Bar only the claimed spouse from the student loan interest deduction (26 U.S.C. 221(c))

changelog.d/student-loan-interest-claimed-spouse.fixed.md

@@ -0,0 +1 @@
+Let the unclaimed spouse on a joint return deduct their own student loan interest when the other spouse is claimed as a dependent elsewhere (26 U.S.C. 221(c)), and count both spouses in joint MAGI.

policyengine_us/tests/core/test_ald_determinism.py

@@ -38,6 +38,7 @@
     "alimony_expense_ald": 1,
     "health_savings_account_ald": 1,
     "student_loan_interest_ald_eligible": True,
+    "is_tax_unit_head_or_spouse": True,
     "is_tax_unit_dependent": False,
     "is_tax_unit_head": True,
     "is_tax_unit_spouse": False,

policyengine_us/tests/core/test_student_loan_interest_claimed_spouse_invariants.py

@@ -0,0 +1,193 @@
+"""Student loan interest deduction on a joint return with a claimed spouse.
+
+IRC 221(c) denies the deduction "to an individual" for whom another taxpayer
+is allowed a dependency deduction. The bar reaches that individual only: on a
+joint return the unclaimed spouse keeps the deduction for their own interest,
+under the single return-level cap of IRC 221(b)(1) and the joint phase-out of
+IRC 221(b)(2), whose MAGI includes both spouses.
+
+Hypothesis draws batches of joint couples with one unclaimed filer and one
+filer who may be claimed. Each couple draws whether the claimable filer is the
+head or the spouse, so the checks hold for either claimed filer. Each couple
+runs in one vectorized simulation in four variants:
+
+- A: the claimable filer is claimed and has the drawn interest;
+- B: the claimable filer is claimed and has no interest;
+- C: the claimable filer is not claimed and has no interest;
+- D: the claimable filer is not claimed and has the drawn interest.
+
+The checks:
+
+1. The unclaimed filer's deduction is the same in A, B and C: it never
+   depends on the claimed filer's own interest, or on whether a filer with no
+   interest is claimed.
+2. A claimed filer's own interest is never deducted: their deduction is zero
+   and the return's total in A is no more than the unclaimed filer's own
+   interest.
+3. The return's deduction never exceeds the cap, in every variant.
+
+Explicit examples put a claimed filer's income inside the joint phase-out in
+both years, with the claimed filer as head and as spouse, so a joint MAGI that
+dropped the claimed filer would break check 1 by hundreds of dollars.
+"""
+
+import numpy as np
+from hypothesis import HealthCheck, example, given, settings
+from hypothesis import strategies as st
+
+from policyengine_us import Simulation
+
+TOLERANCE = 0.01
+VARIANTS = {
+    "A": dict(claimed=True, spouse_interest=True),
+    "B": dict(claimed=True, spouse_interest=False),
+    "C": dict(claimed=False, spouse_interest=False),
+    "D": dict(claimed=False, spouse_interest=True),
+}
+
+money = st.integers(0, 200_000).map(float)
+interest = st.one_of(st.just(0.0), st.integers(1, 4_000).map(float))
+
+
+@st.composite
+def couples(draw):
+    return {
+        "claimed_role": draw(st.sampled_from(["spouse", "head"])),
+        "unclaimed_income": draw(money),
+        "claimed_income": draw(st.one_of(st.just(0.0), money)),
+        "unclaimed_interest": draw(interest),
+        "claimed_interest": draw(interest),
+    }
+
+
+def couple(
+    claimed_role,
+    unclaimed_income,
+    claimed_income,
+    unclaimed_interest,
+    claimed_interest,
+):
+    return dict(
+        claimed_role=claimed_role,
+        unclaimed_income=float(unclaimed_income),
+        claimed_income=float(claimed_income),
+        unclaimed_interest=float(unclaimed_interest),
+        claimed_interest=float(claimed_interest),
+    )
+
+
+# Couples whose claimed filer's income moves the joint phase-out. 2025: start
+# $170,000, range $30,000; 2019: start $140,000, range $30,000.
+PHASE_OUT_2025 = [
+    # Joint MAGI 150,000 + 30,000 = 180,000: 2,500 x (1 - 10/30) = 1,666.67,
+    # against 2,500 if the claimed spouse's 30,000 were dropped.
+    couple("spouse", 150_000, 30_000, 2_500, 1_000),
+    # The same with the head claimed.
+    couple("head", 150_000, 30_000, 2_500, 1_000),
+    # Joint MAGI 165,000 + 20,000 = 185,000: 2,000 x (1 - 15/30) = 1,000,
+    # against 2,000 x (1 - 0) = 2,000 at 165,000.
+    couple("spouse", 165_000, 20_000, 2_000, 3_000),
+    couple("spouse", 2_000, 0, 1_000, 700),
+]
+PHASE_OUT_2019 = [
+    # Joint MAGI 130,000 + 20,000 = 150,000: 2,000 x (1 - 10/30) = 1,333.33,
+    # against 2,000 at 130,000.
+    couple("spouse", 130_000, 20_000, 2_000, 500),
+    couple("head", 130_000, 20_000, 2_000, 500),
+    couple("head", 0, 0, 0, 0),
+]
+
+
+def _situation(units, year):
+    people, tax_units, households = {}, {}, {}
+    for i, unit in enumerate(units):
+        claimed_is_head = unit["claimed_role"] == "head"
+        for key, variant in VARIANTS.items():
+            unclaimed, claimed = f"unclaimed_{i}_{key}", f"claimed_{i}_{key}"
+            people[unclaimed] = {
+                "age": {year: 30},
+                "employment_income": {year: unit["unclaimed_income"]},
+                "student_loan_interest": {year: unit["unclaimed_interest"]},
+                "claimed_as_dependent_on_another_return": {year: False},
+                "is_tax_unit_head": {year: not claimed_is_head},
+                "is_tax_unit_spouse": {year: claimed_is_head},
+            }
+            claimed_interest = (
+                unit["claimed_interest"] if variant["spouse_interest"] else 0.0
+            )
+            people[claimed] = {
+                "age": {year: 22},
+                "employment_income": {year: unit["claimed_income"]},
+                "student_loan_interest": {year: claimed_interest},
+                "claimed_as_dependent_on_another_return": {year: variant["claimed"]},
+                "is_tax_unit_head": {year: claimed_is_head},
+                "is_tax_unit_spouse": {year: not claimed_is_head},
+            }
+            members = [unclaimed, claimed]
+            tax_units[f"tu_{i}_{key}"] = {
+                "members": members,
+                "filing_status": {year: "JOINT"},
+            }
+            households[f"hh_{i}_{key}"] = {
+                "members": members,
+                "state_code": {year: "TX"},
+            }
+    return {"people": people, "tax_units": tax_units, "households": households}
+
+
+def _check(units, year):
+    sim = Simulation(situation=_situation(units, year))
+    ald = sim.calculate("student_loan_interest_ald", year)
+    own = sim.calculate("student_loan_interest", year)
+    cap = sim.tax_benefit_system.parameters(
+        f"{year}-01-01"
+    ).gov.irs.ald.student_loan_interest.cap.JOINT
+    n_variants = len(VARIANTS)
+    # People are ordered unit by unit, variant by variant, unclaimed filer
+    # then claimable filer, whichever of them is the head.
+    ald = ald.reshape(len(units), n_variants, 2)
+    own = own.reshape(len(units), n_variants, 2)
+    a, b, c, d = range(n_variants)
+    unclaimed_ald = ald[:, :, 0]
+
+    # 1. The unclaimed filer's deduction ignores the claimed filer.
+    np.testing.assert_allclose(unclaimed_ald[:, a], unclaimed_ald[:, b], atol=TOLERANCE)
+    np.testing.assert_allclose(unclaimed_ald[:, a], unclaimed_ald[:, c], atol=TOLERANCE)
+
+    # 2. The claimed filer's own interest is never deducted.
+    assert (ald[:, [a, b], 1] == 0).all()
+    assert (ald[:, a].sum(axis=1) <= own[:, a, 0] + TOLERANCE).all()
+
+    # 3. The return's deduction never exceeds the cap.
+    assert (ald.sum(axis=2) <= cap + TOLERANCE).all()
+    assert (ald >= 0).all()
+    # The claimed filer doesn't change the unclaimed filer's deduction
+    # through the shared cap: with the claimable filer's interest, the
+    # unclaimed filer's share in D is never above their deduction in A.
+    assert (unclaimed_ald[:, d] <= unclaimed_ald[:, a] + TOLERANCE).all()
+
+
+SETTINGS = dict(
+    max_examples=4,
+    deadline=None,
+    derandomize=True,
+    suppress_health_check=[HealthCheck.too_slow, HealthCheck.data_too_large],
+)
+
+
+@settings(**SETTINGS)
+@example(PHASE_OUT_2025, 2025)
+@example(PHASE_OUT_2019, 2019)
+@given(st.lists(couples(), min_size=10, max_size=30), st.sampled_from([2019, 2025]))
+def test_claimed_spouse_invariants(units, year):
+    _check(units, year)
+
+
+def test_crafted_witnesses():
+    # A claimed spouse with interest beside an unclaimed head below and in
+    # the 2025 joint phase-out ($170,000 start, $30,000 range).
+    units = [
+        couple("spouse", 2_000, 0, 1_000, 700),
+        couple("spouse", 150_000, 30_000, 4_000, 3_000),
+    ]
+    _check(units, 2025)

policyengine_us/tests/policy/baseline/gov/irs/income/taxable_income/deductions/student_loan_interest/student_loan_interest_ald.yaml

@@ -259,3 +259,107 @@
   output:
     # MAGI 70,000 + 15,000 = 85,000; reduced by (85,000 - 80,000) / 15,000.
     student_loan_interest_ald: 1_666.67
+
+# IRC 221(c) denies the deduction "to an individual" whom another taxpayer
+# claims. On a joint return filed only to claim a refund (IRC 152(c)(1)(E)),
+# the unclaimed spouse keeps the deduction for their own interest.
+- name: Unclaimed spouse retains own loan-interest deduction on a refund-only joint return
+  period: 2025
+  input:
+    people:
+      unclaimed:
+        age: 30
+        is_tax_unit_head: true
+        is_tax_unit_spouse: false
+        employment_income: 2_000
+        student_loan_interest: 1_000
+      claimed_student:
+        age: 22
+        is_full_time_student: true
+        is_tax_unit_head: false
+        is_tax_unit_spouse: true
+        claimable_as_dependent_on_another_return: true
+        claimed_as_dependent_on_another_return: true
+        student_loan_interest: 700
+    tax_units:
+      joint:
+        members: [unclaimed, claimed_student]
+        filing_status: JOINT
+    households:
+      household:
+        members: [unclaimed, claimed_student]
+        state_code: TX
+  output:
+    # Eligible interest 1,000 + 0; the 2,500 cap and the 170,000 phase-out
+    # start don't bind. AGI = 2,000 - 1,000.
+    student_loan_interest_ald_eligible: [true, false]
+    student_loan_interest_ald: [1_000, 0]
+    adjusted_gross_income: 1_000
+
+- name: Claimed head does not bar the unclaimed spouse or drop out of joint MAGI
+  period: 2025
+  input:
+    people:
+      claimed_student:
+        age: 22
+        is_full_time_student: true
+        is_tax_unit_head: true
+        is_tax_unit_spouse: false
+        claimable_as_dependent_on_another_return: true
+        claimed_as_dependent_on_another_return: true
+        employment_income: 1_000
+        student_loan_interest: 700
+      unclaimed:
+        age: 30
+        is_tax_unit_head: false
+        is_tax_unit_spouse: true
+        employment_income: 4_000
+        student_loan_interest: 4_000
+    tax_units:
+      joint:
+        members: [claimed_student, unclaimed]
+        filing_status: JOINT
+    households:
+      household:
+        members: [claimed_student, unclaimed]
+        state_code: TX
+  output:
+    # Eligible interest 4,000, capped once at 2,500. Joint MAGI
+    # 1,000 + 4,000 = 5,000. AGI = 5,000 - 2,500.
+    student_loan_interest_ald_eligible: [false, true]
+    student_loan_interest_ald_magi: [1_000, 4_000]
+    student_loan_interest_ald: [0, 2_500]
+    adjusted_gross_income: 2_500
+
+# Mechanics only: the claim is set as an input. The joint phase-out reads
+# both spouses' MAGI (IRC 221(b)(2)(B)), including a claimed spouse's.
+- name: Joint phase-out counts the claimed spouse's MAGI
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    people:
+      unclaimed:
+        age: 30
+        is_tax_unit_head: true
+        is_tax_unit_spouse: false
+        employment_income: 150_000
+        student_loan_interest: 2_500
+      claimed_spouse:
+        age: 22
+        is_tax_unit_head: false
+        is_tax_unit_spouse: true
+        claimed_as_dependent_on_another_return: true
+        employment_income: 30_000
+    tax_units:
+      joint:
+        members: [unclaimed, claimed_spouse]
+        filing_status: JOINT
+    households:
+      household:
+        members: [unclaimed, claimed_spouse]
+        state_code: TX
+  output:
+    # Joint MAGI 180,000; reduced by (180,000 - 170,000) / 30,000:
+    # 2,500 x (1 - 1/3) = 1,666.67.
+    student_loan_interest_ald_magi: [150_000, 30_000]
+    student_loan_interest_ald: [1_666.67, 0]

policyengine_us/tests/policy/baseline/gov/irs/income/taxable_income/deductions/student_loan_interest/student_loan_interest_ald_eligible.yaml

@@ -56,7 +56,7 @@
     # IRC 221(c).
     student_loan_interest_ald_eligible: false
 
-- name: 2024 joint return with one spouse claimed elsewhere cannot deduct student loan interest (the claimable spouse is the head)
+- name: 2024 joint return with the head claimed elsewhere; only the claimed head is barred
   period: 2024
   input:
     people:
@@ -78,11 +78,11 @@
         members: [person_a, person_b]
         state_code: TX
   output:
-    # Form 1040 instructions: "you, or your spouse if filing jointly, aren't
-    # claimed as a dependent".
-    student_loan_interest_ald_eligible: [false, false]
+    # IRC 221(c) bars the claimed individual only; the statute governs the
+    # Form 1040 instructions, which bar the whole joint return.
+    student_loan_interest_ald_eligible: [false, true]
 
-- name: 2024 joint return with one spouse claimed elsewhere cannot deduct student loan interest (the claimable spouse is the spouse)
+- name: 2024 joint return with the spouse claimed elsewhere; only the claimed spouse is barred
   period: 2024
   input:
     people:
@@ -104,7 +104,7 @@
         members: [person_b, person_a]
         state_code: TX
   output:
-    student_loan_interest_ald_eligible: [false, false]
+    student_loan_interest_ald_eligible: [true, false]
 
 # IRC 221(c): the bar applies to an individual who is claimed.
 - name: 2024 single filer who can be claimed but is not claimed can deduct student loan interest

policyengine_us/tests/policy/baseline/gov/states/hi/tax/income/hi_student_loan_interest_adjustment.yaml

@@ -273,3 +273,44 @@
     hi_subtractions: 5_000
     # $62,500 + $1,666.67 addition - $5,000 pension subtraction.
     hi_agi: 59_166.67
+
+- name: Hawaii deduction keeps the unclaimed head's interest on a joint return with a claimed spouse
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    people:
+      head:
+        age: 30
+        employment_income: 2_000
+        student_loan_interest: 1_000
+        is_tax_unit_head: true
+      spouse:
+        age: 22
+        is_full_time_student: true
+        is_tax_unit_spouse: true
+        claimable_as_dependent_on_another_return: true
+        claimed_as_dependent_on_another_return: true
+        student_loan_interest: 700
+    tax_units:
+      tax_unit:
+        members: [head, spouse]
+        filing_status: JOINT
+    spm_units:
+      spm_unit:
+        members: [head, spouse]
+    households:
+      household:
+        members: [head, spouse]
+        state_code: HI
+  output:
+    # IRC 221(c) bars only the claimed spouse, so Hawaii counts the head's
+    # interest only: min(1,000, 2,500 cap) = 1,000. Federal AGI is
+    # 2,000 - 1,000 = 1,000; Hawaii MAGI adds back the 1,000 federal
+    # deduction, giving 2,000, below the 100,000 joint phase-out start.
+    student_loan_interest_ald_eligible: [true, false]
+    hi_modified_agi: 2_000
+    hi_student_loan_interest_deduction: 1_000
+    # Hawaii deduction 1,000 - federal deduction 1,000 = 0, so Hawaii AGI
+    # equals federal AGI.
+    hi_student_loan_interest_adjustment: 0
+    hi_agi: 1_000