = 0.1
+
+dollars = lambda high: st.integers(min_value=0, max_value=high)  # noqa: E731
+
+returns = st.fixed_dictionaries(
+    {
+        "joint": st.booleans(),
+        "dependents": st.integers(min_value=0, max_value=2),
+        "head_wages": st.sampled_from([0, 40_000, 120_000, 650_000, 1_200_000])
+        | dollars(400_000),
+        "spouse_wages": dollars(200_000),
+        "head_real_estate_taxes": dollars(25_000),
+        "spouse_real_estate_taxes": dollars(25_000),
+        "mortgage_interest": dollars(60_000),
+        "cash_gifts": dollars(30_000),
+        "medical_expenses": dollars(40_000),
+        "casualty_loss_deduction": st.sampled_from([0, 0, 15_000]),
+        # None leaves the model's own estimate of state income tax.
+        "state_income_tax": st.none() | dollars(40_000),
+        "sales_tax": st.none() | dollars(10_000),
+        "extra_cash_gifts": st.integers(min_value=1, max_value=20_000),
+    }
+)
+
+
+def _situation(year, specs):
+    """Two copies of each return; the second gives more cash gifts."""
+    people, tax_units, households, marital_units = {}, {}, {}, {}
+    for i, spec in enumerate(specs):
+        for copy, extra_gifts in (("base", 0), ("more", spec["extra_cash_gifts"])):
+            unit = f"u{i}_{copy}"
+            head, spouse = f"{unit}_head", f"{unit}_spouse"
+            people[head] = {
+                "age": {year: 45},
+                "employment_income": {year: spec["head_wages"]},
+                "real_estate_taxes": {year: spec["head_real_estate_taxes"]},
+                "deductible_mortgage_interest": {year: spec["mortgage_interest"]},
+                "charitable_cash_donations": {year: spec["cash_gifts"] + extra_gifts},
+                "other_medical_expenses": {year: spec["medical_expenses"]},
+            }
+            couple = [head]
+            if spec["joint"]:
+                people[spouse] = {
+                    "age": {year: 43},
+                    "employment_income": {year: spec["spouse_wages"]},
+                    "real_estate_taxes": {year: spec["spouse_real_estate_taxes"]},
+                }
+                couple.append(spouse)
+            members = list(couple)
+            for d in range(spec["dependents"]):
+                child = f"{unit}_child{d}"
+                people[child] = {
+                    "age": {year: 10},
+                    "is_tax_unit_dependent": {year: True},
+                }
+                members.append(child)
+                marital_units[child] = {"members": [child]}
+            tax_unit = {
+                "members": members,
+                "casualty_loss_deduction": {year: spec["casualty_loss_deduction"]},
+            }
+            if spec["state_income_tax"] is not None:
+                tax_unit["state_withheld_income_tax"] = {year: spec["state_income_tax"]}
+            if spec["sales_tax"] is not None:
+                tax_unit["state_sales_tax"] = {year: spec["sales_tax"]}
+                tax_unit["local_sales_tax"] = {year: 0}
+            tax_units[unit] = tax_unit
+            households[unit] = {"members": members, "state_code": {year: "MT"}}
+            marital_units[unit] = {"members": couple}
+    return {
+        "people": people,
+        "tax_units": tax_units,
+        "households": households,
+        "marital_units": marital_units,
+    }
+
+
+def _real_estate_taxes(specs):
+    """Each return's real estate taxes, from the inputs."""
+    return np.repeat(
+        [
+            s["head_real_estate_taxes"] + s["joint"] * s["spouse_real_estate_taxes"]
+            for s in specs
+        ],
+        2,
+    )
+
+
+@pytest.mark.parametrize("year", YEARS)
+@settings(max_examples=6, deadline=None, derandomize=True)
+@given(specs=st.lists(returns, min_size=3, max_size=6))
+def test_montana_deduction_follows_the_federal_return(year, specs):
+    sim = Simulation(tax_benefit_system=system, situation=_situation(year, specs))
+
+    def unit(variable):
+        return np.asarray(sim.calculate(variable, year), dtype=float)
+
+    itemized = unit("itemized_taxable_income_deductions")
+    standard = unit("standard_deduction")
+    salt = unit("salt_deduction")
+    income_tax = unit("state_withheld_income_tax")
+    local_income_tax = unit("local_income_tax")
+    sales_tax = unit("state_sales_tax") + unit("local_sales_tax")
+    montana = unit("mt_adjusted_federal_itemized_deductions")
+
+    # 1. Worksheet B lines 1-5 and Worksheet A lines 1-5.
+    deducts_sales_tax = sales_tax > income_tax + local_income_tax
+    state_income_tax_deducted = np.where(
+        deducts_sales_tax,
+        0,
+        np.maximum(salt - local_income_tax - _real_estate_taxes(specs), 0),
+    )
+    worksheet_a = np.where(
+        itemized >= standard,
+        np.maximum(itemized - state_income_tax_deducted, standard),
+        itemized,
+    )
+    np.testing.assert_allclose(montana, worksheet_a, rtol=0, atol=TOLERANCE)
+
+    # 2. Bounds.
+    assert np.all(montana <= itemized + TOLERANCE)
+    assert np.all(montana >= np.minimum(itemized, standard) - TOLERANCE)
+
+    # 3. Only state income tax inside the SALT deduction is removed.
+    removed = itemized - montana
+    assert np.all(removed <= income_tax + TOLERANCE)
+    assert np.all(removed <= salt + TOLERANCE)
+
+    # 4. The head carries the return's amount, once.
+    joint = np.asarray(sim.calculate("mt_itemized_deductions_joint", year))
+    head = np.asarray(sim.calculate("is_tax_unit_head", year))
+    assert np.all(joint[~head] == 0)
+    for variable in (
+        "mt_itemized_deductions_joint",
+        "mt_itemized_deductions_for_federal_itemization_joint",
+    ):
+        np.testing.assert_allclose(
+            np.asarray(sim.calculate(variable, year, map_to="tax_unit")),
+            montana,
+            rtol=0,
+            atol=TOLERANCE,
+            err_msg=variable,
+        )
+
+    # 5. The federal deduction type.
+    itemizes = unit("tax_unit_itemizes").astype(bool)
+    non_itemizer_charity = unit("charitable_deduction_for_non_itemizers")
+    deduction = np.where(itemizes, montana, standard + non_itemizer_charity)
+    p = system.parameters(year).gov.states.mt.tax.income.exemptions
+    assert not p.applies
+    np.testing.assert_allclose(
+        unit("mt_taxable_income"),
+        np.maximum(unit("mt_agi") - deduction, 0),
+        rtol=0,
+        atol=TOLERANCE,
+    )
+
+    # 6. More cash gifts never lower the Montana amount.
+    base, more = montana[0::2], montana[1::2]
+    assert np.all(more >= base - TOLERANCE)