MT income tax difference with TAXSIM35

[martinholmer]

The following integration test fails. It is not yet known whether the
tax logic problem is in TAXSIM35 or in the current PEUS code, or
whether there are problems in both models. This topic is meant to
facilitate discussion of why this test fails, primarily by reporting
the results of hand calculations required to fill out the relevant tax
form.

- name: Tax unit with taxsimid 58400 in e21.its.csv and e21.ots.csv
  absolute_error_margin: 0.01
  period: 2021
  input:
    people:
      person1:
        age: 70
        employment_income: 4010
        taxable_interest_income: 5505.0
        ssi: 0  # not in TAXSIM35
        state_supplement: 0  # not in TAXSIM35
        wic: 0  # not in TAXSIM35
        ma_covid_19_essential_employee_premium_pay_program: 0  # not in TAXSIM35
      person2:
        age: 70
        employment_income: 28010
        taxable_interest_income: 5505.0
        ssi: 0  # not in TAXSIM35
        state_supplement: 0  # not in TAXSIM35
        wic: 0  # not in TAXSIM35
        ma_covid_19_essential_employee_premium_pay_program: 0  # not in TAXSIM35
    tax_units:
      tax_unit:
        members: [person1, person2]
        premium_tax_credit: 0  # not in TAXSIM35
        local_income_tax: 0  # not in TAXSIM35
        state_sales_tax: 0  # not in TAXSIM35
        ca_use_tax: 0  # not in TAXSIM35
        il_use_tax: 0  # not in TAXSIM35
        nm_2021_income_rebate: 0  # not in TAXSIM35
        nm_additional_2021_income_rebate: 0  # not in TAXSIM35
        nm_supplemental_2021_income_rebate: 0  # not in TAXSIM35
        ny_supplemental_eitc: 0  # not in TAXSIM35
        ok_use_tax: 0  # not in TAXSIM35
        pa_use_tax: 0  # not in TAXSIM35
        vt_renter_credit: 0  # not in TAXSIM35
    spm_units:
      spm_unit:
        members: [person1, person2]
        snap: 0  # not in TAXSIM35
        tanf: 0  # not in TAXSIM35
    households:
      household:
        members: [person1, person2]
        state_fips: 30  # MT
  output:  # expected results from patched TAXSIM35 2024-03-01 version
    mt_income_tax: 975.66

[PavelMakarchuk]

@martinholmer Thank you for the test.

This was caused by our attempt to split the exemptions and deductions in away that would benefit the tax unit the most.
The approach was
Take total exemptions and deductions amount
Determine the gap between head and spouse AGI
Allocate the deduction and exemption amount to the person with the higher AGI not over the gap amount
Divide the remaining deduction and exemption amounts between head and spouse

This causes integration issues.
While I dont see any language in the tax form instructions that would prohibit this, the form seem to be structures in a way that might cause issues with this approach:
Tax form

This looks like the filer and spouse can allocate all exemptions to the head but not the spouse (which happens in this case)

The standard deduction is based on individual Montana AGI:

@MaxGhenis and @martinholmer would love to get your input on this issues as we optimize the exemption and standard deduction allocation but I wonder if this is applicable when actually filing

[PavelMakarchuk]

I could revert the changes for now for integration testing purposes but I would still like to get your insights on the approach

[MaxGhenis]

I'd like to understand how taxsim does it before reverting the changes, given they seem reasonable to me

[PavelMakarchuk]

Reverting the changes would pass the integration test and seems to align with what TAXSIM is doing.

[MaxGhenis]

I understand. I think we should only do that if we find that taxsim's behavior is more accurate/realistic.

[martinholmer]

@PavelMakarchuk said in MT discussion topic #4058:

[We] attempt to split the exemptions and deductions in away that would benefit the tax unit the most.
The approach was
Take total exemptions and deductions amount
Determine the gap between head and spouse AGI
Allocate the deduction and exemption amount to the person with the higher AGI not over the gap amount
Divide the remaining deduction and exemption amounts between head and spouse

TAXSIM35 disagrees assuming that personal (non-dependent) exemptions cannot be allocated.

The following 2021 instructions seem to support this TAXSIM35 assumption.

Would you interpret the following sentence any different way?

No exemption for the spouse is allowed on this form if you and your spouse chose Filing Status 2b or 2c.

[PavelMakarchuk]

That makes sense, thank you. Will be fixed by #4106

[PavelMakarchuk]

However, I believe that TAXSIM does not split the standard and itemized deductions depending on AGI, if I revert to equal attribution regardless of head or spouse AGI, the test above passes, while with the deductions remaining split to reduce taxable liability PE produces a lower income tax output. I believe TAXSIM would need a fix as well here @martinholmer

Please let me know if I missed anything

[martinholmer]

This discussion topic morphed into issue #4106.
After #4106 is resolved, TAXSIM35 logic wrt allocating deductions will be improved.