New Mexico net capital gains deduction: each MFS spouse should take half of the deduction computed on combined joint-return gains (7-2-34(B)) #9679

Problem

nm_net_capital_gains_deduction halves each separate filer's deduction, but it computes that deduction on the filer's own gains (policyengine_us/variables/gov/states/nm/tax/income/deductions/nm_net_capital_gains_deduction.py, the denominator = where(separate, 2, 1) step). The law halves the deduction "allowed on the joint return", so each spouse filing separately should get half of the deduction computed on the couple's combined net capital gain.

Evidence

• NMSA 7-2-34(B), as amended by 2019 HB6, section 14(B), p. 41: a married individual filing separately may claim one-half of the deduction that would be allowed on the joint return.
• 2023 PIT instruction book, p. 53.
• Examples (2023, from the Fix AR, MT and NM income tax gaps found in TAXSIM comparison sweep #9585 review):
  • Each spouse has $2,000 of long-term gains. The model gives $500 each: max(40% × 2,000, min(2,000, 1,000)) / 2. The law gives $800 each: combined 4,000, max(1,600, 1,000) = 1,600, halved.
  • One spouse has +$20,000 and the other −$15,000. The model gives $4,000 and $0: 8,000 / 2 for the first spouse, nothing for the second. The law gives $1,000 each: combined 5,000, max(2,000, 1,000) = 2,000, halved. The couple claims twice the $2,000 joint deduction.

Proposed fix

Compute net capital gain on the marital unit's combined long-term and short-term amounts, plus distributions, following IRC 1222(11). Apply the joint-return formula to that total, then give each separate filer half. The combined amount can come from person.marital_unit.sum(...) projected to the tax unit. Add MFS test cases for the two examples above. A limitation comment was added in #9585 and should be removed when this is fixed.

Found while fixing #9585.

🤖 Generated with Claude Code

https://claude.ai/code/session_01LqCGPgxDukji8Bhs57c5rH