Fix WI retirement income exclusion applied after standard-deduction phaseout (#8817)

changelog.d/fix-wi-retirement-exclusion-standard-deduction.fixed.md

@@ -0,0 +1 @@
+Fix Wisconsin Act 15 retirement income exclusion to reduce WI income before the standard-deduction phaseout, so elderly filers with retirement income are no longer over-taxed.

policyengine_us/tests/policy/baseline/gov/states/wi/tax/income/wi_retirement_income_exclusion.yaml

@@ -78,11 +78,15 @@
         members: [person1]
         state_code: WI
   output:
-    # AGI = $45k → Line 17 ineligible (> $15k), Line 16 = $20k
-    # Standard tax ≈ $1,377, exclusion tax ≈ $474
-    # min($1377, $474) = $474 → exclusion path wins
+    # AGI = $45k → Line 17 ineligible (> $15k), Line 16 = $20k.
+    # The $20k Line 16 subtraction lowers WI income to $25k, where the
+    # standard deduction phaseout is smaller, so the standard deduction is
+    # $12,906 (vs $10,506 at $45k) — $2,400 larger. Exclusion taxable income
+    # = ($45k - $10,506 - $950 exemption) - $20k - $2,400 = $11,144;
+    # exclusion tax = $11,144 * 0.035 = $390.
+    # Standard tax ≈ $1,344 → min($1,344, $390) = $390 → exclusion path wins.
     wi_retirement_income_exclusion_amount: 20_000
-    wi_income_tax: 474
+    wi_income_tax: 390
 
 - name: E2E - Joint both 68, large pension, exclusion zeroes out tax
   absolute_error_margin: 1

policyengine_us/tests/policy/baseline/gov/states/wi/tax/income/wi_retirement_income_exclusion_tax.yaml

@@ -92,3 +92,131 @@
     # exclusion_taxinc = max(0, 18000 - 15000 + 0) = 3000
     # exclusion_tax = 3000 * 0.035 = 105
     wi_retirement_income_exclusion_tax: 105
+
+# Regression for issue #8817: the Line 16 subtraction must reduce WI income
+# BEFORE the standard-deduction phaseout, so a large exclusion recovers
+# standard deduction that the pre-subtraction income had phased out.
+- name: E2E - Joint 67+ with retirement income above the standard-deduction phaseout
+  absolute_error_margin: 1
+  period: 2025
+  input:
+    people:
+      person1:
+        age: 70
+        taxable_pension_income: 90_000
+        is_tax_unit_head: true
+      person2:
+        age: 70
+        taxable_pension_income: 30_000
+        is_tax_unit_spouse: true
+    tax_units:
+      tax_unit:
+        members: [person1, person2]
+        filing_status: JOINT
+    households:
+      household:
+        members: [person1, person2]
+        state_code: WI
+  output:
+    # WI income (line 7) = $120,000; Line 16 exclusion = min($48k, $120k) = $48k.
+    # Standard deduction at $120k = $6,956; at ($120k - $48k) = $72k it is
+    # $16,449 — $9,493 larger (the phaseout is 0.19778 * $48k). Exclusion
+    # taxable income = $72k - $16,449 - $1,900 exemption = $53,651; joint tax
+    # = 19,580*0.035 + (53,651-19,580)*0.044 = $2,184. Before the fix the
+    # phaseout stayed keyed to $120k, giving ~$2,602 and over-taxing the couple.
+    wi_retirement_income_exclusion_amount: 48_000
+    wi_retirement_income_exclusion_tax: 2_184
+
+# --- Boundary tests for the #8817 standard-deduction-phaseout ordering fix ---
+
+# Below the single phaseout start ($19,550, 2025) the standard deduction is at
+# its max for both full and exclusion-reduced income, so the extra deduction the
+# fix unlocks is $0 (no regression vs. a plain taxinc - line16 subtraction).
+- name: Exclusion path - below phaseout start, extra standard deduction is zero (no regression)
+  absolute_error_margin: 0.01
+  period: 2025
+  input:
+    age: 68
+    taxable_pension_income: 15_000
+    is_tax_unit_head: true
+    filing_status: SINGLE
+    state_code: WI
+    wi_taxable_income: 20_000
+    wi_retirement_income_subtraction: 0
+  output:
+    # wi_agi = 15,000 < 19,550 -> SD at max ($13,560) for full and reduced; extra_SD = 0.
+    # line16 = min(24,000, 15,000) = 15,000. exclusion_taxinc = 20,000 - 15,000 = 5,000.
+    # tax = 5,000 * 0.035 = 175.
+    wi_retirement_income_exclusion_tax: 175
+
+# Fully phased-out top end (age 85, very high income): SD = $0 for both full and
+# reduced income, so extra_SD = 0 and the exclusion is a plain subtraction.
+- name: Exclusion path - fully phased-out top end, extra standard deduction is zero
+  absolute_error_margin: 0.01
+  period: 2025
+  input:
+    age: 85
+    taxable_pension_income: 200_000
+    is_tax_unit_head: true
+    filing_status: SINGLE
+    state_code: WI
+    wi_taxable_income: 34_000
+    wi_retirement_income_subtraction: 0
+  output:
+    # wi_agi = 200,000 and reduced = 176,000 are both past the single full-phaseout
+    # point ($132,550) -> SD = 0 for both; extra_SD = 0. line16 = 24,000.
+    # exclusion_taxinc = 34,000 - 24,000 = 10,000. tax = 10,000 * 0.035 = 350.
+    wi_retirement_income_exclusion_tax: 350
+
+# Partial-unlock boundary: full income ($140k) is past the single full-phaseout
+# point (SD_full = 0) while reduced income ($116k) lands INSIDE the phaseout, so
+# the fix unlocks a positive partial deduction.
+- name: Exclusion path - partial unlock (full income past phaseout end, reduced income inside it)
+  absolute_error_margin: 1
+  period: 2025
+  input:
+    age: 68
+    taxable_pension_income: 140_000
+    is_tax_unit_head: true
+    filing_status: SINGLE
+    state_code: WI
+    wi_taxable_income: 40_000
+    wi_retirement_income_subtraction: 0
+  output:
+    # SD_full(140,000) = 0; line16 = 24,000; reduced = 116,000.
+    # SD_reduced(116,000) = 13,560 - 0.12*(116,000-19,550) = 1,986; extra_SD = 1,986.
+    # exclusion_taxinc = 40,000 - 24,000 - 1,986 = 14,014. tax = 14,014 * 0.035 = 490.49.
+    # (Without the fix extra_SD would be 0 -> 16,000 -> ~571.88.)
+    wi_retirement_income_exclusion_tax: 490.49
+
+# Joint with only ONE spouse age 67+: the exclusion uses the per-person single
+# cap ($24,000), NOT the $48,000 both-eligible joint pool.
+- name: Exclusion path - joint with one spouse 67+, uses the $24,000 per-person cap
+  absolute_error_margin: 0.01
+  period: 2025
+  input:
+    people:
+      person1:
+        age: 68
+        taxable_pension_income: 24_000
+        is_tax_unit_head: true
+      person2:
+        age: 60
+        is_tax_unit_spouse: true
+    tax_units:
+      tax_unit:
+        members: [person1, person2]
+        filing_status: JOINT
+        wi_taxable_income: 30_000
+        wi_retirement_income_subtraction: 0
+    households:
+      household:
+        members: [person1, person2]
+        state_code: WI
+  output:
+    # Only person1 (68) is eligible -> line16 = min(24,000, 24,000) = 24,000 (single
+    # per-person cap), not the $48k joint pool. wi_agi = 24,000 < 28,210 joint
+    # phaseout start -> extra_SD = 0. exclusion_taxinc = 30,000 - 24,000 = 6,000.
+    # tax = 6,000 * 0.035 = 210.
+    wi_retirement_income_exclusion_amount: 24_000
+    wi_retirement_income_exclusion_tax: 210

policyengine_us/variables/gov/states/wi/tax/income/wi_retirement_income_exclusion_tax.py

@@ -1,4 +1,7 @@
 from policyengine_us.model_api import *
+from policyengine_us.variables.gov.states.wi.tax.income.wi_standard_deduction import (
+    wi_standard_deduction_for_income,
+)
 
 
 class wi_retirement_income_exclusion_tax(Variable):
@@ -21,9 +24,23 @@ def formula(tax_unit, period, parameters):
         # Line 16 is claimed, so we simply subtract Line 16 here.
         line16 = tax_unit("wi_retirement_income_exclusion_amount", period)
         taxinc = tax_unit("wi_taxable_income", period)
-        exclusion_taxinc = max_(0, taxinc - line16)
 
+        # The Line 16 subtraction reduces WI income (Form 1 line 7), and the
+        # standard deduction (line 8) is looked up on that post-subtraction
+        # income. wi_taxable_income embeds the standard deduction computed on
+        # the higher pre-subtraction income, so add back the extra standard
+        # deduction the subtraction unlocks. This is algebraically equivalent
+        # to recomputing taxable income on the reduced WI income, and keeps
+        # the phaseout from staying keyed to the pre-subtraction income.
         fstatus = tax_unit("filing_status", period)
+        wi_agi = tax_unit("wi_agi", period)
+        standard_deduction_full = tax_unit("wi_standard_deduction", period)
+        standard_deduction_reduced = wi_standard_deduction_for_income(
+            max_(0, wi_agi - line16), fstatus, parameters, period
+        )
+        extra_standard_deduction = standard_deduction_reduced - standard_deduction_full
+        exclusion_taxinc = max_(0, taxinc - line16 - extra_standard_deduction)
+
         statuses = fstatus.possible_values
         p = parameters(period).gov.states.wi.tax.income
         return select(

policyengine_us/variables/gov/states/wi/tax/income/wi_standard_deduction.py

@@ -1,40 +1,53 @@
 from policyengine_us.model_api import *
 
 
+def wi_standard_deduction_for_income(income, filing_status, parameters, period):
+    # Wisconsin standard deduction (Form 1 line 8) as a function of WI income.
+    # Factored out of the variable below so the retirement-income-exclusion
+    # path can look the deduction up on income reduced by the Schedule SB
+    # line-16 subtraction (the phaseout otherwise stays keyed to the higher
+    # pre-subtraction income).
+    deduction = parameters(period).gov.states.wi.tax.income.deductions
+    statuses = filing_status.possible_values
+    max_amount = deduction.standard.max[filing_status]
+    phase_out_amount = select(
+        [
+            filing_status == statuses.SINGLE,
+            filing_status == statuses.JOINT,
+            filing_status == statuses.SURVIVING_SPOUSE,
+            filing_status == statuses.SEPARATE,
+            filing_status == statuses.HEAD_OF_HOUSEHOLD,
+        ],
+        [
+            deduction.standard.phase_out.single.calc(income),
+            deduction.standard.phase_out.joint.calc(income),
+            deduction.standard.phase_out.joint.calc(income),
+            deduction.standard.phase_out.separate.calc(income),
+            deduction.standard.phase_out.head_of_household.calc(income),
+        ],
+    )
+    return max_(0, max_amount - phase_out_amount)
+
+
 class wi_standard_deduction(Variable):
     value_type = float
     entity = TaxUnit
     label = "Wisconsin standard deduction"
     unit = USD
     definition_period = YEAR
     reference = (
-        "https://www.revenue.wi.gov/TaxForms2021/2021-Form1f.pdf"
-        "https://www.revenue.wi.gov/TaxForms2021/2021-Form1-Inst.pdf"
-        "https://www.revenue.wi.gov/TaxForms2022/2022-Form1f.pdf"
-        "https://www.revenue.wi.gov/TaxForms2022/2022-Form1-Inst.pdf"
-        "https://docs.legis.wisconsin.gov/misc/lfb/informational_papers/january_2023/0002_individual_income_tax_informational_paper_2.pdf"
+        "https://www.revenue.wi.gov/TaxForms2021/2021-Form1f.pdf",
+        "https://www.revenue.wi.gov/TaxForms2021/2021-Form1-Inst.pdf",
+        "https://www.revenue.wi.gov/TaxForms2022/2022-Form1f.pdf",
+        "https://www.revenue.wi.gov/TaxForms2022/2022-Form1-Inst.pdf",
+        "https://docs.legis.wisconsin.gov/misc/lfb/informational_papers/january_2023/0002_individual_income_tax_informational_paper_2.pdf",
+        # Standard Deduction Table (keyed to WI income, line 7) and the statute, corroborating the phaseout:
+        "https://www.revenue.wi.gov/TaxForms2025/2025-Form1-inst.pdf#page=35",
+        "https://docs.legis.wisconsin.gov/statutes/statutes/71/i/05/22",
     )
     defined_for = StateCode.WI
 
     def formula(tax_unit, period, parameters):
         fstatus = tax_unit("filing_status", period)
-        deduction = parameters(period).gov.states.wi.tax.income.deductions
-        max_amount = deduction.standard.max[fstatus]
         agi = tax_unit("wi_agi", period)
-        phase_out_amount = select(
-            [
-                fstatus == fstatus.possible_values.SINGLE,
-                fstatus == fstatus.possible_values.JOINT,
-                fstatus == fstatus.possible_values.SURVIVING_SPOUSE,
-                fstatus == fstatus.possible_values.SEPARATE,
-                fstatus == fstatus.possible_values.HEAD_OF_HOUSEHOLD,
-            ],
-            [
-                deduction.standard.phase_out.single.calc(agi),
-                deduction.standard.phase_out.joint.calc(agi),
-                deduction.standard.phase_out.joint.calc(agi),
-                deduction.standard.phase_out.separate.calc(agi),
-                deduction.standard.phase_out.head_of_household.calc(agi),
-            ],
-        )
-        return max_(0, max_amount - phase_out_amount)
+        return wi_standard_deduction_for_income(agi, fstatus, parameters, period)