Fix tax_unit_itemizes tied-federal-tax fallback (#8210)

changelog.d/fix-tax-unit-itemizes-tied-fallback.fixed.md

@@ -0,0 +1 @@
+Fix tax_unit_itemizes tied-federal-tax fallback to compare federal standard against federal itemized deductions, restoring TaxAct/TAXSIM behavior and resolving downstream CO/VT/LA state-tax discrepancies.

policyengine_us/tests/policy/baseline/gov/irs/income/taxable_income/deductions/tax_unit_itemizes.yaml

@@ -20,23 +20,23 @@
   output:
     tax_unit_itemizes: True
 
-- name: When tax liability is equal, itemization is based on state deductions
+- name: When tax liability is equal, itemization is based on federal deduction comparison
   period: 2024
   input:
     gov.simulation.branch_to_determine_itemization: true
-    state_itemized_deductions: 14_000
-    state_standard_deduction: 11_000
+    itemized_taxable_income_deductions: 14_000
+    standard_deduction: 11_000
     tax_liability_if_itemizing: 10_000
     tax_liability_if_not_itemizing: 10_000
   output:
     tax_unit_itemizes: True
 
-- name: When tax liability is equal, itemization is based on state deductions, unit itemizes
+- name: When tax liability is equal and itemized below standard, unit does not itemize
   period: 2024
   input:
     gov.simulation.branch_to_determine_itemization: true
-    state_itemized_deductions: 14_000
-    state_standard_deduction: 16_000
+    itemized_taxable_income_deductions: 14_000
+    standard_deduction: 16_000
     tax_liability_if_itemizing: 10_000
     tax_liability_if_not_itemizing: 10_000
   output:

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

@@ -337,3 +337,49 @@
     # Child age 14: FATC $2,455 (age 6-16 category)
     # At $10k income (below thresholds), full credit amounts
     co_family_affordability_credit: [0, 3_273, 2_455, 2_455]
+
+# Locks in the fix for #8210 / taxsim #870. Pre-fix the tied-federal-tax
+# fallback in tax_unit_itemizes compared CO's federal standard deduction
+# against $0 of CO-specific itemized deductions, returning False. The household
+# was treated as taking the standard deduction, giving co_taxable_income $17,742
+# and co_income_tax +$780. Post-fix: itemizes, co_income_tax matches TaxAct
+# (-$4,397) within ~$65, residual is a separate CO add-back issue.
+- name: 2025 CO joint with property tax + mortgage itemizes when federal tax tied (taxsim #870)
+  absolute_error_margin: 1
+  period: 2025
+  input:
+    people:
+      person1:
+        age: 40
+        employment_income: 0
+        real_estate_taxes: 30_000
+        deductible_mortgage_interest: 20_000
+        is_tax_unit_head: true
+      person2:
+        age: 40
+        employment_income: 20_000
+        taxable_interest_income: 29_241.51
+        is_tax_unit_spouse: true
+      child1:
+        age: 11
+        is_tax_unit_dependent: true
+      child2:
+        age: 5
+        is_tax_unit_dependent: true
+    tax_units:
+      tax_unit:
+        members: [person1, person2, child1, child2]
+        filing_status: JOINT
+        tax_unit_childcare_expenses: 3_000
+        premium_tax_credit: 0
+    spm_units:
+      spm_unit:
+        members: [person1, person2, child1, child2]
+    households:
+      household:
+        members: [person1, person2, child1, child2]
+        state_code: CO
+  output:
+    tax_unit_itemizes: true
+    co_taxable_income: 1_474
+    co_income_tax: -4_332

policyengine_us/tests/policy/baseline/gov/states/me/tax/income/taxable_income/deductions/me_deductions.yaml

@@ -29,11 +29,13 @@
     me_deduction_phaseout_percentage: 0.40
     me_standard_deduction: 10_000
     me_itemized_deductions_pre_phaseout: 15_000
+    # Tied-federal-tax fallback uses the federal standard vs. itemized
+    # comparison; provide consistent federal-level inputs to itemize.
+    standard_deduction: 10_000
+    itemized_taxable_income_deductions: 15_000
   output:
     tax_liability_if_itemizing: 0
     tax_liability_if_not_itemizing: 0
-    state_standard_deduction: 10_000
-    state_itemized_deductions: 15_000
     me_deductions: 9_000
 
 - name: ME single 2025 100K self-employment (TaxAct verified, taxsim issue 790)

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

@@ -59,3 +59,48 @@
     # Only $5,000 flat exclusion applies since gains are from financial instruments
     # VT AGI: 140418 - 5000 = 135418
     vt_agi: 135_418
+
+# Locks in the fix for #8210 / taxsim #869. Pre-fix the tied-federal-tax
+# fallback in tax_unit_itemizes returned False; vt_cdcc was $497 (computed
+# against standard-deduction federal tax). Post-fix: itemizes, federal tax is
+# $0 so capped CDCC and vt_cdcc both round to $0, matching TaxAct's vt_cdcc
+# of $0 and vt_income_tax of -$3,045.
+- name: 2025 VT joint with property tax + mortgage itemizes when federal tax tied (taxsim #869)
+  absolute_error_margin: 2
+  period: 2025
+  input:
+    people:
+      person1:
+        age: 40
+        employment_income: 15_096.83
+        real_estate_taxes: 30_000
+        deductible_mortgage_interest: 20_000
+        is_tax_unit_head: true
+      person2:
+        age: 40
+        employment_income: 20_000
+        social_security_retirement: 8_978.28
+        is_tax_unit_spouse: true
+      child1:
+        age: 11
+        is_tax_unit_dependent: true
+      child2:
+        age: 5
+        is_tax_unit_dependent: true
+    tax_units:
+      tax_unit:
+        members: [person1, person2, child1, child2]
+        filing_status: JOINT
+        tax_unit_childcare_expenses: 3_000
+        premium_tax_credit: 0
+    spm_units:
+      spm_unit:
+        members: [person1, person2, child1, child2]
+    households:
+      household:
+        members: [person1, person2, child1, child2]
+        state_code: VT
+  output:
+    tax_unit_itemizes: true
+    vt_cdcc: 0
+    vt_income_tax: -3_045

policyengine_us/variables/gov/irs/income/taxable_income/deductions/tax_unit_itemizes.py

@@ -10,27 +10,29 @@ class tax_unit_itemizes(Variable):
     definition_period = YEAR
 
     def formula(tax_unit, period, parameters):
+        standard_deduction = tax_unit("standard_deduction", period)
+        itemized_deductions = tax_unit("itemized_taxable_income_deductions", period)
         if parameters(period).gov.simulation.branch_to_determine_itemization:
             # determine federal itemization behavior by comparing tax liability
             tax_liability_if_itemizing = tax_unit("tax_liability_if_itemizing", period)
             tax_liability_if_not_itemizing = tax_unit(
                 "tax_liability_if_not_itemizing", period
             )
-            state_standard_deduction = tax_unit("state_standard_deduction", period)
-            state_itemized_deductions = tax_unit("state_itemized_deductions", period)
             # Use a small tolerance for floating-point comparison due to floating point imprecision
             TOLERANCE = 0.01
             federal_tax_equal = (
                 np.abs(tax_liability_if_itemizing - tax_liability_if_not_itemizing)
                 <= TOLERANCE
             )
+            # When federal tax liabilities tie (typical at low/moderate income where
+            # refundable credits absorb the tax), fall back to the federal-level
+            # deduction comparison. This matches the non-branching path below and
+            # the IRS / TaxAct / TAXSIM-comparison default of itemizing whenever
+            # itemized deductions exceed the standard deduction.
             return where(
                 federal_tax_equal,
-                state_standard_deduction < state_itemized_deductions,
+                itemized_deductions > standard_deduction,
                 tax_liability_if_itemizing < tax_liability_if_not_itemizing,
             )
-        else:
-            standard_deduction = tax_unit("standard_deduction", period)
-            itemized_deductions = tax_unit("itemized_taxable_income_deductions", period)
-            # determine federal itemization behavior by comparing deductions
-            return itemized_deductions > standard_deduction
+        # determine federal itemization behavior by comparing deductions
+        return itemized_deductions > standard_deduction