Fix the 2021 CTC split and surviving-spouse phaseout threshold

changelog.d/ctc-2021-refundable-split.fixed.md

@@ -0,0 +1,3 @@
+Correct the 2021 child tax credit split after both phaseouts so the credit for other dependents remains nonrefundable, including its effect on solar-credit ordering and Oklahoma conformity.
+
+Correct the ordinary CTC phaseout threshold for surviving spouses to $200,000 from 2018 onward, while retaining their separate $150,000 ARPA threshold.

policyengine_us/parameters/gov/irs/credits/ctc/phase_out/threshold.yaml

@@ -13,7 +13,7 @@ HEAD_OF_HOUSEHOLD:
   2018-01-01: 200_000
 SURVIVING_SPOUSE:
   2013-01-01: 75_000
-  2018-01-01: 400_000
+  2018-01-01: 200_000
 metadata:
   propagate_metadata_to_children: true
   unit: currency-USD
@@ -27,6 +27,8 @@ metadata:
     # TCJA:
     - title: U.S.C 26 U.S. Code § 24(h)(3)
       href: https://www.law.cornell.edu/uscode/text/26/24#h_3
+    - title: 2021 Schedule 8812, line 9
+      href: https://www.irs.gov/pub/irs-prior/f1040s8--2021.pdf#page=1
     - title: H.R.1 - One Big Beautiful Bill Act
       href: https://www.congress.gov/bill/119th-congress/house-bill/1/text
     # OBBB extends TCJA CTC phaseout thresholds.

policyengine_us/tests/policy/baseline/gov/irs/credits/ctc/ctc.yaml

@@ -6,3 +6,31 @@
     ctc_phase_out: 1
   output:
     ctc: 2
+
+- name: A surviving spouse phases out the 2021 child credit above 200000.
+  period: 2021
+  input:
+    people:
+      parent:
+        age: 40
+        is_tax_unit_head: true
+        employment_income: 200_001
+      child:
+        age: 5
+        is_tax_unit_dependent: true
+    tax_units:
+      tax_unit:
+        members: [parent, child]
+        filing_status: SURVIVING_SPOUSE
+    households:
+      household:
+        members: [parent, child]
+        state_code: TX
+  output:
+    ctc_arpa_phase_out_threshold: 150_000
+    ctc_arpa_phase_out: 1_600
+    ctc_phase_out_threshold: 200_000
+    ctc_phase_out: 50
+    ctc: 1_950
+    refundable_ctc: 1_950
+    non_refundable_ctc: 0

policyengine_us/tests/policy/baseline/gov/irs/credits/ctc/phase_out/arpa/ctc_arpa_phase_out_cap.yaml

@@ -6,3 +6,21 @@
     ctc_arpa_max_addition: 15_000 # e.g. 15 kids * $1,000 extra.
   output:
     ctc_arpa_phase_out_cap: 12_500 # 400k - 150k = 250k * 0.05 = 12.5k
+
+- name: The first ARPA reduction cannot exceed the child credit enhancement.
+  period: 2021
+  input:
+    filing_status: JOINT
+    ctc_arpa_max_addition: 1_600
+  output:
+    ctc_arpa_phase_out_cap: 1_600
+
+- name: Surviving spouses use the 2500 threshold-difference cap in the Line 5 Worksheet.
+  period: 2021
+  input:
+    filing_status: SURVIVING_SPOUSE
+    ctc_arpa_max_addition: 5_000
+  output:
+    ctc_arpa_phase_out_threshold: 150_000
+    ctc_phase_out_threshold: 200_000
+    ctc_arpa_phase_out_cap: 2_500

policyengine_us/tests/policy/baseline/gov/irs/credits/ctc/phase_out/ctc_phase_out_threshold.yaml

@@ -5,9 +5,40 @@
   output:
     ctc_phase_out_threshold: 200_000
 
-- name: CTC phases out at $400,000 for singles while TCJA is active.
+- name: CTC phases out at $400,000 for joint filers while TCJA is active.
   period: 2022
   input:
     filing_status: JOINT
   output:
     ctc_phase_out_threshold: 400_000
+
+# Section 24(h)(3) reserves $400,000 for joint returns. A surviving spouse
+# shares joint tax rates under section 1(a), but does not file a joint return.
+- name: Before TCJA surviving spouses retain the nonjoint threshold.
+  period: 2017
+  input:
+    filing_status: [SURVIVING_SPOUSE, JOINT]
+  output:
+    ctc_phase_out_threshold: [75_000, 110_000]
+
+- name: TCJA gives surviving spouses the ordinary nonjoint threshold.
+  period: 2018
+  input:
+    filing_status: [SURVIVING_SPOUSE, JOINT]
+  output:
+    ctc_phase_out_threshold: [200_000, 400_000]
+
+- name: ARPA does not make surviving spouses joint filers for ordinary phaseout.
+  period: 2021
+  input:
+    filing_status: [SURVIVING_SPOUSE, JOINT]
+  output:
+    ctc_phase_out_threshold: [200_000, 400_000]
+    ctc_arpa_phase_out_threshold: [150_000, 150_000]
+
+- name: OBBB retains the nonjoint ordinary threshold for surviving spouses.
+  period: 2026
+  input:
+    filing_status: [SURVIVING_SPOUSE, JOINT]
+  output:
+    ctc_phase_out_threshold: [200_000, 400_000]

policyengine_us/tests/policy/baseline/gov/irs/credits/ctc/refundable/refundable_ctc.yaml

@@ -206,3 +206,118 @@
     section_911_excluded_income: 0
     # Without the section 911 bar, the same phase-in gives a $3,400 refund.
     refundable_ctc: 0
+
+# Proposed additions to:
+# policyengine_us/tests/policy/baseline/gov/irs/credits/ctc/refundable/refundable_ctc.yaml
+# Sources: 2021 IRC 24(i)(1)(B), 24(i)(4)(C)-(D), and Schedule 8812
+# https://www.govinfo.gov/content/pkg/USCODE-2021-title26/pdf/USCODE-2021-title26-subtitleA.pdf#page=57
+# https://www.govinfo.gov/content/pkg/USCODE-2021-title26/pdf/USCODE-2021-title26-subtitleA.pdf#page=58
+# https://www.irs.gov/pub/irs-prior/f1040s8--2021.pdf#page=1
+- name: ARPA phaseout cannot make other-dependent credit refundable in 2021
+  period: 2021
+  absolute_error_margin: 0.01
+  input:
+    people:
+      parent:
+        age: 40
+        is_tax_unit_head: true
+        employment_income: 170_000
+      child:
+        age: 5
+        is_tax_unit_dependent: true
+      other_dependent:
+        age: 19
+        is_tax_unit_dependent: true
+    tax_units:
+      tax_unit:
+        members: [parent, child, other_dependent]
+        filing_status: HEAD_OF_HOUSEHOLD
+    households:
+      household:
+        members: [parent, child, other_dependent]
+        state_code: TX
+  output:
+    adjusted_gross_income: 170_000
+    # min(50 * ceil((170,000 - 112,500) / 1,000), 1,600, 4,375).
+    ctc_arpa_phase_out: 1_600
+    ctc_phase_out: 0
+    # Schedule 8812 lines 5 + 7 = (3,600 - 1,600) + 500.
+    ctc: 2_500
+    # Lines 14a = 500; 14b = 2,500 - 500 = 2,000.
+    refundable_ctc: 2_000
+    # Before the section 26(a) tax limit (not binding in this household).
+    non_refundable_ctc: 500
+    ctc_value: 2_500
+
+- name: Other-dependent credit remains nonrefundable after the child portion phases out in 2021
+  period: 2021
+  absolute_error_margin: 0.01
+  input:
+    people:
+      parent:
+        age: 40
+        is_tax_unit_head: true
+        employment_income: 240_001
+      child:
+        age: 5
+        is_tax_unit_dependent: true
+      other_dependent:
+        age: 19
+        is_tax_unit_dependent: true
+    tax_units:
+      tax_unit:
+        members: [parent, child, other_dependent]
+        filing_status: HEAD_OF_HOUSEHOLD
+    households:
+      household:
+        members: [parent, child, other_dependent]
+        state_code: TX
+  output:
+    ctc_arpa_phase_out: 1_600
+    # 50 * ceil((240,001 - 200,000) / 1,000) = 2,050.
+    ctc_phase_out: 2_050
+    ctc: 450
+    # max(3,600 - 1,600 - 2,050, 0) = 0.
+    refundable_ctc: 0
+    non_refundable_ctc: 450
+    ctc_value: 450
+
+# This interaction proves the split affects total federal tax, not only labels.
+# 2021 IRC 25D(c), Form 5695 lines 6b/14/15 and its Credit Limit Worksheet:
+# https://www.govinfo.gov/content/pkg/USCODE-2021-title26/pdf/USCODE-2021-title26-subtitleA.pdf#page=81
+# https://www.irs.gov/pub/irs-prior/f5695--2021.pdf#page=1
+# https://www.irs.gov/pub/irs-prior/i5695--2021.pdf#page=4
+- name: Nonrefundable ODC reduces solar credit capacity before the 2021 child refund
+  period: 2021
+  absolute_error_margin: 0.01
+  input:
+    people:
+      parent:
+        age: 40
+        is_tax_unit_head: true
+        employment_income: 170_000
+      child:
+        age: 5
+        is_tax_unit_dependent: true
+      other_dependent:
+        age: 19
+        is_tax_unit_dependent: true
+    tax_units:
+      tax_unit:
+        members: [parent, child, other_dependent]
+        filing_status: HEAD_OF_HOUSEHOLD
+        solar_electric_property_expenditures: 150_000
+    households:
+      household:
+        members: [parent, child, other_dependent]
+        state_code: TX
+  output:
+    income_tax_before_credits: 28_857
+    residential_clean_energy_credit_potential: 39_000
+    # 28,857 - 500 ODC; refundable child credit is in a different subpart.
+    residential_clean_energy_credit_credit_limit: 28_357
+    residential_clean_energy_credit: 28_357
+    refundable_ctc: 2_000
+    non_refundable_ctc: 500
+    ctc_value: 2_500
+    income_tax: -2_000

policyengine_us/tests/policy/baseline/gov/states/ia/tax/income/ia_integration.yaml

@@ -49,11 +49,11 @@
   output:  # expected ia_income_tax from patched TAXSIM35 2023-05-05 version
     # federal income tax results used by Iowa income tax:
     filing_status: JOINT
-    # federal CTC was fully refundable in 2021, but composition is flawed
-    non_refundable_ctc: 0  # a negative credit is nonsensical
-    refundable_ctc: 8_000  # the correct amount in this case is $8000
+    # The child-only CTC remaining after both 2021 reductions is refundable.
+    non_refundable_ctc: 0
+    refundable_ctc: 8_000
     income_tax_before_refundable_credits: 42_502.80  #
-    # formula for ia_fedtax_deduction works around the above federal CTC flaw
+    # Iowa retains its addback of nonrefundable CTC in fully refundable years.
     additional_medicare_tax: 18.18  # neither this nor SECA tax part of fedtax
     # Iowa income tax results:
     ia_net_income: [104_010, 148_010, 0, 0, 0, 0]

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

@@ -22,6 +22,42 @@
     income_tax_capped_non_refundable_credits: 1_000
     ok_federal_ctc: 500
 
+- name: In 2021 Oklahoma counts the child refund and only usable ODC after ARPA phaseout.
+  period: 2021
+  absolute_error_margin: 0.01
+  input:
+    people:
+      parent:
+        age: 40
+        is_tax_unit_head: true
+        employment_income: 90_000
+      child:
+        age: 5
+        is_tax_unit_dependent: true
+      other_dependent:
+        age: 19
+        is_tax_unit_dependent: true
+    tax_units:
+      tax_unit:
+        members: [parent, child, other_dependent]
+        filing_status: SINGLE
+        # Isolate a binding federal tax limit while deriving the CTC split.
+        income_tax_before_credits: 300
+    households:
+      household:
+        members: [parent, child, other_dependent]
+        state_code: OK
+  output:
+    ctc_arpa_phase_out: 750
+    ctc_phase_out: 0
+    ctc: 3_350
+    refundable_ctc: 2_850
+    non_refundable_ctc: 500
+    income_tax_capped_non_refundable_credits: 300
+    ctc_value: 3_150
+    # Refundable child credit plus 300 of the 500 nonrefundable ODC.
+    ok_federal_ctc: 3_150
+
 - name: A credit on Credit Limit Worksheet A, line 2, is applied before the CTC when credits exceed tax.
   period: 2025
   input: