Fix AMT capital-gains overflow into the 20% bracket below the threshold

changelog.d/fix-amt-cg-bracket-overflow.fixed.md

@@ -0,0 +1 @@
+Fixed the AMT capital-gains calculation to read the regular-tax ordinary-income portion (Schedule D Tax Worksheet line 14 / line 21) for Form 6251 Part III line 27, so that filers whose AMTI minus exemption is below the 20% LTCG bracket threshold no longer overflow gains into the 20% bracket.

policyengine_us/tests/policy/baseline/gov/irs/tax/federal_income/alternative_minimum_tax/alternative_minimum_tax.yaml

@@ -115,3 +115,40 @@
     capital_gains_tax: 0
   output:
     alternative_minimum_tax: 1_000
+
+# Locks in the fix for taxsim #424 / issue #8292. Pre-fix, Form 6251
+# Part III Line 27 read `loss_limited_net_capital_gains` (the LTCG
+# amount) instead of `dwks14` (the regular-tax ordinary-income portion),
+# which shrank the 15% bracket window and overflowed gains into the 20%
+# bracket even though AMTI - exemption sat well below the $583,750 MFJ
+# 20% threshold. The reported $8,634 AMT add-on should be $0 for any
+# year the bug existed (2018-2025).
+- name: AMT add-on is zero for MFJ filer whose AMTI minus exemption is below the 20% cap gains threshold (taxsim #424)
+  absolute_error_margin: 50
+  period: 2024
+  input:
+    people:
+      head:
+        age: 56
+        qualified_dividend_income: 65_148.79
+        taxable_interest_income: 20_301.98
+        long_term_capital_gains: 390_720.38
+        taxable_pension_income: 33_581.32
+        is_tax_unit_head: true
+      spouse:
+        age: 20
+        is_tax_unit_spouse: true
+    tax_units:
+      tax_unit:
+        members: [head, spouse]
+        filing_status: JOINT
+        tax_unit_itemizes: false
+    spm_units:
+      spm_unit:
+        members: [head, spouse]
+    households:
+      household:
+        members: [head, spouse]
+        state_code: NM
+  output:
+    alternative_minimum_tax: 0

policyengine_us/tests/policy/baseline/gov/irs/tax/federal_income/alternative_minimum_tax/amt_tax_including_cg.yaml

@@ -32,7 +32,10 @@
     dwks14: 0
     unrecaptured_section_1250_gain: 0
   output:
-    amt_tax_including_cg: 22_700
+    # AMTI - exemption = $100k; ordinary AMTI = $70k * 26% = $18,200.
+    # Preferential base = min($100k, $30k) = $30k, all in the 0% bracket
+    # (room = $44,625 single, ordinary regular income = $0).
+    amt_tax_including_cg: 18_200
 
 - name: AMT with capital gains in second bracket
   period: 2023
@@ -44,7 +47,11 @@
     dwks14: 0
     unrecaptured_section_1250_gain: 0
   output:
-    amt_tax_including_cg: 144_086
+    # Ordinary AMTI tax: 26% * $220,700 + 28% * $229,300 = $121,586.
+    # Preferential base $150k: 0% bracket consumes $44,625; remaining
+    # $105,375 at 15% = $15,806.25; nothing reaches the 20% bracket
+    # (room = $492,300 - $44,625 = $447,675).
+    amt_tax_including_cg: 137_392.25
 
 - name: AMT with unrecaptured section 1250 gains
   period: 2023
@@ -56,4 +63,96 @@
     dwks14: 0
     unrecaptured_section_1250_gain: 200_000
   output:
-    amt_tax_including_cg: 230_586
+    # Ordinary AMTI tax: 26% * $220,700 + 28% * $279,300 = $135,586.
+    # Preferential base $300k: 0% bracket consumes $44,625; remaining
+    # $255,375 at 15% = $38,306.25. The $200k unrecaptured section 1250
+    # gain stays in line 36 = $1M - ($500k + $300k) = $200k at 25% =
+    # $50,000.
+    amt_tax_including_cg: 223_892.25
+
+# Boundary at the 0% LTCG threshold ($44,625 single 2023). All
+# preferential base falls inside the 0% bracket, so the entire
+# computation should collapse to ordinary AMTI * 26%.
+- name: All CG, preferential base exactly at the 0% bracket threshold
+  period: 2023
+  input:
+    filing_status: SINGLE
+    amt_income_less_exemptions: 44_625
+    dwks10: 44_625
+    dwks13: 44_625
+    dwks14: 0
+    unrecaptured_section_1250_gain: 0
+  output:
+    # L22 = L23 = $44,625; L24 = $0; nothing in 15% or 20%; L17 = $0.
+    amt_tax_including_cg: 0
+
+# Exercises the 15%/20% boundary: AMTI - exemption equals the single
+# 20% bracket threshold ($492,300). Everything above $44,625 is in
+# the 15% bracket, nothing in the 20% bracket.
+- name: All CG, preferential base exactly at the 20% bracket threshold
+  period: 2023
+  input:
+    filing_status: SINGLE
+    amt_income_less_exemptions: 492_300
+    dwks10: 492_300
+    dwks13: 492_300
+    dwks14: 0
+    unrecaptured_section_1250_gain: 0
+  output:
+    # 0% bracket consumes $44,625; remaining $447,675 at 15% =
+    # $67,151.25; nothing reaches 20%.
+    amt_tax_including_cg: 67_151.25
+
+# Exercises the actual 20% bracket (regression for the L27 fix —
+# pre-fix this case would have over-allocated to the 20% bracket).
+- name: All CG, preferential base above the 20% bracket threshold
+  period: 2023
+  input:
+    filing_status: SINGLE
+    amt_income_less_exemptions: 600_000
+    dwks10: 600_000
+    dwks13: 600_000
+    dwks14: 0
+    unrecaptured_section_1250_gain: 0
+  output:
+    # 0%: $44,625; 15%: $447,675 (= $492,300 - $44,625) * 15% =
+    # $67,151.25; 20%: $107,700 (= $600,000 - $44,625 - $447,675)
+    # * 20% = $21,540. Total $88,691.25.
+    amt_tax_including_cg: 88_691.25
+
+# Locks in the L27 fix specifically: with non-zero regular-tax
+# ordinary income, the 0% bracket room shrinks and the 15% bracket
+# starts higher. Pre-fix would have used LTCG amount instead of
+# ordinary income on L27 and shrunk the 15% window incorrectly.
+- name: Mixed preferential + regular ordinary income, AMTI below 20% threshold
+  period: 2023
+  input:
+    filing_status: SINGLE
+    amt_income_less_exemptions: 300_000
+    dwks10: 100_000
+    dwks13: 100_000
+    dwks14: 50_000
+    unrecaptured_section_1250_gain: 0
+  output:
+    # Ordinary AMTI tax: 26% * $200,000 = $52,000.
+    # 0% room: max(0, $44,625 - $50,000) = $0 -> nothing at 0%.
+    # 15% room: $492,300 - $50,000 = $442,300; cap gain $100,000
+    # entirely at 15% = $15,000.
+    # Total: $52,000 + $15,000 = $67,000.
+    amt_tax_including_cg: 67_000
+
+# Joint filer using the joint 20% bracket threshold ($553,850 in
+# 2023). Same logic as the issue 8292 reproducer.
+- name: Joint filer with substantial cap gains below the joint 20% threshold
+  period: 2023
+  input:
+    filing_status: JOINT
+    amt_income_less_exemptions: 400_000
+    dwks10: 400_000
+    dwks13: 400_000
+    dwks14: 0
+    unrecaptured_section_1250_gain: 0
+  output:
+    # 0%: $89,250 (joint); 15%: $310,750 * 15% = $46,612.50;
+    # 20%: $0.
+    amt_tax_including_cg: 46_612.50

policyengine_us/variables/gov/irs/tax/federal_income/alternative_minimum_tax/amt_tax_including_cg.py

@@ -11,76 +11,82 @@ class amt_tax_including_cg(Variable):
     reference = "https://www.irs.gov/pub/irs-pdf/f6251.pdf"
 
     def formula(tax_unit, period, parameters):
-        # Line 12
+        # Form 6251 Part III, Line 12: AMTI minus exemption
         reduced_income = tax_unit("amt_income_less_exemptions", period)
-        # Line 13 - schedule D line 13
+        # Line 13: amount from QDCG Worksheet line 4 or Schedule D Tax
+        # Worksheet line 13 (qualified dividends + LTCG net of unrecaptured
+        # section 1250 and 28%-rate gains).
         cg_distributions = tax_unit("dwks13", period)
-        # Line 14 - schedule D line 19
+        # Line 14: Schedule D line 19 (unrecaptured section 1250 gain).
         section_1250_gain_worksheet = tax_unit("unrecaptured_section_1250_gain", period)
-        # Line 15 - smaller of the sum of Line 13 and Line 14 or Schedule D line 10
+        # Line 15: smaller of (Line 13 + Line 14) or Schedule D Tax Worksheet
+        # line 10.
         total_transactions_reported = tax_unit("dwks10", period)
         capped_capital_gains = min_(
             cg_distributions + section_1250_gain_worksheet,
             total_transactions_reported,
         )
-        # Line 16 - smaller of Line 15 or Line 12
+        # Line 16: smaller of Line 12 or Line 15.
         capped_income = min_(capped_capital_gains, reduced_income)
-        # Line 17 - Line 12 minus Line 16
+        # Line 17: Line 12 minus Line 16 (ordinary AMTI).
         excess_income = max_(0, reduced_income - capped_income)
-        # Line 18 - Apply CG tax rates to Line 17
+        # Line 18: apply the 26%/28% AMT bracket to Line 17.
         p = parameters(period).gov.irs
         income_taxes_at_amt_rates = p.income.amt.brackets.calc(excess_income)
-        # Line 19 - First CG tax bracket threshold
+        # Line 19: 0% LTCG bracket threshold for the filing status.
         filing_status = tax_unit("filing_status", period)
         cg_bracket = p.capital_gains.thresholds["1"][filing_status]
-        # Line 20 - Schedule D Line 14
-        lt_capital_loss_carryover = tax_unit("dwks14", period)
-        # Line 21 - Line 20 minus Line 19
-        reduced_cg_bracket = max_(0, cg_bracket - lt_capital_loss_carryover)
-        # Line 22 - smaller of Line 12 or Line 13
+        # Line 20: amount from QDCG Worksheet line 5 or Schedule D Tax
+        # Worksheet line 14 (as figured for the regular tax). This is the
+        # ordinary-income portion of taxable income.
+        regular_ordinary_income = tax_unit("dwks14", period)
+        # Line 21: Line 19 minus Line 20. Room left in the 0% bracket after
+        # accounting for ordinary income already filling it.
+        reduced_cg_bracket = max_(0, cg_bracket - regular_ordinary_income)
+        # Line 22: smaller of Line 12 or Line 13.
         smaller_of_income_or_cg = min_(reduced_income, cg_distributions)
-        # Line 23 - smaller of Line 22 or Line 21 (amount is taxed at 0%)
+        # Line 23: smaller of Line 21 or Line 22. This is the amount taxed at
+        # 0% (not the tax — the form re-uses this amount in Line 24 and Line
+        # 32, so we keep the quantity here rather than collapsing to the tax).
+        amount_at_first_rate = min_(smaller_of_income_or_cg, reduced_cg_bracket)
         cg_first_rate = p.capital_gains.rates["1"]
-        disregarded_gains = (
-            min_(smaller_of_income_or_cg, reduced_cg_bracket) * cg_first_rate
+        cg_first_bracket_tax = amount_at_first_rate * cg_first_rate
+        # Line 24: Line 22 minus Line 23 (preferential-rate base remaining
+        # after the 0% bracket).
+        income_after_first_rate = max_(
+            0, smaller_of_income_or_cg - amount_at_first_rate
         )
-        # Line 24 - Line 22 minus Line 23
-        taxable_income_including_cg = max_(
-            smaller_of_income_or_cg - disregarded_gains, 0
-        )
-        # Line 25 - Second CG tax bracket threshold
+        # Line 25: 20% LTCG bracket threshold for the filing status.
         second_cg_bracket = p.capital_gains.thresholds["2"][filing_status]
-        # Line 26 - same as line 21
-        # Line 27 - Schedule D Line 21
-        loss_limited_net_capital_gains = tax_unit(
-            "loss_limited_net_capital_gains", period
-        )
-        # Line 28 - Line 26 plus Line 27
-        first_cg_bracket_increased_by_loss = (
-            loss_limited_net_capital_gains + reduced_cg_bracket
+        # Line 26: same as Line 21.
+        # Line 27: amount from QDCG Worksheet line 5 or Schedule D Tax
+        # Worksheet line 21 (as figured for the regular tax). For the QDCG
+        # path this is the same ordinary-income value used on Line 20.
+        # Line 28: Line 26 plus Line 27.
+        first_cg_bracket_increased_by_ordinary = (
+            reduced_cg_bracket + regular_ordinary_income
         )
-        # Line 29 Line 25 minus Line 28
+        # Line 29: Line 25 minus Line 28 (room left in the 15% bracket).
         reduced_second_cg_bracket = max_(
-            0, second_cg_bracket - first_cg_bracket_increased_by_loss
-        )
-        # Line 30 - smaller of Line 24 or Line 29
-        capped_income_including_cg = min_(
-            taxable_income_including_cg, reduced_second_cg_bracket
+            0, second_cg_bracket - first_cg_bracket_increased_by_ordinary
         )
-        # Line 31 - multiply Line 30by second CG tax rate
-        cg_second_bracket_tax = capped_income_including_cg * p.capital_gains.rates["2"]
-        # Line 32 - Line 23 plus Line 30
-        taxed_gains = disregarded_gains + capped_income_including_cg
-        # Line 33 - Line 22 minus Line 32
-        excess_taxed_gains = max_(0, smaller_of_income_or_cg - taxed_gains)
-        # Line 34 - multiply Line 33 by third CG tax rate
+        # Line 30: smaller of Line 24 or Line 29 (amount taxed at 15%).
+        amount_at_second_rate = min_(income_after_first_rate, reduced_second_cg_bracket)
+        # Line 31: Line 30 times the 15% LTCG rate.
+        cg_second_bracket_tax = amount_at_second_rate * p.capital_gains.rates["2"]
+        # Line 32: Line 23 plus Line 30 (cumulative preferential amounts).
+        taxed_gains_amount = amount_at_first_rate + amount_at_second_rate
+        # Line 33: Line 22 minus Line 32 (amount taxed at 20%).
+        excess_taxed_gains = max_(0, smaller_of_income_or_cg - taxed_gains_amount)
+        # Line 34: Line 33 times the 20% LTCG rate.
         cg_third_bracket_tax = excess_taxed_gains * p.capital_gains.rates["3"]
-        # Line 35 - sum of Line 17, Line 32, Line 33
-        final_taxed_income = excess_income + taxed_gains + excess_taxed_gains
-        # Line 36 Line 12 minus Line 35
+        # Line 35: Line 17 plus Line 32 plus Line 33.
+        final_taxed_income = excess_income + taxed_gains_amount + excess_taxed_gains
+        # Line 36: Line 12 minus Line 35 (unrecaptured section 1250 portion).
         final_excess = max_(0, reduced_income - final_taxed_income)
-        # Line 37 - Multiply Line 36 by the AMT specific capital gain excess tax rate
-        # The increased tax does not applied if no recaptured section 1250 gains
+        # Line 37: Line 36 times the 25% rate, only when unrecaptured section
+        # 1250 gains exist (per the form's "skip lines 35-37 if line 14 is
+        # zero" instruction).
         unrecaptured_section_1250_gain = tax_unit(
             "unrecaptured_section_1250_gain", period
         )
@@ -89,9 +95,12 @@ def formula(tax_unit, period, parameters):
             0,
             final_excess * p.income.amt.capital_gains.capital_gain_excess_tax_rate,
         )
-        # Line 38 - sum of Line 18, Line 31, Line 34, and Line 37
+        # Line 38: sum of Lines 18, 31, 34, and 37 (plus Line 23's 0%
+        # contribution, which is always zero with a 0% bracket rate but kept
+        # in the sum for structural clarity).
         return (
             income_taxes_at_amt_rates
+            + cg_first_bracket_tax
             + cg_second_bracket_tax
             + cg_third_bracket_tax
             + excess_tax