Restrict military survivor tax exemptions to eligible spouses

changelog.d/mi-military-survivor-spouse-only.fixed.md

@@ -0,0 +1 @@
+Restrict military survivor retirement tax exemptions to eligible surviving spouses in Arizona, Idaho, Indiana, Michigan, North Dakota, New Mexico, Rhode Island, South Carolina, and Virginia. Apply New Mexico's 2025 survivor eligibility date and use Michigan's eligible subtraction in retirement deduction worksheets.

policyengine_us/parameters/gov/states/id/tax/income/deductions/retirement_benefits/income_sources.yaml

@@ -2,7 +2,7 @@ description: Idaho counts the following income sources under the retirement bene
 values:
   2021-01-01:
     - public_pension_income
-    - military_retirement_income
+    - id_eligible_military_retirement_income
 
   2025-01-01:
     - public_pension_income

policyengine_us/parameters/gov/states/mi/tax/income/subtractions.yaml

@@ -2,7 +2,7 @@ description: Michigan subtracts these sources to federal adjusted gross income w
 values:
   2017-01-01:
     - us_govt_interest # Line 10
-    - military_retirement_income # Line 11
+    - mi_military_retirement_subtraction # Line 11
     - taxable_social_security # Line 14
     - military_service_income # Line 14
     - section_22_income # Line 22
@@ -14,7 +14,7 @@ values:
     - mi_other_subtractions
   2026-01-01:
     - us_govt_interest # Line 10
-    - military_retirement_income # Line 11
+    - mi_military_retirement_subtraction # Line 11
 
     - taxable_social_security # Line 14
     - military_service_income # Line 14

policyengine_us/parameters/gov/states/nd/tax/income/taxable_income/subtractions/sources.yaml

@@ -5,7 +5,7 @@ values:
     - nd_ltcg_subtraction  # long-term capital gains
     - nd_qdiv_subtraction  # qualified dividends
     - taxable_social_security
-    - military_retirement_income
+    - nd_military_retirement_subtraction
     - nd_529_deduction
     - nd_stillborn_subtraction
     - nd_other_subtractions
@@ -15,7 +15,7 @@ values:
     - nd_ltcg_subtraction  # long-term capital gains
     - nd_qdiv_subtraction  # qualified dividends
     - taxable_social_security
-    - military_retirement_income
+    - nd_military_retirement_subtraction
     - nd_529_deduction
     - nd_stillborn_subtraction
     - nd_other_subtractions
@@ -25,7 +25,7 @@ values:
     - nd_ltcg_subtraction  # long-term capital gains
     - nd_qdiv_subtraction  # qualified dividends
     - taxable_social_security
-    - military_retirement_income
+    - nd_military_retirement_subtraction
     - military_service_income  # military pay exclusion
     - nd_529_deduction
     - nd_stillborn_subtraction

policyengine_us/parameters/gov/states/nm/tax/income/exemptions/armed_forces_retirement_pay/survivors_eligible.yaml

@@ -0,0 +1,12 @@
+description: New Mexico allows surviving spouses to claim the armed forces retirement pay exemption when this is true.
+values:
+  2022-01-01: false
+  2025-01-01: true
+
+metadata:
+  label: New Mexico armed forces retirement surviving spouse eligibility
+  unit: bool
+  period: year
+  reference:
+    - title: 2024 HB 252, Sections 32 and 42 (PDF pages 102 and 147), amending NMSA 7-2-5.13 and setting applicability
+      href: https://www.nmlegis.gov/Sessions/24%20Regular/final/HB0252.PDF#page=102

policyengine_us/parameters/gov/states/ri/tax/income/agi/subtractions/subtractions.yaml

@@ -13,7 +13,7 @@ values:
     - ri_tuition_saving_program_contribution_subtraction
     - ri_retirement_income_subtraction
     - us_govt_interest
-    - military_retirement_income
+    - ri_military_retirement_subtraction
     - ri_other_subtractions
 
 metadata:

policyengine_us/parameters/gov/states/ri/tax/income/agi/subtractions/taxable_retirement_income/sources.yaml

@@ -5,10 +5,6 @@ values:
     - military_retirement_income
     - taxable_401k_distributions
     - taxable_403b_distributions
-  2023-01-01:
-    - taxable_pension_income
-    - taxable_401k_distributions
-    - taxable_403b_distributions
 metadata:
   unit: list
   period: year
@@ -18,3 +14,5 @@ metadata:
       href: https://webserver.rilegislature.gov/Statutes/TITLE44/44-30/44-II/44-30-12.htm
     - title: Rhode Island Division of Taxation Publication 2021-02 Line 5b
       href: https://tax.ri.gov/sites/g/files/xkgbur541/files/notice/Pub_2021_02_pension_income_guide_04_06_21.pdf#page=5
+    - title: Rhode Island Division of Taxation Publication 2024-01, pension and annuity income modification
+      href: https://tax.ri.gov/sites/g/files/xkgbur541/files/2024-03/PUB_2024-01_retirement_income_guide.pdf#page=7

policyengine_us/tests/core/test_mi_military_survivor_income_invariants.py

@@ -0,0 +1,192 @@
+"""Non-spouse military survivor benefits stay in Michigan's tax base.
+
+Each year uses one vectorized simulation of paired tax units. The pairs
+share every input except increasing military survivor benefits, including
+benefits paid to dependents. Seeded incomes span the retirement deduction
+caps and ages span Michigan's retirement tiers. This catches an exemption
+that incorrectly leaves taxable income flat as well as deductions that
+incorrectly count taxable survivor benefits against another deduction.
+"""
+
+import numpy as np
+import pytest
+
+from policyengine_us import Simulation
+
+
+SEED = 20261022
+TOLERANCE = 0.05  # dollars; model calculations use float32 arrays
+FILER_AGES = [20, 40, 59, 62, 65, 67, 70, 75, 80, 85]
+
+
+def _draw_units(year):
+    rng = np.random.default_rng(SEED + year)
+    units = []
+    for i in range(24):
+        joint = i % 2 == 1
+
+        def filer(age):
+            return {
+                "age": age,
+                "employment_income": float(rng.integers(0, 80_001)),
+                "taxable_private_pension_income": float(rng.integers(0, 100_001)),
+                "military_retirement_pay": (
+                    0.0 if i % 3 == 0 else float(rng.integers(0, 50_001))
+                ),
+                "taxable_interest_income": float(rng.integers(0, 20_001)),
+                "retirement_benefits_from_ss_exempt_employment": (
+                    10_000.0 if age >= 59 and i % 3 != 0 else 0.0
+                ),
+                "year_of_retirement": 2008 if i % 4 == 0 else 2018,
+                "military_retirement_pay_survivors": float(rng.integers(0, 30_001)),
+                # Unchanged pairs check that units cannot affect each other.
+                "increment": 0.0 if i % 6 == 0 else float(rng.integers(1, 30_001)),
+            }
+
+        head = filer(FILER_AGES[i % len(FILER_AGES)])
+        spouse = filer(FILER_AGES[(i + 3) % len(FILER_AGES)]) if joint else None
+        dependents = [
+            {
+                "age": 8 + j * 4,
+                "military_retirement_pay_survivors": float(rng.integers(0, 10_001)),
+                "increment": 0.0 if i % 6 == 0 else float(rng.integers(1, 10_001)),
+            }
+            for j in range(i % 3)
+        ]
+        units.append({"head": head, "spouse": spouse, "dependents": dependents})
+
+    # Guarantee a young filer above the zero floor, independently of the draw.
+    units[0] = {
+        "head": {
+            "age": 20,
+            "employment_income": 40_000.0,
+            "military_retirement_pay_survivors": 0.0,
+            "increment": 10_000.0,
+        },
+        "spouse": None,
+        "dependents": [],
+    }
+    # This pair changes only a dependent's benefits, which belong on their
+    # own return and must not change the filer's AGI or Michigan deductions.
+    units[1]["head"]["increment"] = 0.0
+    units[1]["spouse"]["increment"] = 0.0
+    units[1]["dependents"][0]["increment"] = 10_000.0
+    # Guarantee a pair whose small survivor increase remains below the tax
+    # base's zero floor, alongside the positive-base example above.
+    units[2]["head"] = {
+        "age": 20,
+        "employment_income": 0.0,
+        "military_retirement_pay_survivors": 0.0,
+        "increment": 1_000.0,
+    }
+    return units
+
+
+def _paired_situation(units, year):
+    people, tax_units, marital_units = {}, {}, {}
+    households, families, spm_units = {}, {}, {}
+    for increased in (False, True):
+        for i, unit in enumerate(units):
+            key = f"{int(increased)}_{i}"
+            members, couple = [], []
+
+            def add_person(role, record):
+                name = f"{role}_{key}"
+                members.append(name)
+                person = {
+                    variable: {year: amount}
+                    for variable, amount in record.items()
+                    if variable != "increment"
+                }
+                benefits = record["military_retirement_pay_survivors"]
+                person["military_retirement_pay_survivors"] = {
+                    year: benefits + increased * record["increment"]
+                }
+                person.update(
+                    {
+                        "is_surviving_spouse": {year: False},
+                        "is_tax_unit_head": {year: role == "head"},
+                        "is_tax_unit_spouse": {year: role == "spouse"},
+                        "is_tax_unit_dependent": {year: role.startswith("dependent")},
+                    }
+                )
+                people[name] = person
+                return name
+
+            couple.append(add_person("head", unit["head"]))
+            if unit["spouse"] is not None:
+                couple.append(add_person("spouse", unit["spouse"]))
+            marital_units[f"couple_{key}"] = {"members": couple}
+            for j, record in enumerate(unit["dependents"]):
+                name = add_person(f"dependent_{j}", record)
+                marital_units[f"dependent_{key}_{j}"] = {"members": [name]}
+            tax_units[f"tax_unit_{key}"] = {"members": members}
+            households[f"household_{key}"] = {
+                "members": members,
+                "state_name": {year: "MI"},
+            }
+            families[f"family_{key}"] = {"members": members}
+            spm_units[f"spm_unit_{key}"] = {"members": members}
+    return {
+        "people": people,
+        "tax_units": tax_units,
+        "marital_units": marital_units,
+        "households": households,
+        "families": families,
+        "spm_units": spm_units,
+    }
+
+
+@pytest.mark.parametrize("year", [2024, 2025, 2026])
+def test_nonspouse_survivor_benefits_never_reduce_michigan_taxable_income(year):
+    units = _draw_units(year)
+    sim = Simulation(situation=_paired_situation(units, year))
+    count = len(units)
+
+    def paired(variable):
+        amounts = sim.calculate(variable, year)
+        return amounts[:count], amounts[count:]
+
+    increments = np.array(
+        [
+            unit["head"]["increment"]
+            + (unit["spouse"]["increment"] if unit["spouse"] is not None else 0)
+            for unit in units
+        ]
+    )
+    # Child benefits are excluded from the filer's federal AGI; every dollar
+    # paid to the head or spouse is federally taxable on this return.
+    agi_before, agi_after = paired("adjusted_gross_income")
+    np.testing.assert_allclose(
+        agi_after - agi_before, increments, rtol=0, atol=TOLERANCE
+    )
+    for variable in ("mi_subtractions", "mi_exemptions"):
+        before, after = paired(variable)
+        np.testing.assert_allclose(
+            after,
+            before,
+            rtol=0,
+            atol=TOLERANCE,
+            err_msg=f"Non-spouse survivor benefits changed {variable}",
+        )
+
+    before, after = paired("mi_taxable_income")
+    assert (after >= before - TOLERANCE).all()
+    above_floor = before > TOLERANCE
+    np.testing.assert_allclose(
+        after[above_floor] - before[above_floor],
+        increments[above_floor],
+        rtol=0,
+        atol=TOLERANCE,
+        err_msg="Non-spouse benefits must increase a positive Michigan tax base",
+    )
+    unchanged_filer_income = increments == 0
+    np.testing.assert_allclose(
+        after[unchanged_filer_income],
+        before[unchanged_filer_income],
+        rtol=0,
+        atol=TOLERANCE,
+    )
+    assert (above_floor & (increments > 0)).any()
+    assert ((before == 0) & (after == 0) & (increments > 0)).any()
+    assert unchanged_filer_income.any()

policyengine_us/tests/policy/baseline/gov/states/az/tax/income/subtractions/az_military_retirement_subtraction.yaml

@@ -119,3 +119,32 @@
         state_code: AZ
   output:
     az_military_retirement_subtraction: 9_000
+
+- name: Arizona excludes a surviving spouse's military survivor benefits.
+  period: 2024
+  input:
+    state_code: AZ
+    is_surviving_spouse: true
+    military_retirement_pay_survivors: 10_000
+  output:
+    az_military_retirement_subtraction: 10_000
+
+- name: Arizona does not exclude a non-spouse survivor's military benefits.
+  period: 2024
+  input:
+    state_code: AZ
+    age: 20
+    is_surviving_spouse: false
+    military_retirement_pay_survivors: 10_000
+  output:
+    az_military_retirement_subtraction: 0
+
+- name: Arizona retains own military retirement pay without excluding non-spouse survivor benefits.
+  period: 2024
+  input:
+    state_code: AZ
+    is_surviving_spouse: false
+    military_retirement_pay: 30_000
+    military_retirement_pay_survivors: 10_000
+  output:
+    az_military_retirement_subtraction: 30_000

policyengine_us/tests/policy/baseline/gov/states/id/tax/income/deductions/retirement_benefits/id_retirement_benefits_deduction.yaml

@@ -102,3 +102,36 @@
         state_code: ID
   output:
     id_retirement_benefits_deduction: 30_000
+
+- name: Idaho general retirement deduction excludes non-spouse military survivor benefits before 2025.
+  period: 2024
+  input:
+    state_code: ID
+    age: 65
+    is_surviving_spouse: false
+    military_retirement_pay_survivors: 10_000
+  output:
+    id_retirement_benefits_deduction_relevant_income: 0
+    id_retirement_benefits_deduction: 0
+
+- name: Idaho general retirement deduction includes an unremarried surviving spouse before 2025.
+  period: 2024
+  input:
+    state_code: ID
+    age: 65
+    is_surviving_spouse: true
+    military_retirement_pay_survivors: 10_000
+  output:
+    id_retirement_benefits_deduction_relevant_income: 10_000
+    id_retirement_benefits_deduction: 10_000
+
+- name: Idaho general retirement deduction retains own military pay before 2025.
+  period: 2024
+  input:
+    state_code: ID
+    age: 65
+    is_surviving_spouse: false
+    military_retirement_pay: 10_000
+  output:
+    id_retirement_benefits_deduction_relevant_income: 10_000
+    id_retirement_benefits_deduction: 10_000