Optimize DC married separate-combined deduction allocation

changelog_entry.yaml

@@ -0,0 +1,5 @@
+- bump: minor
+  changes:
+    changed:
+      - title: Optimize DC married separate-combined deduction allocation
+        description: DC married couples filing separately on the same return can now benefit from optimal deduction allocation to the higher-earning spouse, reducing combined tax liability per DC Schedule S Calculation J Line F.

policyengine_us/tests/policy/baseline/gov/states/dc/tax/income/dc_deduction_indiv.yaml

@@ -1,4 +1,4 @@
-- name: dc_deduction_indiv unit test 1
+- name: dc_deduction_indiv unit test 1 - optimal allocation to higher earner
   absolute_error_margin: 0.01
   period: 2021
   input:
@@ -24,4 +24,113 @@
         members: [person1, person2, person3]
         state_code: DC
   output:
-    dc_deduction_indiv: [15_000, 5_000, 0]
+    # All deductions allocated to higher earner (person1) per DC Schedule S Line F
+    dc_deduction_indiv: [20_000, 0, 0]
+
+- name: dc_deduction_indiv unit test 2 - spouse is higher earner
+  absolute_error_margin: 0.01
+  period: 2021
+  input:
+    people:
+      person1:
+        is_tax_unit_head: true
+        dc_agi: 50_000
+      person2:
+        is_tax_unit_spouse: true
+        dc_agi: 150_000
+    tax_units:
+      tax_unit:
+        members: [person1, person2]
+        tax_unit_itemizes: false
+        dc_deduction_joint: 25_000
+    spm_units:
+      spm_unit:
+        members: [person1, person2]
+    households:
+      household:
+        members: [person1, person2]
+        state_code: DC
+  output:
+    # All deductions allocated to higher earner (person2/spouse)
+    dc_deduction_indiv: [0, 25_000]
+
+- name: dc_deduction_indiv unit test 3 - equal AGI splits equally
+  absolute_error_margin: 0.01
+  period: 2021
+  input:
+    people:
+      person1:
+        is_tax_unit_head: true
+        dc_agi: 100_000
+      person2:
+        is_tax_unit_spouse: true
+        dc_agi: 100_000
+    tax_units:
+      tax_unit:
+        members: [person1, person2]
+        tax_unit_itemizes: false
+        dc_deduction_joint: 30_000
+    spm_units:
+      spm_unit:
+        members: [person1, person2]
+    households:
+      household:
+        members: [person1, person2]
+        state_code: DC
+  output:
+    # Equal AGI: income gap is 0, so all deductions split equally
+    dc_deduction_indiv: [15_000, 15_000]
+
+- name: dc_deduction_indiv unit test 4 - partial equalization
+  absolute_error_margin: 0.01
+  period: 2021
+  input:
+    people:
+      person1:
+        is_tax_unit_head: true
+        dc_agi: 120_000
+      person2:
+        is_tax_unit_spouse: true
+        dc_agi: 100_000
+    tax_units:
+      tax_unit:
+        members: [person1, person2]
+        tax_unit_itemizes: false
+        dc_deduction_joint: 30_000
+    spm_units:
+      spm_unit:
+        members: [person1, person2]
+    households:
+      household:
+        members: [person1, person2]
+        state_code: DC
+  output:
+    # Income gap = 20k, deduction = 30k
+    # Capped at gap: 20k to head, remaining (30k-20k)/2 = 5k each
+    # Head: 20k + 5k = 25k, Spouse: 5k
+    dc_deduction_indiv: [25_000, 5_000]
+
+- name: dc_deduction_indiv unit test 5 - single filer
+  absolute_error_margin: 0.01
+  period: 2021
+  input:
+    people:
+      person1:
+        is_tax_unit_head: true
+        dc_agi: 80_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+        tax_unit_itemizes: false
+        dc_deduction_joint: 15_000
+    spm_units:
+      spm_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: DC
+  output:
+    # Single filer: income gap = 80k, deduction = 15k < gap
+    # All deduction goes to head
+    dc_deduction_indiv: [15_000]

policyengine_us/tests/policy/baseline/gov/states/dc/tax/income/dc_income_tax.yaml

@@ -0,0 +1,36 @@
+- name: DC married separate-combined - optimal deduction allocation
+  period: 2024
+  absolute_error_margin: 1
+  input:
+    people:
+      person1:
+        age: 74
+        employment_income: 32_665
+        taxable_interest_income: 2_865
+        taxable_pension_income: 6_300
+        social_security: 19_103
+      person2:
+        age: 74
+        employment_income: 83_570
+        taxable_interest_income: 2_865
+        taxable_pension_income: 6_299
+        social_security: 19_102
+    tax_units:
+      tax_unit:
+        members: [person1, person2]
+    spm_units:
+      spm_unit:
+        members: [person1, person2]
+    households:
+      household:
+        members: [person1, person2]
+        state_fips: 11  # DC
+  output:
+    # With optimal deduction allocation to higher earner (person2)
+    # All $32,300 standard deduction goes to the spouse with higher AGI
+    dc_deduction_indiv: [0, 32_300]
+    # Files separately when separate filing reduces combined tax
+    dc_files_separately: true
+    # Tax is approximately $5,856 (lower than TAXSIM's $6,098 due to
+    # differences in social security taxation calculations)
+    dc_income_tax: 5_856

policyengine_us/tests/policy/baseline/household/cliff_gap.yaml

@@ -150,4 +150,6 @@
         members: [person1, person2]
         state_fips: 11  # DC
   output:  # as expected from above two test results
-    cliff_gap: [486.5, 470.47]
+    # Second value updated after dc_deduction_indiv optimization
+    # (PR #7297 allocates all deductions to higher earner)
+    cliff_gap: [486.5, 461.5]

policyengine_us/variables/gov/states/dc/tax/income/deductions/dc_deduction_indiv.py

@@ -8,19 +8,27 @@ class dc_deduction_indiv(Variable):
     unit = USD
     definition_period = YEAR
     reference = (
-        "https://otr.cfo.dc.gov/sites/default/files/dc/sites/otr/publication/attachments/52926_D-40_12.21.21_Final_Rev011122.pdf#page=44"
-        "https://otr.cfo.dc.gov/sites/default/files/dc/sites/otr/publication/attachments/2022_D-40_Booklet_Final_blk_01_23_23_Ordc.pdf#page=44"
+        "https://otr.cfo.dc.gov/sites/default/files/dc/sites/otr/publication/attachments/52926_D-40_12.21.21_Final_Rev011122.pdf#page=44",
+        "https://otr.cfo.dc.gov/sites/default/files/dc/sites/otr/publication/attachments/2022_D-40_Booklet_Final_blk_01_23_23_Ordc.pdf#page=44",
     )
     defined_for = StateCode.DC
 
     def formula(person, period, parameters):
         tax_unit_deduction = person.tax_unit("dc_deduction_joint", period)
-        # The above references say the following:
-        # "You may allocate this [tax-unit deduction] amount as you wish."
-        # Here we allocate in proportion to head and spouse DC AGI
+        # Per DC Schedule S, Calculation J, Line F:
+        # "You may allocate this amount as you wish."
+        # Optimal strategy: equalize taxable income across spouses
+        # to minimize combined tax under progressive rates.
         person_agi = person("dc_agi", period)
-        tax_unit_agi = person.tax_unit.sum(person_agi)
-        share = np.zeros_like(tax_unit_agi)
-        mask = tax_unit_agi > 0
-        share[mask] = person_agi[mask] / tax_unit_agi[mask]
-        return share * tax_unit_deduction
+        head = person("is_tax_unit_head", period)
+        spouse = person("is_tax_unit_spouse", period)
+        head_agi = person.tax_unit.sum(person_agi * head)
+        spouse_agi = person.tax_unit.sum(person_agi * spouse)
+        income_difference = np.abs(head_agi - spouse_agi)
+        # Give up to the income gap to the higher earner
+        capped = min_(income_difference, tax_unit_deduction)
+        higher_earner = where(head_agi >= spouse_agi, head, spouse)
+        # Split the remainder equally
+        remaining = (tax_unit_deduction - capped) / 2
+        head_or_spouse = head | spouse
+        return capped * higher_earner + remaining * head_or_spouse