Split the New Mexico net capital gains deduction between separate filers

changelog.d/nm-mfs-capital-gains-split.fixed.md

@@ -0,0 +1 @@
+New Mexico net capital gains deduction now gives each married-filing-separately spouse half of the deduction computed on the couple's combined net capital gain, per NMSA 7-2-34(B).

policyengine_us/parameters/gov/states/nm/tax/income/deductions/net_capital_gains/separate_filer_share.yaml

@@ -0,0 +1,18 @@
+description: New Mexico provides this share of the joint-return net capital gains deduction to each separate filer.
+values:
+  2019-01-01: 0.5
+metadata:
+  unit: /1
+  period: year
+  label: New Mexico net capital gains deduction separate filer share
+  reference:
+    - title: 2019 HB6, Section 14(B), amending NMSA 7-2-34(B)
+      href: https://www.nmlegis.gov/Sessions/19%20Regular/final/HB0006.pdf#page=41
+    - title: 2024 HB252, Section 8(B), amending NMSA 7-2-34(B)
+      href: https://www.nmlegis.gov/Sessions/24%20Regular/final/HB0252.pdf#page=30
+    - title: 2023 New Mexico PIT-ADJ Instructions, Line 16, Net capital gains deduction
+      href: https://klvg4oyd4j.execute-api.us-west-2.amazonaws.com/prod/PublicFiles/34821a9573ca43e7b06dfad20f5183fd/90560f4e-0ef0-4e52-a003-878b84f858bb/PITbook2023.pdf#page=53
+    - title: 2024 New Mexico PIT-ADJ Instructions, Line 16, Net capital gains deduction
+      href: https://klvg4oyd4j.execute-api.us-west-2.amazonaws.com/prod/PublicFiles/34821a9573ca43e7b06dfad20f5183fd/97f27f33-5e23-4a25-ad68-0980a22b802d/PITbook2024.pdf#page=53
+    - title: 2025 New Mexico PIT-ADJ Instructions, Line 16, Net capital gains deduction
+      href: https://klvg4oyd4j.execute-api.us-west-2.amazonaws.com/prod/PublicFiles/34821a9573ca43e7b06dfad20f5183fd/0558a902-6362-47ca-8e3b-7cca3bc69b9d/2025%20PIT%20Packet_Final.pdf#page=50

policyengine_us/tests/policy/baseline/gov/states/nm/tax/income/deductions/nm_net_capital_gains_deduction.yaml

@@ -278,3 +278,253 @@
     # 852(b)(3)(B), so net capital gains = 5,000.
     # max(40% x 5,000, min(5,000, 1,000)) = max(2,000, 1,000) = 2,000.
     nm_net_capital_gains_deduction: 2_000
+
+# Married filing separately: NMSA 7-2-34(B) (2019 HB6, section 14(B), p.41;
+# 2024 HB252, section 8(B), p.30) lets each spouse claim one-half of the
+# deduction that would have been allowed on the joint return. The PIT-ADJ line
+# 16 instructions (2023 PIT instruction book, p.53) say the same. Each spouse
+# heads a separate tax unit, so the deduction is computed on the couple's
+# combined gains and losses (reached through the marital unit) and halved.
+
+- name: Separate couple, gains only on one spouse, each spouse gets half of the joint deduction
+  period: 2023
+  input:
+    people:
+      person1:
+        long_term_capital_gains: 10_000
+      person2:
+        long_term_capital_gains: 0
+    tax_units:
+      tax_unit1:
+        members: [person1]
+        filing_status: SEPARATE
+      tax_unit2:
+        members: [person2]
+        filing_status: SEPARATE
+    marital_units:
+      marital_unit:
+        members: [person1, person2]
+    households:
+      household:
+        members: [person1, person2]
+        state_code: NM
+  output:
+    # Combined net capital gains = 10,000 + 0 = 10,000.
+    # Joint deduction = max(40% x 10,000, min(10,000, 1,000)) = 4,000.
+    # Each spouse: 0.5 x 4,000 = 2,000 (before: 2,000 and 0).
+    nm_net_capital_gains_deduction: [2_000, 2_000]
+
+- name: Separate couple, gains split between spouses
+  period: 2023
+  input:
+    people:
+      person1:
+        long_term_capital_gains: 2_000
+      person2:
+        long_term_capital_gains: 2_000
+    tax_units:
+      tax_unit1:
+        members: [person1]
+        filing_status: SEPARATE
+      tax_unit2:
+        members: [person2]
+        filing_status: SEPARATE
+    marital_units:
+      marital_unit:
+        members: [person1, person2]
+    households:
+      household:
+        members: [person1, person2]
+        state_code: NM
+  output:
+    # Combined net capital gains = 2,000 + 2,000 = 4,000.
+    # Joint deduction = max(40% x 4,000, min(4,000, 1,000))
+    # = max(1,600, 1,000) = 1,600.
+    # Each spouse: 0.5 x 1,600 = 800 (before: max(800, 1,000) / 2 = 500 each).
+    nm_net_capital_gains_deduction: [800, 800]
+
+- name: Separate couple, one spouse's long-term loss offsets the other's long-term gain
+  period: 2023
+  input:
+    people:
+      person1:
+        long_term_capital_gains: 20_000
+      person2:
+        long_term_capital_gains: -15_000
+    tax_units:
+      tax_unit1:
+        members: [person1]
+        filing_status: SEPARATE
+      tax_unit2:
+        members: [person2]
+        filing_status: SEPARATE
+    marital_units:
+      marital_unit:
+        members: [person1, person2]
+    households:
+      household:
+        members: [person1, person2]
+        state_code: NM
+  output:
+    # Combined net long-term gain = 20,000 - 15,000 = 5,000.
+    # Joint deduction = max(40% x 5,000, min(5,000, 1,000))
+    # = max(2,000, 1,000) = 2,000.
+    # Each spouse: 0.5 x 2,000 = 1,000 (before: 8,000 / 2 = 4,000 and 0).
+    nm_net_capital_gains_deduction: [1_000, 1_000]
+
+- name: Separate couple, one spouse's short-term loss offsets the other's long-term gain
+  period: 2023
+  input:
+    people:
+      person1:
+        long_term_capital_gains: 20_000
+      person2:
+        short_term_capital_gains: -5_000
+    tax_units:
+      tax_unit1:
+        members: [person1]
+        filing_status: SEPARATE
+      tax_unit2:
+        members: [person2]
+        filing_status: SEPARATE
+    marital_units:
+      marital_unit:
+        members: [person1, person2]
+    households:
+      household:
+        members: [person1, person2]
+        state_code: NM
+  output:
+    # Combined net short-term loss = 5,000.
+    # Combined net capital gains = 20,000 - 5,000 = 15,000.
+    # Joint deduction = max(40% x 15,000, min(15,000, 1,000)) = 6,000.
+    # Each spouse: 0.5 x 6,000 = 3,000.
+    nm_net_capital_gains_deduction: [3_000, 3_000]
+
+- name: Separate couple, combined gains at the joint $1,000 cap in 2023
+  period: 2023
+  input:
+    people:
+      person1:
+        long_term_capital_gains: 1_200
+      person2:
+        long_term_capital_gains: 800
+    tax_units:
+      tax_unit1:
+        members: [person1]
+        filing_status: SEPARATE
+      tax_unit2:
+        members: [person2]
+        filing_status: SEPARATE
+    marital_units:
+      marital_unit:
+        members: [person1, person2]
+    households:
+      household:
+        members: [person1, person2]
+        state_code: NM
+  output:
+    # Combined net capital gains = 1,200 + 800 = 2,000.
+    # Joint deduction = max(40% x 2,000, min(2,000, 1,000))
+    # = max(800, 1,000) = 1,000.
+    # Each spouse: 0.5 x 1,000 = 500 (before: max(480, 1,000) / 2 = 500 and
+    # max(320, 800) / 2 = 400).
+    nm_net_capital_gains_deduction: [500, 500]
+
+- name: Separate couple, combined gains above the joint $2,500 cap in 2025
+  period: 2025
+  input:
+    people:
+      person1:
+        long_term_capital_gains: 3_000
+      person2:
+        long_term_capital_gains: 1_000
+    tax_units:
+      tax_unit1:
+        members: [person1]
+        filing_status: SEPARATE
+      tax_unit2:
+        members: [person2]
+        filing_status: SEPARATE
+    marital_units:
+      marital_unit:
+        members: [person1, person2]
+    households:
+      household:
+        members: [person1, person2]
+        state_code: NM
+  output:
+    # Combined net capital gains = 3,000 + 1,000 = 4,000.
+    # Joint deduction = min(4,000, 2,500) = 2,500 (the 40% element is zero).
+    # Each spouse: 0.5 x 2,500 = 1,250 (before: min(3,000, 2,500) / 2 = 1,250
+    # and min(1,000, 2,500) / 2 = 500).
+    nm_net_capital_gains_deduction: [1_250, 1_250]
+
+- name: Separate couple with a dependent in one spouse's unit, explicit marital units
+  period: 2023
+  input:
+    people:
+      person1:
+        age: 40
+        long_term_capital_gains: 2_000
+      person2:
+        age: 40
+        long_term_capital_gains: 2_000
+      child:
+        age: 10
+        is_tax_unit_dependent: true
+    tax_units:
+      tax_unit1:
+        members: [person1, child]
+        filing_status: SEPARATE
+      tax_unit2:
+        members: [person2]
+        filing_status: SEPARATE
+    marital_units:
+      marital_unit1:
+        members: [person1, person2]
+      marital_unit2:
+        members: [child]
+    households:
+      household:
+        members: [person1, person2, child]
+        state_code: NM
+  output:
+    # Combined net capital gains = 2,000 + 2,000 = 4,000.
+    # Joint deduction = max(40% x 4,000, min(4,000, 1,000)) = 1,600.
+    # Each spouse: 0.5 x 1,600 = 800.
+    nm_net_capital_gains_deduction: [800, 800]
+
+- name: Joint couple regression, full deduction on combined gains
+  period: 2023
+  input:
+    people:
+      person1:
+        long_term_capital_gains: 2_000
+      person2:
+        long_term_capital_gains: 2_000
+    tax_units:
+      tax_unit:
+        members: [person1, person2]
+        filing_status: JOINT
+    marital_units:
+      marital_unit:
+        members: [person1, person2]
+    households:
+      household:
+        members: [person1, person2]
+        state_code: NM
+  output:
+    # Net capital gains = 2,000 + 2,000 = 4,000.
+    # max(40% x 4,000, min(4,000, 1,000)) = 1,600, not halved.
+    nm_net_capital_gains_deduction: 1_600
+
+- name: Single filer regression, full deduction on own gains
+  period: 2023
+  input:
+    filing_status: SINGLE
+    long_term_capital_gains: 2_000
+    state_code: NM
+  output:
+    # max(40% x 2,000, min(2,000, 1,000)) = max(800, 1,000) = 1,000.
+    nm_net_capital_gains_deduction: 1_000

policyengine_us/variables/gov/states/nm/tax/income/deductions/nm_net_capital_gains_deduction.py

@@ -9,13 +9,18 @@ class nm_net_capital_gains_deduction(Variable):
     definition_period = YEAR
     reference = (
         "https://nmonesource.com/nmos/nmsa/en/item/4340/index.do#!fragment/zoupio-_Toc140503882/BQCwhgziBcwMYgK4DsDWszIQewE4BUBTADwBdoAvbRABwEtsBaAfX2zgEYAWABgFYeAZgAcwgEwBKADTJspQhACKiQrgCe0AOSapEQmFwJlqjdt37DIAMp5SAIQ0AlAKIAZZwDUAggDkAws5SpGAARtCk7BISQA",
-        # 2019 HB6, section 14: NMSA 7-2-34(D) adopts IRC 1222(11).
+        # 2019 HB6, section 14: NMSA 7-2-34(B) gives each spouse filing
+        # separately one-half of the joint-return deduction, and 7-2-34(D)
+        # adopts IRC 1222(11).
         "https://www.nmlegis.gov/Sessions/19%20Regular/final/HB0006.pdf#page=41",
         # 2019 HB6, section 59(A): section 14 applies from tax year 2019.
         "https://www.nmlegis.gov/Sessions/19%20Regular/final/HB0006.pdf#page=105",
-        # 2024 HB252, section 8: from 2025 (section 42(B)) the same definition
-        # is in NMSA 7-2-34(C).
+        # 2024 HB252, section 8: from 2025 (section 42(B)) subsection (B) keeps
+        # the separate-return rule and the same definition is in NMSA
+        # 7-2-34(C).
         "https://www.nmlegis.gov/Sessions/24%20Regular/final/HB0252.pdf#page=30",
+        # 2023 PIT-ADJ instructions, line 16.
+        "https://klvg4oyd4j.execute-api.us-west-2.amazonaws.com/prod/PublicFiles/34821a9573ca43e7b06dfad20f5183fd/90560f4e-0ef0-4e52-a003-878b84f858bb/PITbook2023.pdf#page=53",
         "https://www.law.cornell.edu/uscode/text/26/1222#11",
         # Capital gain distributions are long-term capital gains.
         "https://www.law.cornell.edu/uscode/text/26/852#b_3_B",
@@ -26,10 +31,36 @@ def formula(tax_unit, period, parameters):
         p = parameters(period).gov.states.nm.tax.income.deductions.net_capital_gains
         # Capital gain distributions reported without Schedule D are
         # long-term capital gains under IRC 852(b)(3)(B).
-        long_term_gain = add(
+        unit_long_term_gain = add(
             tax_unit, period, ["long_term_capital_gains", "non_sch_d_capital_gains"]
         )
-        short_term_gain = add(tax_unit, period, ["short_term_capital_gains"])
+        unit_short_term_gain = add(tax_unit, period, ["short_term_capital_gains"])
+        filing_status = tax_unit("filing_status", period)
+        separate = filing_status == filing_status.possible_values.SEPARATE
+        # NMSA 7-2-34(B) (2019 HB6, section 14(B); 2024 HB252, section 8(B))
+        # gives each spouse filing separately one-half of the deduction that
+        # would have been allowed on the joint return, so the deduction is
+        # computed on the couple's combined gains and losses. Each spouse
+        # filing separately heads their own tax unit; reach the other spouse's
+        # unit through the marital unit only when it holds exactly two people
+        # who both head a separate-filing unit: without explicit marital
+        # units, everyone shares one default unit.
+        person = tax_unit.members
+        separate_head = person("is_tax_unit_head", period) & tax_unit.project(separate)
+        couple = (person.marital_unit.nb_persons() == 2) & (
+            person.marital_unit.sum(separate_head) == 2
+        )
+        # Only the head of a separate-filing unit can be in such a couple, so
+        # each tax unit sums at most one couple member's combined amount.
+        pooled = tax_unit.any(couple)
+        couple_long_term_gain = tax_unit.sum(
+            couple * person.marital_unit.sum(tax_unit.project(unit_long_term_gain))
+        )
+        couple_short_term_gain = tax_unit.sum(
+            couple * person.marital_unit.sum(tax_unit.project(unit_short_term_gain))
+        )
+        long_term_gain = where(pooled, couple_long_term_gain, unit_long_term_gain)
+        short_term_gain = where(pooled, couple_short_term_gain, unit_short_term_gain)
         # NMSA 7-2-34 defines "net capital gain" by IRC Section 1222(11): net
         # long-term capital gain less any net short-term capital loss, so
         # short-term gains are excluded. The definition is in subsection (D)
@@ -38,13 +69,7 @@ def formula(tax_unit, period, parameters):
         net_short_term_loss = max_(0, -short_term_gain)
         net_capital_gains = max_(0, long_term_gain - net_short_term_loss)
         uncapped_element = p.uncapped_element_percent * net_capital_gains
-        filing_status = tax_unit("filing_status", period)
-        separate = filing_status == filing_status.possible_values.SEPARATE
-        # Halve the deduction if filing separately. Limitation: the law
-        # (2019 HB6, section 14(B)) halves the deduction allowed on the joint
-        # return, which requires the couple's combined gains; each separate
-        # unit here uses only its own gains.
-        denominator = where(separate, 2, 1)
         capped_element = p.capped_element.calc(net_capital_gains)
-        numerator = max_(uncapped_element, capped_element)
-        return numerator / denominator
+        joint_return_deduction = max_(uncapped_element, capped_element)
+        share = where(separate, p.separate_filer_share, 1)
+        return share * joint_return_deduction