Wire NY itemized-deduction phase-out into IT-196 Line 40 (pre-TCJA Pease limitation)

changelog.d/ny-itemized-phaseout-line-40.fixed.md

@@ -0,0 +1 @@
+Wired New York's orphaned itemized-deduction phase-out parameter into the IT-196 Line 40 pre-TCJA overall limitation (26 U.S.C. 68 via NY Tax Law 615 conformity), reducing itemized deductions by the lesser of 3% of federal AGI over the applicable amount or 80% of the deductions subject to the limitation.

policyengine_us/parameters/gov/states/ny/tax/income/deductions/itemized/phase_out/agi_excess_rate.yaml

@@ -0,0 +1,14 @@
+description: New York reduces itemized deductions by this share of federal adjusted gross income above the applicable amount, as one of the two limbs of the pre-TCJA federal overall limitation on itemized deductions.
+values:
+  2021-01-01: 0.03
+metadata:
+  unit: /1
+  period: year
+  label: New York itemized deduction phase-out AGI excess rate
+  reference:
+    # Pre-TCJA IRC § 68(a)(1): reduce itemized deductions by 3% of AGI over the
+    # applicable amount. NY Tax Law § 615 conforms to pre-TCJA federal rules.
+    - title: 26 U.S. Code § 68 - Overall limitation on itemized deductions (a)(1)
+      href: https://www.law.cornell.edu/uscode/text/26/68#a_1
+    - title: 2025 NY Form IT-196 Instructions, Line 40 Total itemized deductions worksheet (line 8, multiply by 3%)
+      href: https://www.tax.ny.gov/pdf/current_forms/it/it196i.pdf#page=19

policyengine_us/parameters/gov/states/ny/tax/income/deductions/itemized/phase_out/deduction_limited_rate.yaml

@@ -0,0 +1,15 @@
+description: New York caps the pre-TCJA overall limitation on itemized deductions at this share of the deductions that are subject to the limitation.
+values:
+  2021-01-01: 0.80
+metadata:
+  unit: /1
+  period: year
+  label: New York itemized deduction phase-out limited-deduction cap rate
+  reference:
+    # Pre-TCJA IRC § 68(a)(2): the reduction cannot exceed 80% of the itemized
+    # deductions otherwise allowable (excluding medical, investment interest,
+    # casualty/theft, and wagering losses per § 68(c)). NY Tax Law § 615 conforms.
+    - title: 26 U.S. Code § 68 - Overall limitation on itemized deductions (a)(2)
+      href: https://www.law.cornell.edu/uscode/text/26/68#a_2
+    - title: 2025 NY Form IT-196 Instructions, Line 40 Total itemized deductions worksheet (line 4, multiply by 80%)
+      href: https://www.tax.ny.gov/pdf/current_forms/it/it196i.pdf#page=19

policyengine_us/tests/policy/baseline/gov/states/ny/tax/income/taxable_income/deductions/itemized/ny_itemized_deductions_phase_out.yaml

@@ -0,0 +1,136 @@
+# IT-196 Line 40 "Total itemized deductions worksheet" (pre-TCJA IRC 68
+# overall limitation, to which NY Tax Law 615 conforms). The reduction is the
+# LESSER OF 3% of federal AGI over the Table 1 applicable amount, or 80% of the
+# deductions subject to the limitation.
+# 2025 applicable amounts (Table 1): SINGLE 340,700; JOINT 408,850.
+
+- name: SINGLE, federal AGI just below the 2025 applicable amount - not limited.
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    ny_itemized_deductions_max: 100_000
+    ny_college_tuition_deduction: 0
+    medical_expense_deduction: 0
+    investment_interest_expense: 0
+    ny_casualty_loss_deduction: 0
+    adjusted_gross_income: 340_000
+    filing_status: SINGLE
+    state_code: NY
+  output:
+    ny_itemized_deductions_phase_out_applies: false
+    ny_itemized_deductions_phase_out: 0
+
+- name: SINGLE, federal AGI just above the 2025 applicable amount - 3% limb binds.
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    ny_itemized_deductions_max: 100_000
+    ny_college_tuition_deduction: 0
+    medical_expense_deduction: 0
+    investment_interest_expense: 0
+    ny_casualty_loss_deduction: 0
+    adjusted_gross_income: 350_000
+    filing_status: SINGLE
+    state_code: NY
+  output:
+    ny_itemized_deductions_phase_out_applies: true
+    # L1 = 100,000; L2 = 0; L3 = 100,000; L4 = 0.80 * 100,000 = 80,000.
+    # AGI excess = 350,000 - 340,700 = 9,300; L8 = 0.03 * 9,300 = 279.
+    # Reduction = min(80,000, 279) = 279.
+    ny_itemized_deductions_phase_out: 279
+
+- name: JOINT, federal AGI just below the 2025 applicable amount - not limited.
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    ny_itemized_deductions_max: 100_000
+    ny_college_tuition_deduction: 0
+    medical_expense_deduction: 0
+    investment_interest_expense: 0
+    ny_casualty_loss_deduction: 0
+    adjusted_gross_income: 408_000
+    filing_status: JOINT
+    state_code: NY
+  output:
+    ny_itemized_deductions_phase_out_applies: false
+    ny_itemized_deductions_phase_out: 0
+
+- name: JOINT, federal AGI above the 2025 applicable amount - 3% limb binds.
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    ny_itemized_deductions_max: 100_000
+    ny_college_tuition_deduction: 0
+    medical_expense_deduction: 0
+    investment_interest_expense: 0
+    ny_casualty_loss_deduction: 0
+    adjusted_gross_income: 500_000
+    filing_status: JOINT
+    state_code: NY
+  output:
+    ny_itemized_deductions_phase_out_applies: true
+    # L1 = 100,000; L2 = 0; L4 = 80,000.
+    # AGI excess = 500,000 - 408,850 = 91,150; L8 = 0.03 * 91,150 = 2,734.50.
+    # Reduction = min(80,000, 2,734.50) = 2,734.50.
+    ny_itemized_deductions_phase_out: 2_734.50
+
+- name: JOINT, very high AGI - 80% limb binds (cap on the reduction).
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    ny_itemized_deductions_max: 20_000
+    ny_college_tuition_deduction: 0
+    medical_expense_deduction: 0
+    investment_interest_expense: 0
+    ny_casualty_loss_deduction: 0
+    adjusted_gross_income: 5_000_000
+    filing_status: JOINT
+    state_code: NY
+  output:
+    ny_itemized_deductions_phase_out_applies: true
+    # L1 = 20,000; L3 = 20,000; L4 = 0.80 * 20,000 = 16,000.
+    # AGI excess = 5,000,000 - 408,850 = 4,591,150; L8 = 0.03 * that = 137,734.50.
+    # Reduction = min(16,000, 137,734.50) = 16,000 (the 80% cap binds).
+    ny_itemized_deductions_phase_out: 16_000
+
+- name: Medical, investment interest, and casualty are excluded from the 80% base (26 U.S.C. 68(c)).
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    # ny_itemized_deductions_max = 100,000 total, of which 40,000 is excluded
+    # (medical 25,000 + investment interest 10,000 + casualty 5,000). Only the
+    # remaining 60,000 is subject to the limitation.
+    ny_itemized_deductions_max: 100_000
+    ny_college_tuition_deduction: 0
+    medical_expense_deduction: 25_000
+    investment_interest_expense: 10_000
+    ny_casualty_loss_deduction: 5_000
+    adjusted_gross_income: 5_000_000
+    filing_status: JOINT
+    state_code: NY
+  output:
+    ny_itemized_deductions_phase_out_applies: true
+    # L1 = 100,000; L2 = 25,000 + 10,000 + 5,000 = 40,000; L3 = 60,000.
+    # L4 = 0.80 * 60,000 = 48,000. AGI excess huge so L8 >> L4.
+    # Reduction = min(48,000, large) = 48,000.
+    ny_itemized_deductions_phase_out: 48_000
+
+- name: NY-only college tuition deduction is excluded from L1 (added after Line 40).
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    # max includes 30,000 of NY college tuition deduction that is not part of
+    # the federal Line 40 worksheet; the Pease base should ignore it.
+    ny_itemized_deductions_max: 130_000
+    ny_college_tuition_deduction: 30_000
+    medical_expense_deduction: 0
+    investment_interest_expense: 0
+    ny_casualty_loss_deduction: 0
+    adjusted_gross_income: 500_000
+    filing_status: JOINT
+    state_code: NY
+  output:
+    ny_itemized_deductions_phase_out_applies: true
+    # L1 = 130,000 - 30,000 = 100,000; L4 = 80,000; L8 = 2,734.50.
+    # Reduction = min(80,000, 2,734.50) = 2,734.50 (same as without tuition).
+    ny_itemized_deductions_phase_out: 2_734.50

policyengine_us/tests/policy/baseline/gov/states/ny/tax/income/taxable_income/deductions/itemized/ny_itemized_deductions_phase_out_integration.yaml

@@ -0,0 +1,81 @@
+# End-to-end wiring of the IT-196 Line 40 pre-TCJA limitation into
+# ny_itemized_deductions, computed from raw household inputs. Confirms the
+# Line 40 (federal-AGI-gated) reduction is applied in addition to the Line 46
+# (NY-AGI-gated) 615(f)/(g) reduction. Sales taxes are set to 0 so the NY SALT
+# deduction reduces to real estate taxes only.
+
+- name: JOINT 2025 high earner - Line 40 limitation applies (below Line 46 NY-AGI threshold).
+  period: 2025
+  absolute_error_margin: 0.05
+  input:
+    people:
+      head:
+        age: 45
+        taxable_interest_income: 420_000
+        deductible_mortgage_interest: 50_000
+        real_estate_taxes: 25_000
+        charitable_cash_donations: 10_000
+      spouse:
+        age: 45
+    tax_units:
+      tax_unit:
+        members: [head, spouse]
+        state_sales_tax: 0
+        local_sales_tax: 0
+    marital_units:
+      marital_unit:
+        members: [head, spouse]
+    families:
+      family:
+        members: [head, spouse]
+    spm_units:
+      spm_unit:
+        members: [head, spouse]
+    households:
+      household:
+        members: [head, spouse]
+        state_code: NY
+  output:
+    # Federal AGI = 420,000 > 408,850 (JOINT applicable amount), so Line 40 applies.
+    # L1 = mortgage 50,000 + real estate 25,000 + charitable 10,000 = 85,000.
+    # L4 = 0.80 * 85,000 = 68,000. AGI excess = 11,150; L8 = 0.03 * 11,150 = 334.50.
+    # Line 40 reduction = min(68,000, 334.50) = 334.50.
+    ny_itemized_deductions_phase_out: 334.50
+
+- name: JOINT 2025 modest itemizer below the Line 40 applicable amount - no limitation.
+  period: 2025
+  absolute_error_margin: 0.05
+  input:
+    people:
+      head:
+        age: 45
+        taxable_interest_income: 300_000
+        deductible_mortgage_interest: 50_000
+        real_estate_taxes: 25_000
+        charitable_cash_donations: 10_000
+      spouse:
+        age: 45
+    tax_units:
+      tax_unit:
+        members: [head, spouse]
+        state_sales_tax: 0
+        local_sales_tax: 0
+    marital_units:
+      marital_unit:
+        members: [head, spouse]
+    families:
+      family:
+        members: [head, spouse]
+    spm_units:
+      spm_unit:
+        members: [head, spouse]
+    households:
+      household:
+        members: [head, spouse]
+        state_code: NY
+  output:
+    # Federal AGI = 300,000 < 408,850, so no Line 40 limitation.
+    ny_itemized_deductions_phase_out: 0
+    # ny_itemized_deductions_max = 50,000 + 25,000 + 10,000 = 85,000 passes
+    # through Line 40 untouched (Line 46 still applies on NY AGI 300,000).
+    ny_itemized_deductions_phase_out_applies: false

policyengine_us/variables/gov/states/ny/tax/income/taxable_income/deductions/itemized/ny_itemized_deductions.py

@@ -11,4 +11,12 @@ class ny_itemized_deductions(Variable):
     defined_for = StateCode.NY
 
     adds = ["ny_itemized_deductions_max"]
-    subtracts = ["ny_itemized_deductions_reduction"]
+    # IT-196 applies two reductions in sequence: the pre-TCJA federal overall
+    # limitation (Line 40, keyed on federal AGI, 26 U.S.C. 68 via NY Tax Law
+    # 615 conformity) first, then NY's own higher-income adjustment (Line 46,
+    # keyed on NY AGI per 615(f)/(g)). Both are modeled here as amounts
+    # subtracted from ny_itemized_deductions_max.
+    subtracts = [
+        "ny_itemized_deductions_phase_out",
+        "ny_itemized_deductions_reduction",
+    ]

policyengine_us/variables/gov/states/ny/tax/income/taxable_income/deductions/itemized/phase_out/ny_itemized_deductions_phase_out.py

@@ -0,0 +1,89 @@
+from policyengine_us.model_api import *
+
+
+class ny_itemized_deductions_phase_out(Variable):
+    value_type = float
+    entity = TaxUnit
+    label = "New York itemized deductions pre-TCJA overall limitation"
+    unit = USD
+    definition_period = YEAR
+    reference = (
+        "https://www.law.cornell.edu/uscode/text/26/68",  # pre-TCJA IRC 68
+        "https://www.nysenate.gov/legislation/laws/TAX/615",  # NY conformity
+        "https://www.tax.ny.gov/pdf/current_forms/it/it196i.pdf#page=19",  # Line 40 worksheet
+    )
+    defined_for = "ny_itemized_deductions_phase_out_applies"
+    documentation = """
+    IT-196 Line 40, Total itemized deductions worksheet. This is the pre-TCJA
+    federal "Pease" overall limitation on itemized deductions (26 U.S.C. 68 as
+    it existed before Public Law 115-97), to which NY Tax Law 615 conforms.
+    The limitation reduces itemized deductions by the LESSER OF:
+      (a) 3% of federal AGI over the applicable amount (worksheet lines 5-8), or
+      (b) 80% of the deductions that are subject to the limitation (lines 1-4).
+
+    Mapping of the worksheet's line-total inputs to PolicyEngine variables
+    (federal Form IT-196 line numbers in brackets):
+
+    Worksheet line 1 (L1) = form lines 4, 9, 15, 19, 20, 28, 39, i.e. the total
+    itemized deductions before the limitation. In PolicyEngine this is
+    ny_itemized_deductions_max minus the NY-only college tuition addition
+    (form line 48/43, which is added after line 40 and is not on this
+    worksheet). Form line 39 ("other itemized deductions": gambling losses,
+    estate tax on income in respect of a decedent, amortizable bond premium,
+    federal disaster loss, etc.) is not modeled in PolicyEngine and is therefore
+    treated as zero.
+
+    Worksheet line 2 (L2) = form lines 4, 14, 16a, 20, 29, 30, 37, i.e. the
+    deductions NOT subject to the limitation (26 U.S.C. 68(c)):
+      - line 4  medical/dental        -> medical_expense_deduction
+      - line 14 investment interest   -> investment_interest_expense
+      - line 20 casualty/theft loss   -> ny_casualty_loss_deduction
+      - lines 16a/29/30/37 (qualified contributions, gambling losses,
+        income-producing-property casualty, federal disaster loss) are not
+        separately modeled in PolicyEngine and are treated as zero.
+
+    L3 = L1 - L2 (worksheet line 3) is therefore the mortgage interest, real
+    estate taxes, charitable gifts, and 2%-floor miscellaneous deductions -
+    exactly the 68(c) base subject to the limitation. Because investment
+    interest appears in both L1 (inside interest_deduction) and L2, it cancels
+    out of L3, as intended.
+    """
+
+    def formula(tax_unit, period, parameters):
+        p = parameters(period).gov.states.ny.tax.income.deductions.itemized.phase_out
+
+        # Worksheet line 1 (L1): total itemized deductions before the limitation.
+        # ny_itemized_deductions_max includes the NY-only college tuition
+        # deduction (form line 48/43), which is added after line 40 and is not
+        # part of this worksheet, so it is removed here.
+        itemized_max = tax_unit("ny_itemized_deductions_max", period)
+        college_tuition = tax_unit("ny_college_tuition_deduction", period)
+        l1 = itemized_max - college_tuition
+
+        # Worksheet line 2 (L2): deductions not subject to the limitation
+        # (26 U.S.C. 68(c)) - medical, investment interest, casualty/theft.
+        medical = tax_unit("medical_expense_deduction", period)
+        investment_interest = add(tax_unit, period, ["investment_interest_expense"])
+        casualty = tax_unit("ny_casualty_loss_deduction", period)
+        l2 = medical + investment_interest + casualty
+
+        # Worksheet line 3 (L3): deductions subject to the limitation. Floored at
+        # zero to implement the worksheet's line-3 stop ("If line 2 is not less
+        # than line 1, your deduction is not limited").
+        l3 = max_(l1 - l2, 0)
+
+        # Worksheet line 4 (L4): 80% of the limited deductions.
+        l4 = l3 * p.deduction_limited_rate
+
+        # Worksheet lines 5-8: 3% of federal AGI over the applicable amount.
+        # The defined_for guard already restricts this to filers whose federal
+        # AGI exceeds the applicable amount (worksheet line 7), so the excess is
+        # positive; max_ guards the vectorized boundary.
+        agi = tax_unit("adjusted_gross_income", period)
+        filing_status = tax_unit("filing_status", period)
+        applicable_amount = p.start[filing_status]
+        agi_excess = max_(agi - applicable_amount, 0)
+        l8 = agi_excess * p.agi_excess_rate
+
+        # Worksheet lines 9-10: reduce by the smaller of the two limbs.
+        return min_(l4, l8)

policyengine_us/variables/gov/states/ny/tax/income/taxable_income/deductions/itemized/phase_out/ny_itemized_deductions_phase_out_applies.py

@@ -0,0 +1,25 @@
+from policyengine_us.model_api import *
+
+
+class ny_itemized_deductions_phase_out_applies(Variable):
+    value_type = bool
+    entity = TaxUnit
+    label = "Whether the pre-TCJA overall limitation on New York itemized deductions applies"
+    definition_period = YEAR
+    reference = (
+        "https://www.law.cornell.edu/uscode/text/26/68#b",  # applicable amount
+        "https://www.tax.ny.gov/pdf/current_forms/it/it196i.pdf#page=19",  # Line 40 worksheet, line 7
+    )
+    defined_for = StateCode.NY
+
+    def formula(tax_unit, period, parameters):
+        # IT-196 Line 40 worksheet, lines 5-7: the limitation only applies when
+        # federal AGI (Form IT-201/IT-203 line 19) exceeds the Table 1
+        # applicable amount for the filing status. NY Tax Law § 615 conforms to
+        # the pre-TCJA federal 26 U.S.C. § 68(b) applicable amount, which NY
+        # continues to inflation-adjust.
+        p = parameters(period).gov.states.ny.tax.income.deductions.itemized.phase_out
+        agi = tax_unit("adjusted_gross_income", period)
+        filing_status = tax_unit("filing_status", period)
+        applicable_amount = p.start[filing_status]
+        return agi > applicable_amount