Net spouses' self-employment losses in Oklahoma EITC, Washington WFTC and NY WFTC reform earned income

changelog.d/fix-10448-eitc-earned-income-ok-wa-ny.fixed.md

@@ -0,0 +1 @@
+Oklahoma's EITC, Washington's Working Families Tax Credit and the New York WFTC contributed reform now net a spouse's self-employment loss against the other spouse's wages when they compute earned income.

policyengine_us/reforms/states/ny/wftc/ny_working_families_tax_credit.py

@@ -117,7 +117,7 @@ class eitc_younger_phased_in(Variable):
         def formula(tax_unit, period, parameters):
             maximum = tax_unit("eitc_younger_maximum", period)
             phase_in_rate = tax_unit("eitc_younger_phase_in_rate", period)
-            earnings = tax_unit("filer_adjusted_earnings", period)
+            earnings = tax_unit("eitc_earned_income", period)
             phased_in_amount = earnings * phase_in_rate
             return min_(maximum, phased_in_amount)
 
@@ -161,7 +161,7 @@ class eitc_younger_reduction(Variable):
         reference = "https://www.law.cornell.edu/uscode/text/26/32#a_2"
 
         def formula(tax_unit, period, parameters):
-            earnings = tax_unit("filer_adjusted_earnings", period)
+            earnings = tax_unit("eitc_earned_income", period)
             agi = tax_unit("adjusted_gross_income", period)
             highest_income_variable = max_(earnings, agi)
             phase_out_start = tax_unit("eitc_younger_phase_out_start", period)
@@ -298,7 +298,7 @@ class eitc_older_phased_in(Variable):
         def formula(tax_unit, period, parameters):
             maximum = tax_unit("eitc_older_maximum", period)
             phase_in_rate = tax_unit("eitc_older_phase_in_rate", period)
-            earnings = tax_unit("filer_adjusted_earnings", period)
+            earnings = tax_unit("eitc_earned_income", period)
             phased_in_amount = earnings * phase_in_rate
             return min_(maximum, phased_in_amount)
 
@@ -346,7 +346,7 @@ class eitc_older_reduction(Variable):
         reference = "https://www.law.cornell.edu/uscode/text/26/32#a_2"
 
         def formula(tax_unit, period, parameters):
-            earnings = tax_unit("filer_adjusted_earnings", period)
+            earnings = tax_unit("eitc_earned_income", period)
             agi = tax_unit("adjusted_gross_income", period)
             highest_income_variable = max_(earnings, agi)
             phase_out_start = tax_unit("eitc_older_phase_out_start", period)

policyengine_us/tests/policy/baseline/gov/states/ok/tax/income/credits/eitc/ok_eitc.yaml

@@ -144,3 +144,70 @@
   output:
     # No federal EITC = no OK EITC
     ok_eitc: 0
+
+- name: OK EITC - 2025 - a spouse's self-employment loss reduces the phase-in base
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    people:
+      head:
+        age: 40
+        employment_income: 10_000
+      spouse:
+        age: 40
+        self_employment_income: -4_000
+      child1:
+        age: 7
+        is_tax_unit_dependent: true
+      child2:
+        age: 10
+        is_tax_unit_dependent: true
+    tax_units:
+      tax_unit:
+        members: [head, spouse, child1, child2]
+    households:
+      household:
+        members: [head, spouse, child1, child2]
+        state_code: OK
+  output:
+    # Form 511-EIC: line 1 wages 10,000; line 12 Schedule C loss -4,000;
+    # line 15 total earned income 6,000 (lines 13 and 15 combine them). AGI is
+    # also 6,000. Under the 2020 rules the two-child phase-in rate is 40%:
+    # 0.40 x 6,000 = 2,400 (the 2020 EIC table row 6,000-6,050 gives 2,410 at
+    # the row midpoint). OK EITC = 5% x 2,400 = 120. Flooring each spouse at
+    # zero would count 10,000 and give 4,000 and 200.
+    ok_federal_eitc: 2_400
+    ok_eitc: 120
+
+- name: OK EITC - 2025 - a spouse's self-employment loss lowers the phase-out base
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    people:
+      head:
+        age: 40
+        employment_income: 40_000
+      spouse:
+        age: 40
+        self_employment_income: -10_000
+      child1:
+        age: 7
+        is_tax_unit_dependent: true
+      child2:
+        age: 10
+        is_tax_unit_dependent: true
+    tax_units:
+      tax_unit:
+        members: [head, spouse, child1, child2]
+    households:
+      household:
+        members: [head, spouse, child1, child2]
+        state_code: OK
+  output:
+    # Earned income (511-EIC line 15) = 40,000 + (-10,000) = 30,000 = AGI.
+    # 2020 joint two-child credit: 5,920 - 21.06% x (30,000 - 25,220) =
+    # 4,913.33 (the 2020 EIC table row 30,000-30,050 gives 4,908 at the row
+    # midpoint). OK EITC = 5% x 4,913.33 = 245.67. Measuring from 40,000 would
+    # give 5,920 - 21.06% x 14,780 = 2,807.33.
+    ok_federal_eitc: 4_913.33
+    ok_eitc: 245.67

policyengine_us/tests/policy/baseline/gov/states/wa/tax/income/credits/wa_working_families_tax_credit.yaml

@@ -1566,3 +1566,94 @@
     # full 2024 one-child maximum ($640). This end-to-end case confirms the
     # WFTC flows through to household_net_income (it is a positive component).
     wa_working_families_tax_credit: 640
+
+- name: Case 37, a spouse's self-employment loss that offsets the wages leaves no earned income.
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    people:
+      head:
+        age: 40
+        employment_income: 3_000
+        has_tin: true
+        ssn_card_type: CITIZEN
+        is_tax_unit_head: true
+      spouse:
+        age: 40
+        self_employment_income: -5_000
+        has_tin: true
+        ssn_card_type: CITIZEN
+        is_tax_unit_spouse: true
+      child:
+        age: 7
+        has_tin: true
+        ssn_card_type: CITIZEN
+        is_tax_unit_dependent: true
+    tax_units:
+      tax_unit:
+        members: [head, spouse, child]
+        filing_status: JOINT
+        would_file_taxes_voluntarily: true
+        takes_up_eitc: true
+    spm_units:
+      spm_unit:
+        members: [head, spouse, child]
+    households:
+      household:
+        members: [head, spouse, child]
+        state_code: WA
+  output:
+    # RCW 82.08.0206(2)(b): income is earned income under 26 U.S.C. 32. On a
+    # joint return, federal EIC Worksheet B combines both spouses' amounts:
+    # line 4b = 3,000 + (-5,000) < 0, so "You can't take the credit", and
+    # (2)(a)(i)(A) requires eligibility for the federal credit. Flooring each
+    # spouse at zero would count 3,000 and pay the one-child $660.
+    wa_working_families_tax_credit: 0
+
+- name: Case 38, a spouse's self-employment loss lowers the phase-out base.
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    people:
+      head:
+        age: 40
+        employment_income: 62_000
+        has_tin: true
+        ssn_card_type: CITIZEN
+        is_tax_unit_head: true
+      spouse:
+        age: 40
+        self_employment_income: -10_000
+        has_tin: true
+        ssn_card_type: CITIZEN
+        is_tax_unit_spouse: true
+      child1:
+        age: 7
+        has_tin: true
+        ssn_card_type: CITIZEN
+        is_tax_unit_dependent: true
+      child2:
+        age: 10
+        has_tin: true
+        ssn_card_type: CITIZEN
+        is_tax_unit_dependent: true
+    tax_units:
+      tax_unit:
+        members: [head, spouse, child1, child2]
+        filing_status: JOINT
+        would_file_taxes_voluntarily: true
+        takes_up_eitc: true
+    spm_units:
+      spm_unit:
+        members: [head, spouse, child1, child2]
+    households:
+      household:
+        members: [head, spouse, child1, child2]
+        state_code: WA
+  output:
+    # Earned income (Worksheet B line 4b) = 62,000 + (-10,000) = 52,000, and AGI
+    # is also 52,000. The 2025 joint two-child limit is $64,430 (Form 1040
+    # instructions), so the reduction starts at 59,430 and does not apply.
+    # ETA 3240.2026 gives the 2025 two-child maximum, $995. Measuring from
+    # 62,000 would give 995 - 0.199 x (62,000 - 59,430) = 484.
+    wa_working_families_tax_credit: 995

policyengine_us/tests/policy/contrib/states/ny/ny_working_families_tax_credit.yaml

@@ -344,3 +344,36 @@
         state_code: NY
   output:
     ny_exemptions: 0
+
+- name: Couple, one younger child, a spouse's self-employment loss reduces the federal credit - reform
+  period: 2025
+  absolute_error_margin: 0.01
+  reforms: policyengine_us.reforms.states.ny.wftc.ny_working_families_tax_credit.ny_working_families_tax_credit
+  input:
+    gov.contrib.states.ny.wftc.in_effect: true
+    people:
+      person1:
+        age: 40
+        employment_income: 10_000
+      person2:
+        age: 40
+        self_employment_income: -4_000
+      person3:
+        age: 7
+        is_tax_unit_dependent: true
+    tax_units:
+      tax_unit:
+        members: [person1, person2, person3]
+    households:
+      household:
+        members: [person1, person2, person3]
+        state_code: NY
+  output:
+    # Federal earned income (EIC Worksheet B, both spouses combined) is
+    # 10,000 + (-4,000) = 6,000. The one-child federal credit is 34% x 6,000 =
+    # 2,040, the same as eitc. S277C's 2025 match is 25%, so ny_eitc is
+    # 0.25 x 2,040 = 510 (no household credit at this income). Flooring each
+    # spouse at zero would give 34% x 10,000 = 3,400 and 850.
+    eitc: 2_040
+    younger_eitc: 2_040
+    ny_eitc: 510

policyengine_us/variables/gov/states/ok/tax/income/credits/eitc/federal_credit/ok_federal_eitc_phased_in.py

@@ -12,7 +12,7 @@ class ok_federal_eitc_phased_in(Variable):
     EITC phase-in amount using FROZEN 2020 parameters.
 
     The phase-in amount represents how much credit has been "earned" based
-    on the filer's adjusted earnings. It equals:
+    on earned income (Form 511-EIC line 15). It equals:
     min(maximum_credit, earnings * phase_in_rate)
 
     This creates the rising portion of the EITC where the credit increases
@@ -36,7 +36,9 @@ def formula(tax_unit, period, parameters):
         maximum = tax_unit("ok_federal_eitc_maximum", period)
         # Get the phase-in rate (frozen at 2020 values)
         phase_in_rate = tax_unit("ok_federal_eitc_phase_in_rate", period)
-        earnings = tax_unit("filer_adjusted_earnings", period)
+        # Form 511-EIC line 15: both spouses' earned income combined, with
+        # a net self-employment loss subtracted (lines 12 and 13).
+        earnings = tax_unit("eitc_earned_income", period)
         # Calculate phased-in amount, capped at maximum
         phased_in_amount = earnings * phase_in_rate
         return min_(maximum, phased_in_amount)

policyengine_us/variables/gov/states/ok/tax/income/credits/eitc/federal_credit/ok_federal_eitc_reduction.py

@@ -36,7 +36,8 @@ class ok_federal_eitc_reduction(Variable):
     """
 
     def formula(tax_unit, period, parameters):
-        earnings = tax_unit("filer_adjusted_earnings", period)
+        # Form 511-EIC line 15 earned income, as in ok_federal_eitc_phased_in.
+        earnings = tax_unit("eitc_earned_income", period)
         agi = tax_unit("adjusted_gross_income", period)
         # Use the greater of earnings or AGI for phase-out
         highest_income_variable = max_(earnings, agi)

policyengine_us/variables/gov/states/wa/tax/income/credits/wa_working_families_tax_credit.py

@@ -80,7 +80,10 @@ def formula(tax_unit, period, parameters):
             tax_unit("eitc_relevant_investment_income", period)
             <= eitc.phase_out.max_investment_income
         )
-        earnings = tax_unit("filer_adjusted_earnings", period)
+        # RCW 82.08.0206(2)(b): income is earned income under 26 U.S.C. 32,
+        # both spouses combined on a joint return, net of a self-employment
+        # loss.
+        earnings = tax_unit("eitc_earned_income", period)
         agi = tax_unit("adjusted_gross_income", period)
         higher_income = max_(earnings, agi)
         maximum_qualifying_income = tax_unit(

policyengine_us/variables/gov/states/wa/tax/income/credits/wa_working_families_tax_credit_age_expansion_eligible.py

@@ -56,7 +56,8 @@ def formula(tax_unit, period, parameters):
             tax_unit("eitc_relevant_investment_income", period)
             <= eitc.phase_out.max_investment_income
         )
-        earnings = tax_unit("filer_adjusted_earnings", period)
+        # RCW 82.08.0206(2)(b) earned income, as in wa_working_families_tax_credit.
+        earnings = tax_unit("eitc_earned_income", period)
         agi = tax_unit("adjusted_gross_income", period)
         # ESSB 6346 Sec. 901(2)(a)(ii)(C) makes the age-expansion path eligible
         # when income is "equal to or less than" the maximum qualifying income,