From 61e26f68ac08175bced588de9ca090a2d3a702a7 Mon Sep 17 00:00:00 2001
From: PavelMakarchuk <pavel.ma99@gmail.com>
Date: Wed, 25 Sep 2024 14:50:42 +0200
Subject: [PATCH] Apply the TCJA mortgage interest deduction limits Fixes #5128

---
 changelog_entry.yaml                          |  4 ++++
 .../itemized/interest/mortgage/cap.yaml       | 24 ++++++++++++++-----
 .../household/expense/interest_expense.yaml   | 19 +++++++++++++++
 .../expense/person/interest_expense.py        | 10 +++++++-
 4 files changed, 50 insertions(+), 7 deletions(-)
 create mode 100644 policyengine_us/tests/policy/baseline/household/expense/interest_expense.yaml

diff --git a/changelog_entry.yaml b/changelog_entry.yaml
index e69de29bb2d..f80a269810f 100644
--- a/changelog_entry.yaml
+++ b/changelog_entry.yaml
@@ -0,0 +1,4 @@
+- bump: minor
+  changes:
+    added:
+    - Apply the TCJA mortgage interest deduction limits.
diff --git a/policyengine_us/parameters/gov/irs/deductions/itemized/interest/mortgage/cap.yaml b/policyengine_us/parameters/gov/irs/deductions/itemized/interest/mortgage/cap.yaml
index 2f371e152fd..3701a2d6501 100644
--- a/policyengine_us/parameters/gov/irs/deductions/itemized/interest/mortgage/cap.yaml
+++ b/policyengine_us/parameters/gov/irs/deductions/itemized/interest/mortgage/cap.yaml
@@ -1,21 +1,33 @@
 description: IRS limits the total home mortgage interest deduction to this amount, based on filing status.
 SINGLE:
-  2018-01-01: 1_000_000
+  2017-01-01: 1_000_000
+  2018-01-01: 750_000
+  2026-01-01: 1_000_000
 JOINT:
-  2018-01-01: 1_000_000
+  2017-01-01: 1_000_000
+  2018-01-01: 750_000
+  2026-01-01: 1_000_000
 SEPARATE:
-  2018-01-01: 500_000
+  2017-01-01: 500_000
+  2018-01-01: 375_000
+  2026-01-01: 500_000
 HEAD_OF_HOUSEHOLD:
-  2018-01-01: 1_000_000
+  2017-01-01: 1_000_000
+  2018-01-01: 750_000
+  2026-01-01: 1_000_000
 SURVIVING_SPOUSE:
-  2018-01-01: 1_000_000
+  2017-01-01: 1_000_000
+  2018-01-01: 750_000
+  2026-01-01: 1_000_000
 metadata:
   breakdown: filing_status
   unit: currency-USD
+  period: year
   label: IRS home mortgage interest deduction amount cap
   reference:
     # Hawaii applies this AGI threshold in the state itemized deductions computation
     - title: Hawaii Income Tax Law, Chapter 235, Section 235-2.4, (j)(3)
       href: https://files.hawaii.gov/tax/legal/hrs/hrs_235.pdf#page=10
-    - title: 26 U.S. Code § 163 - Interest, (h)(3)(F)
+    # TCJA adjustemnts described in (h)(3)(F)(i)(II)
+    - title: 26 U.S. Code § 163 - Interest, (h)(3)(b)(ii)
       href: https://www.law.cornell.edu/uscode/text/26/163
diff --git a/policyengine_us/tests/policy/baseline/household/expense/interest_expense.yaml b/policyengine_us/tests/policy/baseline/household/expense/interest_expense.yaml
new file mode 100644
index 00000000000..3ed419d6417
--- /dev/null
+++ b/policyengine_us/tests/policy/baseline/household/expense/interest_expense.yaml
@@ -0,0 +1,19 @@
+- name: Capped mortageg interest, joint
+  absolute_error_margin: 0.01
+  period: 2021
+  input:
+    mortgage_interest: 1_200_000
+    filing_status: JOINT
+    non_mortgage_interest: 0
+  output:
+    interest_expense: 750_000
+
+- name: Uncapped mortageg interest, joint
+  absolute_error_margin: 0.01
+  period: 2021
+  input:
+    mortgage_interest: 700_000
+    filing_status: JOINT
+    non_mortgage_interest: 100_000
+  output:
+    interest_expense: 800_000
diff --git a/policyengine_us/variables/household/expense/person/interest_expense.py b/policyengine_us/variables/household/expense/person/interest_expense.py
index f7426a9f881..d4ae880a19b 100644
--- a/policyengine_us/variables/household/expense/person/interest_expense.py
+++ b/policyengine_us/variables/household/expense/person/interest_expense.py
@@ -7,4 +7,12 @@ class interest_expense(Variable):
     label = "Interest paid on all loans"
     unit = USD
     definition_period = YEAR
-    adds = ["mortgage_interest", "non_mortgage_interest"]
+
+    def formula(person, period, parameters):
+        p = parameters(period).gov.irs.deductions.itemized.interest.mortgage
+        mortgage_interest = person("mortgage_interest", period)
+        filing_status = person.tax_unit("filing_status", period)
+        cap = p.cap[filing_status]
+        capped_mortgage_interest = min_(mortgage_interest, cap)
+        non_mortgage_interest = person("non_mortgage_interest", period)
+        return capped_mortgage_interest + non_mortgage_interest