Fix MT income tax applying preferential LTCG rates when net CG is negative

changelog.d/fix-mt-ltcg-negative-net-gains.fixed.md

@@ -0,0 +1 @@
+Fix Montana income tax incorrectly applying preferential LTCG rates when net capital gains are negative.

policyengine_us/tests/policy/baseline/gov/states/mt/tax/income/capital_gains/mt_capital_gains_tax_applicable_threshold_indiv.yaml

@@ -7,3 +7,25 @@
     state_code: MT
   output:
     mt_capital_gains_tax_applicable_threshold_indiv: 0
+
+- name: Indiv threshold uses net LTCG after STCG losses when MFSS is enabled
+  period: 2024
+  reforms: policyengine_us.tests.policy.baseline.gov.states.mt.tax.income.enable_mt_mfss_2024_reform.enable_mt_mfss_2024_reform
+  input:
+    people:
+      person1:
+        mt_taxable_income_indiv: 40_000
+        long_term_capital_gains: 50_000
+        short_term_capital_gains: -20_000
+      person2:
+        mt_taxable_income_indiv: 0
+    tax_units:
+      tax_unit:
+        members: [person1, person2]
+        state_filing_status_if_married_filing_separately_on_same_return: SEPARATE
+    households:
+      household:
+        members: [person1, person2]
+        state_code: MT
+  output:
+    mt_capital_gains_tax_applicable_threshold_indiv: [10_500, 20_500]

policyengine_us/tests/policy/baseline/gov/states/mt/tax/income/capital_gains/mt_capital_gains_tax_applicable_threshold_joint.yaml

@@ -2,7 +2,7 @@
   period: 2024
   input:
     long_term_capital_gains: 2_000
-    mt_taxable_income_indiv: 2_500
+    mt_taxable_income_joint: 2_500
     filing_status: SINGLE
     state_code: MT
   output:
@@ -12,7 +12,7 @@
   period: 2024
   input:
     long_term_capital_gains: 2_000
-    mt_taxable_income_indiv: 1_000
+    mt_taxable_income_joint: 1_000
     filing_status: SINGLE
     state_code: MT
   output:
@@ -22,7 +22,7 @@
   period: 2024
   input:
     long_term_capital_gains: 2_000
-    mt_taxable_income_indiv: 40_000
+    mt_taxable_income_joint: 40_000
     filing_status: HEAD_OF_HOUSEHOLD
     state_code: MT
   output:
@@ -32,8 +32,19 @@
   period: 2024
   input:
     long_term_capital_gains: 2_000
-    mt_taxable_income_indiv: 40_000
+    mt_taxable_income_joint: 40_000
     filing_status: JOINT
     state_code: MT
   output:
     mt_capital_gains_tax_applicable_threshold_joint: 3_000
+
+- name: Short-term losses reduce the remaining joint CG threshold
+  period: 2024
+  input:
+    long_term_capital_gains: 50_000
+    short_term_capital_gains: -20_000
+    mt_taxable_income_joint: 40_000
+    filing_status: JOINT
+    state_code: MT
+  output:
+    mt_capital_gains_tax_applicable_threshold_joint: 31_000

policyengine_us/tests/policy/baseline/gov/states/mt/tax/income/capital_gains/mt_capital_gains_tax_indiv.yaml

@@ -17,3 +17,27 @@
     state_code: MT
   output:
     mt_capital_gains_tax_indiv: 0
+
+- name: Indiv CG tax uses net LTCG after STCG losses when MFSS is enabled
+  period: 2024
+  reforms: policyengine_us.tests.policy.baseline.gov.states.mt.tax.income.enable_mt_mfss_2024_reform.enable_mt_mfss_2024_reform
+  input:
+    people:
+      person1:
+        long_term_capital_gains: 50_000
+        short_term_capital_gains: -20_000
+        mt_capital_gains_tax_applicable_threshold_indiv: 10_000
+      person2:
+        long_term_capital_gains: 0
+        short_term_capital_gains: 0
+        mt_capital_gains_tax_applicable_threshold_indiv: 20_500
+    tax_units:
+      tax_unit:
+        members: [person1, person2]
+        state_filing_status_if_married_filing_separately_on_same_return: SEPARATE
+    households:
+      household:
+        members: [person1, person2]
+        state_code: MT
+  output:
+    mt_capital_gains_tax_indiv: [1_120, 0]

policyengine_us/tests/policy/baseline/gov/states/mt/tax/income/capital_gains/mt_capital_gains_tax_joint.yaml

@@ -75,3 +75,32 @@
     state_code: MT
   output:
     mt_capital_gains_tax_joint: 410
+
+- name: No CG tax when net capital gains are negative
+  # LTCG=50K but STCG=-80K → net=-30K → no preferential treatment
+  period: 2024
+  input:
+    long_term_capital_gains: 50_000
+    short_term_capital_gains: -80_000
+    mt_taxable_income_joint: 100_000
+    filing_status: JOINT
+    state_code: MT
+  output:
+    mt_capital_gains_tax_joint: 0
+
+- name: CG tax applies when net capital gains are positive despite STCG losses
+  # Form 2 line 2 uses the positive net LTCG amount, not gross LTCG
+  period: 2024
+  input:
+    long_term_capital_gains: 50_000
+    short_term_capital_gains: -20_000
+    mt_taxable_income_joint: 100_000
+    mt_capital_gains_tax_applicable_threshold_joint: 41_000
+    filing_status: JOINT
+    state_code: MT
+  output:
+    # lesser_of_cg_and_taxable = min(30K, 100K) = 30K
+    # excess_over_taxable = max(100K - 30K, 0) = 70K
+    # excess_over_threshold = max(41K - 70K, 0) = 0
+    # All 30K taxed at higher rate: 30K * 0.041 = 1230
+    mt_capital_gains_tax_joint: 1_230

policyengine_us/tests/policy/baseline/gov/states/mt/tax/income/enable_mt_mfss_2024_reform.py

@@ -0,0 +1,14 @@
+from policyengine_core.model_api import *
+from policyengine_core.periods import instant
+
+
+def modify_parameters(parameters):
+    parameters.gov.states.mt.tax.income.married_filing_separately_on_same_return_allowed.update(
+        start=instant("2024-01-01"), stop=instant("2024-12-31"), value=True
+    )
+    return parameters
+
+
+class enable_mt_mfss_2024_reform(Reform):
+    def apply(self):
+        self.modify_parameters(modify_parameters)

policyengine_us/tests/policy/baseline/gov/states/mt/tax/income/integration.yaml

@@ -291,7 +291,7 @@
         members: [person1, person2]
         state_fips: 30
   output:
-    mt_capital_gains_tax_joint: [59, 0]
+    mt_capital_gains_tax_joint: 59
     mt_income_tax: 59
 
 - name: 2251-MT.yaml
@@ -371,3 +371,143 @@
   output:
     adjusted_gross_income: -3_000
     mt_income_tax: 0
+
+- name: MT joint 2024 - net capital loss should use ordinary rates (issue 7859)
+  period: 2024
+  absolute_error_margin: 1
+  input:
+    people:
+      primary:
+        age: 56
+        self_employment_income: -188_899.73
+        taxable_interest_income: 23_241.32
+        short_term_capital_gains: -1_575_884.50
+        long_term_capital_gains: 532_687.31
+        taxable_private_pension_income: 21_262.69
+      spouse:
+        age: 58
+        employment_income: 538_104.25
+    tax_units:
+      tax_unit:
+        members: [primary, spouse]
+    families:
+      family:
+        members: [primary, spouse]
+    spm_units:
+      spm_unit:
+        members: [primary, spouse]
+    households:
+      household:
+        members: [primary, spouse]
+        state_fips: 30
+    marital_units:
+      marital_unit:
+        members: [primary, spouse]
+  output:
+    mt_taxable_income: 361_508
+    mt_income_tax: 20_837
+
+- name: MT joint 2024 - positive net CG with STCG losses applies preferential rates
+  # LTCG=50K, STCG=-30K, net=+20K → Form 2 line 2 uses only the net LTCG amount
+  period: 2024
+  absolute_error_margin: 1
+  input:
+    people:
+      head:
+        age: 40
+        long_term_capital_gains: 50_000
+        short_term_capital_gains: -30_000
+      spouse:
+        age: 40
+        employment_income: 100_000
+    tax_units:
+      tax_unit:
+        members: [head, spouse]
+    families:
+      family:
+        members: [head, spouse]
+    spm_units:
+      spm_unit:
+        members: [head, spouse]
+    households:
+      household:
+        members: [head, spouse]
+        state_fips: 30
+    marital_units:
+      marital_unit:
+        members: [head, spouse]
+  output:
+    mt_taxable_income: 90_800
+    mt_regular_income_tax_joint: 3_685
+    mt_capital_gains_tax_joint: 820
+    mt_income_tax: 4_505
+
+- name: MT joint 2024 - LTCG on head, wages on spouse (cross-person aggregation)
+  # Tests TaxUnit-level CG tax aggregation across spouses
+  period: 2024
+  absolute_error_margin: 1
+  input:
+    people:
+      head:
+        age: 40
+        long_term_capital_gains: 30_000
+      spouse:
+        age: 40
+        employment_income: 80_000
+    tax_units:
+      tax_unit:
+        members: [head, spouse]
+    families:
+      family:
+        members: [head, spouse]
+    spm_units:
+      spm_unit:
+        members: [head, spouse]
+    households:
+      household:
+        members: [head, spouse]
+        state_fips: 30
+    marital_units:
+      marital_unit:
+        members: [head, spouse]
+  output:
+    mt_taxable_income: 80_800
+    mt_regular_income_tax_joint: 2_505
+    mt_capital_gains_tax_joint: 1_230
+    mt_income_tax: 3_735
+
+- name: MT joint 2024 - both spouses have LTCG
+  # Tests combined LTCG aggregation at TaxUnit level
+  period: 2024
+  absolute_error_margin: 1
+  input:
+    people:
+      head:
+        age: 40
+        long_term_capital_gains: 15_000
+        employment_income: 40_000
+      spouse:
+        age: 40
+        long_term_capital_gains: 10_000
+        employment_income: 30_000
+    tax_units:
+      tax_unit:
+        members: [head, spouse]
+    families:
+      family:
+        members: [head, spouse]
+    spm_units:
+      spm_unit:
+        members: [head, spouse]
+    households:
+      household:
+        members: [head, spouse]
+        state_fips: 30
+    marital_units:
+      marital_unit:
+        members: [head, spouse]
+  output:
+    mt_taxable_income: 65_800
+    mt_regular_income_tax_joint: 1_918
+    mt_capital_gains_tax_joint: 1_025
+    mt_income_tax: 2_943

policyengine_us/tests/policy/baseline/gov/states/mt/tax/income/mt_regular_income_tax_indiv.yaml

@@ -64,3 +64,27 @@
   output:
     mt_capital_gains_tax_indiv: [0, 0]
     mt_regular_income_tax_indiv: [0, 0]
+
+- name: Indiv regular tax subtracts net LTCG after STCG losses when MFSS is enabled
+  period: 2024
+  reforms: policyengine_us.tests.policy.baseline.gov.states.mt.tax.income.enable_mt_mfss_2024_reform.enable_mt_mfss_2024_reform
+  input:
+    people:
+      person1:
+        mt_taxable_income_indiv: 80_000
+        long_term_capital_gains: 50_000
+        short_term_capital_gains: -20_000
+      person2:
+        mt_taxable_income_indiv: 0
+        long_term_capital_gains: 0
+        short_term_capital_gains: 0
+    tax_units:
+      tax_unit:
+        members: [person1, person2]
+        state_filing_status_if_married_filing_separately_on_same_return: SEPARATE
+    households:
+      household:
+        members: [person1, person2]
+        state_code: MT
+  output:
+    mt_regular_income_tax_indiv: [2_704, 0]

policyengine_us/variables/gov/states/mt/tax/income/capital_gains/mt_capital_gains_tax_applicable_threshold_indiv.py

@@ -12,7 +12,9 @@ class mt_capital_gains_tax_applicable_threshold_indiv(Variable):
 
     def formula(person, period, parameters):
         p = parameters(period).gov.states.mt.tax.income.main.capital_gains
-        capital_gains = person("long_term_capital_gains", period)
+        ltcg = person("long_term_capital_gains", period)
+        stcg = person("short_term_capital_gains", period)
+        capital_gains = max_(min_(ltcg, ltcg + stcg), 0)
         taxable_income = person("mt_taxable_income_indiv", period)
         filing_status = person.tax_unit(
             "state_filing_status_if_married_filing_separately_on_same_return",

policyengine_us/variables/gov/states/mt/tax/income/capital_gains/mt_capital_gains_tax_applicable_threshold_joint.py

@@ -3,21 +3,20 @@
 
 class mt_capital_gains_tax_applicable_threshold_joint(Variable):
     value_type = float
-    entity = Person
+    entity = TaxUnit
     label = "Montana applicable threshold for the capital gains tax when married couples file jointly"
     unit = USD
     definition_period = YEAR
     reference = "https://mtrevenue.gov/wp-content/uploads/dlm_uploads/2023/12/Form_2_2023_Instructions.pdf#page=6"  # Net Long-Term Capital Gains Tax Table
     defined_for = StateCode.MT
 
-    def formula(person, period, parameters):
+    def formula(tax_unit, period, parameters):
         p = parameters(period).gov.states.mt.tax.income.main.capital_gains
-        capital_gains = person("long_term_capital_gains", period)
-        taxable_income = person("mt_taxable_income_indiv", period)
-        filing_status = person.tax_unit(
-            "filing_status",
-            period,
-        )
+        ltcg = add(tax_unit, period, ["long_term_capital_gains"])
+        stcg = add(tax_unit, period, ["short_term_capital_gains"])
+        capital_gains = max_(min_(ltcg, ltcg + stcg), 0)
+        taxable_income = add(tax_unit, period, ["mt_taxable_income_joint"])
+        filing_status = tax_unit("filing_status", period)
         status = filing_status.possible_values
         non_qualified_income = max_(taxable_income - capital_gains, 0)
         rate_threshold = select(

policyengine_us/variables/gov/states/mt/tax/income/capital_gains/mt_capital_gains_tax_indiv.py

@@ -16,8 +16,10 @@ def formula(person, period, parameters):
         p = parameters(period).gov.states.mt.tax.income.main.capital_gains
         # the tax for capital gains comes into effect after 2024
         if p.in_effect:
-            capital_gains = person("long_term_capital_gains", period)
-            # No tax on zero or negative capital gains
+            ltcg = person("long_term_capital_gains", period)
+            stcg = person("short_term_capital_gains", period)
+            net_cg = ltcg + stcg
+            capital_gains = max_(min_(ltcg, net_cg), 0)
             filing_status = person.tax_unit(
                 "state_filing_status_if_married_filing_separately_on_same_return",
                 period,