Verify state CDCC coupling to federal IRC § 21 filing-status and deemed-income changes (follow-up to #8704)

[hua7450]

Context

PR #8704 improves federal CDCC conformance with IRC § 21:

• The § 21(e)(2) joint-return requirement (with the § 21(e)(4) separated-taxpayer exception) is now applied in cdcc_potential, the pre-liability-cap credit that state credits read.
• The § 21(d)(2) deemed earned income for a student or incapacitated spouse now flows through min_head_spouse_earned.

These federal variables feed ~26 state credits, so the changes propagate into state results. This issue tracked the state-law questions left open by the #8704 review.

Verification tasks — all resolved 2026-07-02 (see the verification-results comment below for citations)

• § 21(d)(2) deemed income pass-through — VA, MA, CA, ID, OR, WI (+ MN, NY, which also cap by min_head_spouse_earned and were missing from this list). All verified correct: each state imports the federal § 21(d) earned-income definition including deemed income. MA/CA were fixed in Improve federal CDCC conformance with IRC § 21 (deemed income, qualifying-individual count, filing status) and fix CO/MA/CA coupling #8704 itself.
• Colorado DR 0347 / C.R.S. 39-22-119.5 — MFS exclusion. Confirmed: § 39-22-119.5(3)(a) requires that the filer "would be allowed a credit under section 21 ... if he or she had sufficient tax liability," which an MFS filer fails regardless of liability, and DR 0347 bars MFS outright. The Improve federal CDCC conformance with IRC § 21 (deemed income, qualifying-individual count, filing status) and fix CO/MA/CA coupling #8704 gate is correct and necessary.
• New Mexico NMSA 7-2-18.1 — "claimed" vs "allowable". Resolved in the model's favor: § 7-2-18.1(E) offsets the federal credit the taxpayer "is able to deduct from federal tax liability" (i.e. claimed/usable, $0 for MFS), matching PIT-RC line 21. The resulting NM credit increase for MFS filers is legitimate; NM allows them half the credit per § 7-2-18.1(G).
• States reading cdcc_potential. Corrected list: PA, IA, DC, NE (refundable), LA (refundable), NM, OH, WI (pre-2024) — OK switched to the capped cdcc in Use allowed federal CDCC (not potential) in OK Child Care/Child Tax Credit #8778; OH was missing from the original list. All verified: each statute couples to § 21 eligibility (the liability-cap carve-outs in IA/NE/OH waive only § 26, not § 21(e)(2)). The PA MFS regression test removed from Improve federal CDCC conformance with IRC § 21 (deemed income, qualifying-individual count, filing status) and fix CO/MA/CA coupling #8704 can be re-added.
• States multiplying cdcc (~16 states). All verified: every statute couples to the federal credit allowed/allowable/claimed, so MFS → $0 passes through correctly. DE/KY combined-separate regimes presuppose a joint federal return and are unaffected.

Outcome: remaining work found by the verification

Model bugs (pre-existing — these states bypass the variables #8704 fixed):

• WI: gate the 2024+ credit branch of wi_childcare_expense_credit_potential and wi_childcare_expense_subtraction on cdcc_filing_status_eligible — Wis. Stat. § 71.07(9g)(c)4. and § 71.05(6)(b)43.e. impose "the special rules in 26 USC 21(e)(2) and (4)".
• NY: multiply ny_cdcc by cdcc_filing_status_eligible — IT-216 requires qualifying for the federal credit and states the MFS/considered-unmarried rule.
• HI: add the HRS § 235-55.6(e)(2)/(e)(4) joint-return gate; restrict the (d)(2) income floor to a spouse on a married return (person-level today, wrongly deems single filers); use is_incapable_of_self_care instead of is_disabled in hi_cdcc_income_floor_eligible.
• Add SEPARATE-filing tests with the fixes (only CO has any today) and re-add the PA MFS regression test.

Decision item:

• SC: § 12-6-3380 imports § 21 wholesale (including the (e)(4) exception), but sc_cdcc_potential uses a blanket filing_status != SEPARATE. SC1040 instructions say MFS cannot claim, so the status quo is form-faithful — decide whether to switch to cdcc_filing_status_eligible.

Expense-base conformity gap (follow-up PR):

• VA, ID, OR, MN, WI (subtraction): add disabled-adult care_expenses to each state's expense base (children-only tax_unit_childcare_expenses today), mirroring federal cdcc_relevant_expenses — each statute references the full § 21 expense set. Under-inclusion only.

Tangential pre-existing flags (file separately):

• AR: statute makes the 20% credit refundable (§ 26-51-502(c)(1)(A)(ii)); model treats it as non-refundable. Statute also pins § 21 to its 2013-01-02 text; model reads the live federal credit.
• VT: TY2022 over-grant (Act 138 of 2022 kept the low-income AGI cap for 2022; only Act 72 of 2023 removed it for TY2023+); state_cdccs.yaml lists both VT credits for 2022–2024 (display double-count).
• MD: verify the separate-filer phase-out start ($30,000 in model vs. $20,500 in older § 10-716 text) against Form 502CR.

Background

• One further question from the Improve federal CDCC conformance with IRC § 21 (deemed income, qualifying-individual count, filing status) and fix CO/MA/CA coupling #8704 review was already resolved: when both spouses are floor-eligible with no earnings, the credit is $0 — verified against Treas. Reg. § 1.21-2(c), Example 3 (earned income may be attributed to only one spouse per § 1.21-2(b)(4)(iii)).
• Related follow-up (separate concern): Hawaii duplicates the deeming logic in hi_cdcc_min_head_spouse_earned and could be deduplicated against the federal variable — note this now folds into the HI fix above.

[hua7450]

Verification complete (2026-07-02)

All state consumers of the changed federal variables have been verified: a code-interaction audit of every consumer of cdcc_potential / cdcc / capped_cdcc / min_head_spouse_earned / count_cdcc_eligible / cdcc_relevant_expenses, plus primary-source verification (statute text and current form instructions) for 24 states. KS, DC, CA, MA were verified during #8704; TX/WA have no coupled credit.

Result: 21 of 24 states pass through the federal changes correctly. Three states have confirmed model bugs (WI, NY, HI) — all pre-existing gaps that bypass the variables #8704 fixed, not regressions. Details below.

Checklist resolution

1. § 21(d)(2) deemed-income pass-through — RESOLVED, all correct (MN and NY also cap by min_head_spouse_earned and were verified in addition to the listed states):

• VA: Va. Code § 58.1-322.03 subd. 3 — deduction equals the amount the federal credit "is based" on (Form 2441 line 6, which includes deeming). https://law.lis.virginia.gov/vacode/title58.1/chapter3/section58.1-322.03/
• ID: Idaho Code § 63-3022D expressly adopts § 21(d). https://legislature.idaho.gov/statutesrules/idstat/Title63/T63CH30/SECT63-3022D/
• OR: Schedule OR-WFHDC instructions adopt the federal $250/$500 monthly deemed amounts for a disabled or student spouse, and OR's qualifying-individual definition mirrors § 21(b)(1) — so the deemed floor (and the QI-count increase for a disabled spouse) is correct law. https://www.oregon.gov/dor/forms/FormsPubs/schedule-or-wfhdc-inst_101-195-1_2024.pdf#page=4
• MN: Minn. Stat. § 290.067 subd. 1(a) computes the credit "pursuant to ... section 21"; Schedule M1CD line 3 confirms the student/disabled-spouse treatment. https://www.revisor.mn.gov/statutes/cite/290.067
• WI: Schedule WI-2441 line B uses the $250/$500 monthly deemed amounts — deeming coupling correct (WI's bug is filing status; see below).
• MA/CA: fixed and verified in Improve federal CDCC conformance with IRC § 21 (deemed income, qualifying-individual count, filing status) and fix CO/MA/CA coupling #8704.

2. Colorado DR 0347 / C.R.S. 39-22-119.5 — CONFIRMED. § 39-22-119.5(3)(a) requires that the individual "would be allowed a credit ... under section 21 ... if he or she had sufficient tax liability" — an MFS filer fails § 21(e)(2) regardless of liability, so the cdcc_filing_status_eligible gate added in #8704 is correct and necessary (without it the capped_cdcc <= 0 backstop would invert). DR 0347: "You cannot claim this credit if your federal filing status is Married Filing Separate." https://colorado.public.law/statutes/crs_39-22-119.5

3. New Mexico "claimed vs allowable" — RESOLVED, model correct. NMSA § 7-2-18.1(E) offsets "the federal credit ... the taxpayer is able to deduct from federal tax liability" — the credit actually usable/claimed, which is $0 for an MFS filer — and PIT-RC line 21 confirms ("the federal ... credit you claimed on your federal Schedule 3"). § 7-2-18.1(G) allows separate filers half the credit. The post-#8704 NM credit increase for MFS filers is therefore legitimate. https://codes.findlaw.com/nm/chapter-7-taxation/nm-st-sect-7-2-18-1/

4. States reading cdcc_potential — RESOLVED, all correct. List correction: the actual readers are PA, IA, DC, NE (refundable), LA (refundable), NM, OH, WI (pre-2024) — OK moved to the capped cdcc in #8778, and OH was missing from the original list.

• PA: Art. XVII-G (Act 53 of 2022) — taxpayer must "receive" the federal § 21 credit; PA DOR states the joint-return rule with a § 21(e)(4)-mirror exception. The PA MFS regression test removed from Improve federal CDCC conformance with IRC § 21 (deemed income, qualifying-individual count, filing status) and fix CO/MA/CA coupling #8704 can be re-added. https://www.pa.gov/agencies/revenue/resources/tax-types-and-information/personal-income-tax/child-and-dependent-care-credit
• IA: § 422.12C's "without regard to whether or not the federal credit was limited by the taxpayer's federal tax liability" waives only the § 26 cap — validating both the cdcc_potential read and the surviving MFS bar. https://www.legis.iowa.gov/docs/code/422.12C.pdf
• NE: § 77-2715.07(2)(b) "allowable ... whether or not ... limited by the federal tax liability" (refundable → cdcc_potential) vs. (2)(a) "would have received the federal credit" (nonrefundable → cdcc). https://nebraskalegislature.gov/laws/statutes.php?statute=77-2715.07
• LA: R.S. 47:297.4(A) gates both paths on being "eligible pursuant to the federal income tax credit provided by Internal Revenue Code Section 21." http://legis.la.gov/Legis/Law.aspx?d=101769
• OH: ORC § 5747.054's "without regard to any limitation imposed by section 26" removes only the liability cap; § 21(e)(2) is internal to § 21 and survives. The IT 1040 worksheet's two branches mirror the model's cdcc_potential/cdcc split. https://codes.ohio.gov/ohio-revised-code/section-5747.054
• DC: verified during Improve federal CDCC conformance with IRC § 21 (deemed income, qualifying-individual count, filing status) and fix CO/MA/CA coupling #8704.

5. States multiplying cdcc — RESOLVED, all correct. Every statute couples to the federal credit allowed/allowable/claimed, so MFS → $0 flows through as required: AR § 26-51-502(c)(1)(A)(i) ("as allowed under 26 U.S.C. § 21"), DE 30 Del. C. § 1114(a) ("allowable"; DE combined-separate presupposes a joint federal return), GA § 48-7-29.10(a) ("claimed and allowed"), KY KRS 141.067, ME 36 M.R.S. § 5218(1), MS § 27-7-22.39 (DOR: taxpayer "must claim the federal credit"), NJ 54A:4-17 (double-locked: federal credit "allowed" and "married couples shall file a joint return"), OK 68 O.S. § 2357(B)(2) (greater-of structure correctly keeps the 5%-CTC leg for MFS filers), RI § 44-30-2.6, WV § 11-21-26, MD § 10-716 (separate filers get their own AGI limits and inherit the federal gate), KS (verified in #8704). VT § 5828c ("72 percent of the federal ... credit allowed to the taxpayer") also passes — VT's low-income credit gates on AGI only, so no Colorado-style inversion is possible.

New findings — model bugs (pre-existing; separate fix PRs)

1. Wisconsin — 2024+ credit and subtraction miss the § 21(e)(2)/(4) gate. Wis. Stat. § 71.07(9g)(c)4. and § 71.05(6)(b)43.e. each provide the claimant "is subject to the special rules in 26 USC 21(e)(2) and (4)"; 2023 Act 101 swapped only the § 21(c) expense cap. The 2024 Schedule WI-2441 instructions limit eligibility to single/HoH/MFJ. The model's 2024+ branch of wi_childcare_expense_credit_potential and wi_childcare_expense_subtraction bypass the gated federal variables and use the ungated cdcc_rate, so MFS filers wrongly receive both. Fix: gate both on cdcc_filing_status_eligible. (The pre-2024 path reads cdcc_potential and is correct.) https://docs.legis.wisconsin.gov/statutes/statutes/71/i/07/9g ; https://docs.legis.wisconsin.gov/statutes/statutes/71/i/05/6/b/43 ; https://www.revenue.wi.gov/TaxForms2024/2024-ScheduleWI-2441-Inst.pdf#page=1
2. New York — replica credit misses the filing-status gate. ny_cdcc/ny_cdcc_max rebuild the federal credit from components without reading cdcc_filing_status_eligible, so an MFS filer keeps a NY credit that § 21(e)(2) denies. IT-216-I requires qualifying for the federal credit and states the MFS/"considered unmarried" rule (a § 21(e)(4) analog). Fix: multiply ny_cdcc by cdcc_filing_status_eligible (deeming, count, and expense-base inheritance are all confirmed correct). https://www.tax.ny.gov/pdf/current_forms/it/it216i.pdf#page=1 (MFS rule; deemed-income rule on p. 5)
3. Hawaii — three divergences from HRS § 235-55.6 (full text: https://files.hawaii.gov/tax/legal/hrs/hrs_235.pdf#page=47, subsections (d)–(e)):
   • Missing joint-return gate: (e)(2) allows the credit to a married taxpayer "only if the taxpayer and the taxpayer's spouse file a joint return," with an (e)(4) living-apart exception; the model's hi_cdcc_eligible checks only count_cdcc_eligible > 0.
   • Deeming over-applied: (d)(2)'s income floor is spouse-only on a married return, but hi_cdcc_income_floor_eligible is person-level with no married gate and hi_cdcc_min_head_spouse_earned lacks the is_joint guard — a single disabled/student filer's $0 earnings are wrongly floored to $2,400/$4,800.
   • Wrong disability standard: HRS says "incapable of caring for oneself," but the floor uses is_disabled instead of is_incapable_of_self_care (HI's count, via the federal chain, already uses the correct variable).
   • Confirmed correct: the $200/$400 monthly floor amounts and tiers, and inheriting the expanded federal count_cdcc_eligible ((b)(1) and (e)(5) track § 21(b)(1)/§ 152(e)).

Decision item

SC: § 12-6-3380(A) computes the credit "as provided in Internal Revenue Code Section 21," importing § 21(e)(2) and (e)(4) — but sc_cdcc_potential uses a blanket filing_status != SEPARATE, denying the separated-taxpayer exception. SC1040 instructions bluntly say MFS cannot claim, so the status quo is form-faithful; swapping in cdcc_filing_status_eligible would be a one-line statute-fidelity fix. (SC's inheritance of the #8746 expense base and #8704 count rules is confirmed correct.)

Expense-base conformity gap (follow-up PR)

VA, ID, OR, MN (and the WI subtraction) build their expense base from children-only tax_unit_childcare_expenses, omitting the disabled-adult care_expenses that #8746 added to the federal base — though each statute references the full § 21 employment-related-expense set. Under-inclusion only (adult-care-only households get $0 state benefit vs. a positive federal one); never an over-payment. Fix is the same one-line addition as cdcc_relevant_expenses in each state file.

Tangential pre-existing flags (file separately)

• AR: § 26-51-502(c)(1)(A)(ii) makes the 20% credit refundable, but the model routes it through non-refundable credits; the statute also pins § 21 to its January 2, 2013 text while the model reads the live federal credit (would leak ARPA-2021 amounts).
• VT: the model applies the 72% credit to all of TY2022, but Act 138 of 2022 kept the low-income AGI cap for 2022 (Act 72 of 2023 removed it for TY2023+) — over-grants above-threshold 2022 filers. Also gov/states/household/state_cdccs.yaml lists both VT credits for 2022–2024, so the display aggregate can double-count (liability unaffected).
• MD: the separate-filer phase-out start is $30,000 in the model vs. $20,500 in older § 10-716 text — verify against Form 502CR.

Test gap

Only Colorado has SEPARATE-filing CDCC tests. The WI/NY/HI fixes should each add MFS cases, and the PA MFS regression test drafted for #8704 can now be re-added (PA's coupling is verified).

Sources blocked to automation (verdicts corroborated elsewhere; manual download for verbatim text)

SC statute (https://law.justia.com/codes/south-carolina/title-12/chapter-6/section-12-6-3380/), SC1040 instructions (https://dor.sc.gov/sites/dor/files/forms/SC1040Instr_2024.pdf), VT IN-112 (https://tax.vermont.gov/sites/tax/files/documents/IN-112-2024.pdf), CO DR 0347 (https://tax.colorado.gov/sites/tax/files/documents/DR0347_2025.pdf), NY Tax Law § 606(c) verbatim (https://www.nysenate.gov/legislation/laws/TAX/606), MD § 10-716 verbatim (https://mgaleg.maryland.gov/mgawebsite/Laws/StatuteText?article=gtg&section=10-716).

🤖 Generated with Claude Code

[MaxGhenis]

Audit complete via #8933 (merged): every state variable consuming federal cdcc/capped_cdcc/cdcc_potential was enumerated and its conformity semantics verified against the state's own statute (full table in the PR body). Outcomes:

• Pinned to pre-OBBBA § 21 (static conformity predating Pub. L. 119-21): KY, ME, VT — new pre_obbba_cdcc* federal variables freeze only the rate schedule; the OBBBA-invariant expense base stays live.
• Verified correct on the live read: OH (SB 9 moved its date past OBBBA in March 2026), GA (HB 1199), WV (SB 400), CO (rolling, 2026 redesign), AR (already pinned to 2013 IRC via Compute the Arkansas CDCC from IRC § 21 as in effect January 2, 2013 (Form AR2441) #8885), and the rolling/selective states (IA, KS, DE, OK, RI, MD, NE, LA, NM, NJ, PA, MS).
• § 129 base: CA/ID/VA independently recompute the dollar limit and now subtract the employer dependent-care exclusion per their own forms (FTB 3506 Part IV; ID Form 39R Line 6 worksheet; Va. Code § 58.1-322.03(3)); states reading cdcc_relevant_expenses inherit it from Federal credit accuracy: reduce CDCC by section 129 benefits (+ 25C/clean-vehicle findings) #8931.

Confirmed residual defects (WI/NY/HI filing-status gating, WI 2024+ rate vintage, AR refundability, VT TY2022, expense-base scope) are consolidated in #8948.