Cap the regular tax at the tax on all taxable income (26 U.S.C. 1(h)(1)) and use it on Form 6251 line 10

changelog.d/fix-dwks-regular-tax-lines.fixed.md

@@ -0,0 +1 @@
+Cap the regular tax at the tax on all taxable income at the ordinary rates (26 U.S.C. 1(h)(1), Schedule D Tax Worksheet line 47), and make regular_tax_before_credits, which Form 6251 line 10 uses, the regular tax the model charges (income_tax_main_rates plus capital_gains_tax) instead of a second worksheet computation. regular_tax_before_credits now includes the capital gains tax.

policyengine_us/parameters/gov/irs/capital_gains/thresholds.yaml

@@ -16,7 +16,7 @@ metadata:
     - title: 26 U.S. Code § 1(j)(5)(B) - Capital gains rate thresholds
       href: https://www.law.cornell.edu/uscode/text/26/1#j_5_B
     - title: 2026 IRS data release
-      href: https://www.irs.gov/pub/irs-drop/rp-25-32.pdf#page=12
+      href: https://www.irs.gov/pub/irs-drop/rp-25-32.pdf#page=13
     - title: 2025 IRS data release
       href: https://www.irs.gov/pub/irs-drop/rp-24-40.pdf#page=7
     - title: 2024 IRS data release

policyengine_us/parameters/gov/irs/credits/ctc/amount/base.yaml

@@ -27,7 +27,7 @@ brackets:
           - title: 26 U.S. Code § 24(i)(2) - Inflation adjustment for credit amount
             href: https://www.law.cornell.edu/uscode/text/26/24#i_2
           - title: 2026 IRS data release
-            href: https://www.irs.gov/pub/irs-drop/rp-25-32.pdf#page=13
+            href: https://www.irs.gov/pub/irs-drop/rp-25-32.pdf#page=14
         # IRC §24(i)(2) adjusts the $2,200 statutory base using 2024 as reference year.
         # Current implementation uses incremental uprating from latest value, which
         # produces correct results but differs from statutory base-year calculation.

policyengine_us/parameters/gov/irs/credits/ctc/refundable/individual_max.yaml

@@ -31,7 +31,7 @@ metadata:
     - title: 26 U.S. Code § 24(i)(1) - Inflation adjustment for refundable amount
       href: https://www.law.cornell.edu/uscode/text/26/24#i_1
     - title: 2026 IRS data release
-      href: https://www.irs.gov/pub/irs-drop/rp-25-32.pdf#page=13
+      href: https://www.irs.gov/pub/irs-drop/rp-25-32.pdf#page=14
     - title: 2025 IRS data release
       href: https://www.irs.gov/pub/irs-drop/rp-24-40.pdf#page=8
     - title: 2024 IRS data release

policyengine_us/parameters/gov/states/me/tax/income/deductions/standard/aged_or_blind.yaml

@@ -18,7 +18,7 @@ metadata:
     href: https://www.mainelegislature.org/legis/statutes/36/title36sec5124-C.html
   - title: 36 M.R.S. Sec. 5124-C(1-B)(B) and (1-C)(B) (Maine additional standard deduction equals the IRC Section 63(c)(3) amount)
     href: https://legislature.maine.gov/statutes/36/title36sec5124-C.html
-  - title: IRS Rev. Proc. 2025-32, Section 3.14(3) (2026 federal additional standard deduction for the aged or the blind)
+  - title: IRS Rev. Proc. 2025-32, Section 4.14(3) (2026 federal additional standard deduction for the aged or the blind)
     href: https://www.irs.gov/pub/irs-drop/rp-25-32.pdf#page=18
 SINGLE:
   2018-01-01: 1_600

policyengine_us/reforms/additional_tax_bracket/additional_tax_bracket_reform.py

@@ -5,80 +5,9 @@
     amount_taxed_below_rate,
     tax_at_main_rates,
 )
-from policyengine_us.variables.gov.irs.tax.federal_income.foreign_earned_income_exclusion.schedule_d_tax_worksheet_after_capital_gain_excess import (
-    schedule_d_tax_worksheet_after_capital_gain_excess,
-)
 
 
 def create_additional_tax_bracket() -> Reform:
-    class regular_tax_before_credits(Variable):
-        value_type = float
-        entity = TaxUnit
-        definition_period = YEAR
-        label = "Regular tax before credits"
-        documentation = "Regular tax on regular taxable income before credits"
-        unit = USD
-
-        def formula(tax_unit, period, parameters):
-            p = parameters(period).gov.irs
-            filing_status = tax_unit("filing_status", period)
-            # As in the baseline formula, a Form 2555 filer stacks taxable
-            # income on the excluded amount (26 U.S.C. 911(f)).
-            dwks1 = tax_unit("taxable_income_plus_section_911_exclusion", period)
-            worksheet = schedule_d_tax_worksheet_after_capital_gain_excess(
-                tax_unit, period, tax_unit("taxable_income", period)
-            )
-
-            dwks16 = min_(p.capital_gains.thresholds["1"][filing_status], dwks1)
-            dwks17 = min_(tax_unit("dwks14", period), dwks16)
-            dwks20 = dwks16 - dwks17
-            lowest_rate_tax = p.capital_gains.rates["1"] * dwks20
-            # Break in worksheet lines
-            dwks13 = worksheet.line_13
-            dwks21 = min_(dwks1, dwks13)
-            dwks22 = dwks20
-            dwks23 = max_(0, dwks21 - dwks22)
-            dwks25 = min_(p.capital_gains.thresholds["2"][filing_status], dwks1)
-            dwks19 = tax_unit("dwks19", period)
-            dwks26 = min_(dwks19, dwks20)
-            dwks27 = max_(0, dwks25 - dwks26)
-            dwks28 = min_(dwks23, dwks27)
-            dwks29 = p.capital_gains.rates["2"] * dwks28
-            dwks30 = dwks22 + dwks28
-            dwks31 = dwks21 - dwks30
-            dwks32 = p.capital_gains.rates["3"] * dwks31
-            # Break in worksheet lines
-            dwks33 = min_(worksheet.line_9, worksheet.unrecaptured_section_1250_gain)
-            dwks10 = worksheet.line_10
-            dwks34 = dwks10 + dwks19
-            dwks36 = max_(0, dwks34 - dwks1)
-            dwks37 = max_(0, dwks33 - dwks36)
-
-            p = parameters(period).gov.irs.income
-
-            dwks38 = p.amt.capital_gains.capital_gain_excess_tax_rate * dwks37
-            # Break in worksheet lines
-            dwks39 = dwks19 + dwks20 + dwks28 + dwks31 + dwks37
-            dwks40 = dwks1 - dwks39
-            dwks41 = p.amt.brackets.rates[-1] * dwks40
-
-            # Compute regular tax using bracket rates and thresholds
-            # The shared schedule clamps inverted brackets as in the
-            # baseline formulas (#9084).
-            reg_taxinc = max_(0, dwks19)
-            bracket = parameters(period).gov.contrib.additional_tax_bracket.bracket
-            reg_tax = tax_at_main_rates(reg_taxinc, filing_status, bracket)
-
-            # Return to worksheet lines
-            dwks42 = reg_tax
-            dwks43 = dwks29 + dwks32 + dwks38 + dwks41 + dwks42 + lowest_rate_tax
-            excluded = max_(0, tax_unit("foreign_earned_income_exclusion", period))
-            tax_on_excluded = tax_at_main_rates(excluded, filing_status, bracket)
-            dwks43 = where(excluded > 0, max_(0, dwks43 - tax_on_excluded), dwks43)
-            dwks44 = tax_unit("income_tax_main_rates", period)
-            dwks45 = min_(dwks43, dwks44)
-            return where(tax_unit("has_qdiv_or_ltcg", period), dwks45, dwks44)
-
     class income_tax_main_rates(Variable):
         value_type = float
         entity = TaxUnit
@@ -110,6 +39,28 @@ def formula(tax_unit, period, parameters):
             tax_on_excluded = tax_at_main_rates(excluded, filing_status, bracket)
             return where(excluded > 0, max_(0, tax - tax_on_excluded), tax)
 
+    class tax_on_taxable_income_at_main_rates(Variable):
+        value_type = float
+        entity = TaxUnit
+        definition_period = YEAR
+        label = "Tax on all taxable income at the main rates"
+        reference = "https://www.law.cornell.edu/uscode/text/26/1#h_1"
+        unit = USD
+
+        def formula(tax_unit, period, parameters):
+            # Schedule D Tax Worksheet line 46 on the reform's rate schedule,
+            # as in the baseline formula on the baseline schedule. Section
+            # 1(h)(1) caps the regular tax at it (capital_gains_tax).
+            taxable_income = tax_unit(
+                "taxable_income_plus_section_911_exclusion", period
+            )
+            bracket = parameters(period).gov.contrib.additional_tax_bracket.bracket
+            filing_status = tax_unit("filing_status", period)
+            tax = tax_at_main_rates(max_(0, taxable_income), filing_status, bracket)
+            excluded = max_(0, tax_unit("foreign_earned_income_exclusion", period))
+            tax_on_excluded = tax_at_main_rates(excluded, filing_status, bracket)
+            return where(excluded > 0, max_(0, tax - tax_on_excluded), tax)
+
     class taxable_income_taxed_below_25_percent(Variable):
         value_type = float
         entity = TaxUnit
@@ -135,7 +86,7 @@ def formula(tax_unit, period, parameters):
     class reform(Reform):
         def apply(self):
             self.update_variable(income_tax_main_rates)
-            self.update_variable(regular_tax_before_credits)
+            self.update_variable(tax_on_taxable_income_at_main_rates)
             self.update_variable(taxable_income_taxed_below_25_percent)
 
     return reform

policyengine_us/reforms/biden/budget_2025/capital_gains_tax_increase.py

@@ -3,6 +3,7 @@
     section_911_net_capital_gain_other_than_dividends,
 )
 from policyengine_us.variables.gov.irs.tax.federal_income.capital_gains.capital_gains_tax import (
+    limit_to_tax_at_main_rates,
     rate_gain_taxed_at_28_percent,
 )
 
@@ -144,7 +145,13 @@ def formula(tax_unit, period, parameters):
                 adjusted_net_cg,
                 taxable_unrecaptured_gain,
             )
-            return main_cg_tax + unrecaptured_gain_tax + remaining_cg_tax
+            # As in the baseline formula, section 1(h)(1) keeps the regular
+            # tax within the tax on all taxable income at the main rates.
+            return limit_to_tax_at_main_rates(
+                tax_unit,
+                period,
+                main_cg_tax + unrecaptured_gain_tax + remaining_cg_tax,
+            )
 
     class reform(Reform):
         def apply(self):

policyengine_us/reforms/harris/capital_gains/harris_capital_gains.py

@@ -3,6 +3,7 @@
     section_911_net_capital_gain_other_than_dividends,
 )
 from policyengine_us.variables.gov.irs.tax.federal_income.capital_gains.capital_gains_tax import (
+    limit_to_tax_at_main_rates,
     rate_gain_taxed_at_28_percent,
 )
 
@@ -134,7 +135,13 @@ def formula(tax_unit, period, parameters):
                 taxable_unrecaptured_gain,
             )
 
-            return main_cg_tax + unrecaptured_gain_tax + remaining_cg_tax
+            # As in the baseline formula, section 1(h)(1) keeps the regular
+            # tax within the tax on all taxable income at the main rates.
+            return limit_to_tax_at_main_rates(
+                tax_unit,
+                period,
+                main_cg_tax + unrecaptured_gain_tax + remaining_cg_tax,
+            )
 
     class reform(Reform):
         def apply(self):

policyengine_us/tests/core/test_me_standard_deduction_federal_conformity.py

@@ -109,7 +109,7 @@ def test_me_standard_deduction_does_not_follow_federal_in_2026():
 
 
 def test_me_standard_deduction_applies_the_federal_dependent_cap_in_2027():
-    # IRC Section 63(c)(5), as adjusted by Rev. Proc. 2025-32 section .14(2):
+    # IRC Section 63(c)(5), as adjusted by Rev. Proc. 2025-32 section 4.14(2):
     # an individual who is a dependent of another taxpayer gets at most the
     # greater of the dependent floor and earned income plus a fixed addition,
     # capped at the ordinary basic standard deduction. Maine follows the federal

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

@@ -99,7 +99,6 @@
     foreign_tax_credit: 0
     regular_tax_before_credits: 11_000
     form_4972_lumpsum_distributions: 0
-    capital_gains_tax: 0
   output:
     alternative_minimum_tax: 0
 
@@ -112,7 +111,6 @@
     foreign_tax_credit: 0
     regular_tax_before_credits: 11_000
     form_4972_lumpsum_distributions: 0
-    capital_gains_tax: 0
   output:
     alternative_minimum_tax: 1_000
 
@@ -168,7 +166,6 @@
     foreign_tax_credit: 0
     regular_tax_before_credits: 30_000
     form_4972_lumpsum_distributions: 0
-    capital_gains_tax: 0
   output:
     # Line 3 = 280,000. Line 4 = 280,000 x 28% - 4,782 = 73,618. Line 5 =
     # 130,000 x 26% = 33,800. Line 6 = 39,818, which goes on Form 6251 line 7.
@@ -187,7 +184,6 @@
     foreign_tax_credit: 0
     regular_tax_before_credits: 30_000
     form_4972_lumpsum_distributions: 0
-    capital_gains_tax: 0
   output:
     # Form 6251 line 7 = 150,000 x 26% = 39,000.
     alternative_minimum_tax: 9_000
@@ -203,7 +199,6 @@
     foreign_tax_credit: 0
     regular_tax_before_credits: 0
     form_4972_lumpsum_distributions: 0
-    capital_gains_tax: 0
   output:
     # Line 3 = 180,000. Line 4 = 180,000 x 28% - 2,391 = 48,009. Line 5 =
     # 130,000 x 28% - 2,391 = 34,009. Line 6 = 14,000.
@@ -219,9 +214,9 @@
     amt_part_iii_required: true
     amt_tax_including_cg: 57_785
     foreign_tax_credit: 0
-    regular_tax_before_credits: 0
+    # Form 6251 line 10: the regular tax, all of it capital gains tax.
+    regular_tax_before_credits: 42_637.50
     form_4972_lumpsum_distributions: 0
-    capital_gains_tax: 42_637.50
   output:
     # Form 6251 line 39 = 311,900 x 28% - 4,782 = 82,550, line 38 = 57,785,
     # line 40 = 57,785. Worksheet line 5 = 100,000 x 26% = 26,000, line 6 =
@@ -238,6 +233,5 @@
     foreign_tax_credit: 0
     regular_tax_before_credits: 0
     form_4972_lumpsum_distributions: 0
-    capital_gains_tax: 0
   output:
     alternative_minimum_tax: 0

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

@@ -327,7 +327,7 @@
     dwks19: 136_000
     unrecaptured_section_1250_gain: 0
   output:
-    # Rev. Proc. 2025-32, section 3.10: for 2026 the 28 percent rate applies
+    # Rev. Proc. 2025-32, section 4.10: for 2026 the 28 percent rate applies
     # above $122,250 for married individuals filing separate returns
     # ($244,500 for all other taxpayers). Line 17 is all of line 12,
     # $136,000, so line 18 is 28% * $136,000 - 2% * $122,250 = $38,080 -

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

@@ -54,8 +54,9 @@
     # $759,250 = $151,850; line 22 tax on $134,250 = $25,067; line 25
     # $201,779.50.
     taxable_income: 1_059_250
-    regular_tax_before_credits: 25_067
+    income_tax_main_rates: 25_067
     capital_gains_tax: 176_712.5
+    regular_tax_before_credits: 201_779.5
     # Form 6251: line 1 $1,059,250; line 2a $15,750; line 4 $1,075,000 plus
     # 25% * ($1,075,000 - $900,350) = $43,662.50 for married filing
     # separately (line 4 instructions) = $1,118,662.50. Line 5: $68,500 -