Include non-Schedule-D capital gain distributions in gross income and net investment income

changelog.d/e01100-agi-inclusion.fixed.md

@@ -0,0 +1 @@
+Included non-Schedule-D capital gain distributions in gross income, the preferential-rate capital gains base, and net investment income.

policyengine_us/parameters/gov/irs/gross_income/sources.yaml

@@ -9,6 +9,8 @@ values:
     - farm_rent_income
     - other_net_gain_gross_income
     - capital_gains
+    - non_sch_d_capital_gains
+    # Capital gain distributions received without filing Schedule D (Form 1040 line 7).
     - taxable_interest_income
     - rental_income
     # Royalties included in rental income

policyengine_us/parameters/gov/irs/investment/income/sources.yaml

@@ -5,6 +5,8 @@ values:
     - dividend_income
     - rental_income
     - loss_limited_net_capital_gains
+    - non_sch_d_capital_gains
+    # Capital gain distributions received without filing Schedule D (Form 1040 line 7).
 metadata:
   unit: currency-USD
   label: net investment income sources

policyengine_us/tests/policy/baseline/gov/irs/integration/non_sch_d_capital_gains.yaml

@@ -0,0 +1,119 @@
+- name: Case 1, wages plus capital gain distributions without Schedule D.
+  absolute_error_margin: 0.01
+  period: 2026
+  input:
+    people:
+      person1:
+        is_tax_unit_head: true
+        age: 40
+        employment_income: 60_000
+        non_sch_d_capital_gains: 5_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: TX  # no state income tax
+  output:
+    # Distributions enter AGI: 60,000 + 5,000.
+    adjusted_gross_income: 65_000
+    # And the preferential-rate base, so ordinary tax excludes them.
+    net_capital_gain: 5_000
+    dwks10: 5_000
+    # They are net investment income (below the NIIT MAGI threshold here).
+    net_investment_income: 5_000
+    net_investment_income_tax: 0
+
+- name: Case 1b, distributions are taxed at preferential rates, not ordinary rates.
+  absolute_error_margin: 0.01
+  period: 2026
+  input:
+    people:
+      person1:
+        is_tax_unit_head: true
+        age: 40
+        employment_income: 60_000
+        non_sch_d_capital_gains: 10_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: TX  # no state income tax
+  output:
+    # Taxable income 70,000 - 16,100 = 53,900; ordinary part 43,900 taxes
+    # identically to a wages-only return (5,020).
+    income_tax_main_rates: 5_020
+    # Distributions straddle the 49,450 zero-rate breakpoint: 5,550 at 0%
+    # and 4,450 at 15% = 667.50.
+    capital_gains_tax: 667.50
+    income_tax: 5_687.50
+
+- name: Case 1c, distributions alone in the zero-rate bracket owe no tax.
+  absolute_error_margin: 0.01
+  period: 2026
+  input:
+    people:
+      person1:
+        is_tax_unit_head: true
+        age: 40
+        non_sch_d_capital_gains: 30_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: TX  # no state income tax
+  output:
+    adjusted_gross_income: 30_000
+    # Taxable income 13,900 is entirely adjusted net capital gain below the
+    # 49,450 zero-rate breakpoint.
+    capital_gains_tax: 0
+    income_tax: 0
+
+- name: Case 2, capital gain distributions below the standard deduction owe no tax.
+  absolute_error_margin: 0.01
+  period: 2026
+  input:
+    people:
+      person1:
+        is_tax_unit_head: true
+        age: 70
+        non_sch_d_capital_gains: 5_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: TX  # no state income tax
+  output:
+    adjusted_gross_income: 5_000
+    income_tax: 0
+
+- name: Case 3, capital gain distributions are subject to NIIT above the MAGI threshold.
+  absolute_error_margin: 0.01
+  period: 2026
+  input:
+    people:
+      person1:
+        is_tax_unit_head: true
+        age: 45
+        employment_income: 300_000
+        non_sch_d_capital_gains: 10_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: TX  # no state income tax
+  output:
+    adjusted_gross_income: 310_000
+    dwks10: 10_000
+    net_investment_income: 10_000
+    # 3.8% x min(NII 10,000, MAGI 310,000 - 200,000 threshold) = 380.
+    net_investment_income_tax: 380

policyengine_us/tests/policy/baseline/gov/irs/irs_gross_income.yaml

@@ -65,3 +65,10 @@
   output:  # expected results from online TAXSIM35 10/24/22 version
     taxsim_tfica: 0.00
     income_tax: -1400.00
+
+- name: IRS gross income includes capital gain distributions not reported on Schedule D.
+  period: 2026
+  input:
+    non_sch_d_capital_gains: 5_000
+  output:
+    irs_gross_income: 5_000

policyengine_us/variables/gov/irs/tax/federal_income/capital_gains/net_capital_gain.py

@@ -30,4 +30,9 @@ def formula(tax_unit, period, parameters):
             lt_capital_gain - st_capital_loss - investment_income_election,
         )
         qual_div_income = add(tax_unit, period, ["qualified_dividend_income"])
-        return net_cap_gain + qual_div_income
+        # Capital gain distributions reported without Schedule D (Form 1040
+        # line 7 with the box checked) are long-term gains under IRC
+        # 852(b)(3)(B) and enter the preferential-rate base directly, with no
+        # Schedule D netting available on that filing path.
+        non_sch_d_capital_gains = add(tax_unit, period, ["non_sch_d_capital_gains"])
+        return net_cap_gain + qual_div_income + non_sch_d_capital_gains