Limit reported SALT to the amount that would zero out regular tax liability

Fixes #5899

Author: PavelMakarchuk

changelog_entry.yaml

@@ -0,0 +1,7 @@
+- bump: minor
+  changes:
+    added:
+    - Limit reported SALT to the amount that would zero out regular tax liability.
+    - Create SALT and reported SALT variables.
+    fixes:
+    - Remove itemized deductions limitation at taxable income.

policyengine_us/reforms/salt_phase_out/salt_phase_out_reform.py

@@ -16,11 +16,7 @@ def formula(tax_unit, period, parameters):
             p = parameters(
                 period
             ).gov.irs.deductions.itemized.salt_and_real_estate
-            salt_amount = add(
-                tax_unit,
-                period,
-                p.sources,
-            )
+            salt_amount = tax_unit("reported_salt", period)
             filing_status = tax_unit("filing_status", period)
             cap = p.cap[filing_status]
             p_ref = parameters(period).gov.contrib.salt_phase_out

policyengine_us/tests/policy/baseline/gov/irs/deductions/itemized/salt_and_real_estate/reported_salt.yaml

@@ -0,0 +1,53 @@
+# - name: SALT capped at taxable income
+#   period: 2023
+#   input:
+#     salt: 100_000
+#     adjusted_gross_income: 100_000
+#     exemptions: 2_000
+#   output:
+#     reported_salt: 98_000
+
+# - name: SALT below cap
+#   period: 2023
+#   input:
+#     salt: 23_000
+#     adjusted_gross_income: 100_000
+#     exemptions: 2_000
+#   output:
+#     reported_salt: 23_000
+
+# - name: SALT uncapped
+#   period: 2023
+#   input:
+#     gov.simulation.limit_itemized_deductions_to_taxable_income: False
+#     salt: 100_000
+#     adjusted_gross_income: 100_000
+#     exemptions: 2_000
+#   output:
+#     reported_salt: 100_000
+
+- name: Integration test with amt, limit is applied
+  period: 2026
+  input:
+    gov.simulation.limit_itemized_deductions_to_taxable_income: True
+    salt: 45_000
+    employment_income: 40_000
+  output:
+    adjusted_gross_income: 40_000
+    exemptions: 5_300
+    reported_salt: 34_700
+    amt_income: 40_000
+    taxable_income: 0
+
+- name: Integration test with amt, limit is not applied
+  period: 2026
+  input:
+    gov.simulation.limit_itemized_deductions_to_taxable_income: False
+    salt: 45_000
+    employment_income: 40_000
+  output:
+    adjusted_gross_income: 40_000
+    exemptions: 5_300
+    reported_salt: 45_000
+    amt_income: 50_300
+    taxable_income: 0

policyengine_us/tests/policy/baseline/gov/irs/deductions/itemized/salt_and_real_estate/salt_deduction.yaml

@@ -0,0 +1,15 @@
+- name: Capped SALT deduction
+  period: 2023
+  input:
+    reported_salt: 100_000
+    filing_status: SINGLE
+  output:
+    salt_deduction: 10_000
+
+- name: Cap does not apply
+  period: 2023
+  input:
+    reported_salt: 4_000
+    filing_status: SINGLE
+  output:
+    salt_deduction: 4_000

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

@@ -21,39 +21,3 @@
     exemptions: 12_000
   output:
     taxable_income_deductions: 10_000
-
-- name: Unit itemizes, sim, capped itemized deductions
-  period: 2024
-  input:
-    gov.simulation.limit_itemized_deductions_to_taxable_income: true
-    tax_unit_itemizes: true
-    taxable_income_deductions_if_itemizing: 11_000
-    taxable_income_deductions_if_not_itemizing: 10_000
-    adjusted_gross_income: 3_000
-    exemptions: 1_000
-  output:
-    taxable_income_deductions: 2_000
-
-- name: Unit itemizes, sim, un-capped itemized deductions
-  period: 2024
-  input:
-    gov.simulation.limit_itemized_deductions_to_taxable_income: true
-    tax_unit_itemizes: true
-    taxable_income_deductions_if_itemizing: 11_000
-    taxable_income_deductions_if_not_itemizing: 10_000
-    adjusted_gross_income: 23_000
-    exemptions: 1_000
-  output:
-    taxable_income_deductions: 11_000
-
-- name: Unit does not itemize, sim, un-capped itemized deductions
-  period: 2024
-  input:
-    gov.simulation.limit_itemized_deductions_to_taxable_income: true
-    tax_unit_itemizes: false
-    taxable_income_deductions_if_itemizing: 11_000
-    taxable_income_deductions_if_not_itemizing: 10_000
-    adjusted_gross_income: 1_000
-    exemptions: 1_000
-  output:
-    taxable_income_deductions: 10_000

policyengine_us/variables/gov/irs/income/taxable_income/deductions/itemizing/reported_salt.py

@@ -0,0 +1,19 @@
+from policyengine_us.model_api import *
+
+
+class reported_salt(Variable):
+    value_type = float
+    entity = TaxUnit
+    definition_period = YEAR
+    label = "Reported State and local sales or income tax and real estate taxes subject to the SALT deduction limited to taxable income"
+    unit = USD
+
+    def formula(tax_unit, period, parameters):
+        salt = tax_unit("salt", period)
+        p = parameters(period).gov.simulation
+        if p.limit_itemized_deductions_to_taxable_income:
+            agi = tax_unit("adjusted_gross_income", period)
+            exemptions = tax_unit("exemptions", period)
+            agi_less_exemptions = max_(0, agi - exemptions)
+            return min_(salt, agi_less_exemptions)
+        return salt

policyengine_us/variables/gov/irs/income/taxable_income/deductions/itemizing/salt.py

@@ -0,0 +1,11 @@
+from policyengine_us.model_api import *
+
+
+class salt(Variable):
+    value_type = float
+    entity = TaxUnit
+    definition_period = YEAR
+    label = "State and local sales or income tax and real estate taxes subject to the SALT deduction"
+    unit = USD
+
+    adds = "gov.irs.deductions.itemized.salt_and_real_estate.sources"

policyengine_us/variables/gov/irs/income/taxable_income/deductions/itemizing/salt_deduction.py

@@ -12,10 +12,6 @@ class salt_deduction(Variable):
 
     def formula(tax_unit, period, parameters):
         p = parameters(period).gov.irs.deductions.itemized.salt_and_real_estate
-        salt_amount = add(
-            tax_unit,
-            period,
-            p.sources,
-        )
+        reported_salt = tax_unit("reported_salt", period)
         cap = p.cap[tax_unit("filing_status", period)]
-        return min_(cap, salt_amount)
+        return min_(cap, reported_salt)

policyengine_us/variables/gov/irs/income/taxable_income/deductions/taxable_income_deductions.py

@@ -16,21 +16,6 @@ def formula(tax_unit, period, parameters):
         deductions_if_not_itemizing = tax_unit(
             "taxable_income_deductions_if_not_itemizing", period
         )
-        # Limiting itemized deductions to taxable income, if itemizing
-        p = parameters(period).gov.simulation
-        if p.limit_itemized_deductions_to_taxable_income:
-            agi = tax_unit("adjusted_gross_income", period)
-            exemptions = tax_unit("exemptions", period)
-            itemizes = tax_unit("tax_unit_itemizes", period)
-            agi_less_exemptions = max_(0, agi - exemptions)
-            capped_deductions_if_itemizing = min_(
-                deductions_if_itemizing, agi_less_exemptions
-            )
-            return where(
-                itemizes,
-                capped_deductions_if_itemizing,
-                deductions_if_not_itemizing,
-            )
         return where(
             itemizes, deductions_if_itemizing, deductions_if_not_itemizing
         )