Summary

PolicyEngine's New Jersey gross income calculation incorrectly includes net losses from income categories like capital gains and S-corp income. Under NJ's unique "same category rule" (N.J.S. 54A:5-1), if any of the 16 income categories has a net loss, that loss must be disregarded (treated as $0) - it cannot offset income from other categories.

Root Cause

In /policyengine_us/variables/gov/states/nj/tax/income/adjusted_gross_income/nj_gross_income.py:

class nj_gross_income(Variable):
    adds = "gov.states.nj.tax.income.gross_income_sources"

The gross_income_sources.yaml includes:

• long_term_capital_gains
• short_term_capital_gains
• partnership_s_corp_income

These are added directly without applying NJ's rule that net losses in any category must be disregarded.

Legal Reference

N.J.S. 54A:5-1 defines 16 separate categories of gross income:

• Category (a): Salaries, wages, tips
• Category (c): Net gains from disposition of property (capital gains)
• Category (e): Interest
• Category (f): Dividends
• Category (k): Distributive share of partnership income
• Category (p): Net pro rata share of S corporation income
• etc.

The "Same Category Rule": Losses within one category can offset gains in that same category, but a net loss in any category is disregarded when computing total NJ gross income. Losses cannot:

• Offset income from other categories
• Be carried forward to future years

From the NJ Division of Taxation:

"You can deduct federal passive losses in full in the year incurred against any gain within the same category of income"

Example (from policyengine-taxsim issue #673)

Input:

• MFJ, ages 54 and 54
• Wages: $136,639
• Interest: $343
• Dividends: $1,661
• Short-term capital losses: -$237,873
• Long-term capital losses: -$2,252
• S-corp losses: -$29,134

PE calculates:

• NJ Gross Income: -$133,628 (incorrectly includes full losses)
• NJ AGI: $3,011
• NJ Tax: $0

TaxAct (correct) calculates:

• NJ Gross Income: $138,673 (losses disregarded per same category rule)
  • Wages: $136,639
  • Interest: $343
  • Dividends: $1,661
  • Capital gains: $0 (net loss → disregarded)
  • S-corp: $0 (net loss → disregarded)
  • Other: $30
• NJ Tax: $4,776

Files to Fix

1. policyengine_us/variables/gov/states/nj/tax/income/adjusted_gross_income/nj_gross_income.py

   • Restructure to calculate each NJ income category separately
   • Apply max_(0, category_total) to each category before summing

2. New variables needed for NJ income categories:

   • nj_category_c_income (capital gains - net of losses, capped at 0)
   • nj_category_k_income (partnership income - net, capped at 0)
   • nj_category_p_income (S-corp income - net, capped at 0)
   • etc.

Suggested Fix

class nj_gross_income(Variable):
    value_type = float
    entity = Person
    label = "New Jersey gross income"
    unit = USD
    definition_period = YEAR
    defined_for = StateCode.NJ

    def formula(person, period, parameters):
        # Category (a): Wages - always positive
        cat_a = person("employment_income", period)
        
        # Category (c): Net gains from disposition of property
        # Net loss is disregarded (capped at 0)
        cat_c = max_(0, 
            person("short_term_capital_gains", period) +
            person("long_term_capital_gains", period)
        )
        
        # Category (e): Interest
        cat_e = person("taxable_interest_income", period)
        
        # Category (f): Dividends
        cat_f = person("dividend_income", period)
        
        # Category (k): Partnership income - net loss disregarded
        # Category (p): S-corp income - net loss disregarded
        cat_k_p = max_(0, person("partnership_s_corp_income", period))
        
        # ... other categories ...
        
        # Sum all categories (each already capped at 0 if net loss)
        return cat_a + cat_c + cat_e + cat_f + cat_k_p + ...

Integration Test

- name: NJ same category rule - capital and S-corp losses disregarded
  period: 2024
  absolute_error_margin: 1
  input:
    people:
      person1:
        age: 54
        employment_income: 0
        qualified_dividend_income: 830.69
        long_term_capital_gains: -1126.16
        short_term_capital_gains: -118936.69
        partnership_s_corp_income: -14566.96
        taxable_interest_income: 171.53
        is_tax_unit_head: true
      person2:
        age: 54
        employment_income: 136639.06
        qualified_dividend_income: 830.69
        long_term_capital_gains: -1126.16
        short_term_capital_gains: -118936.69
        partnership_s_corp_income: -14566.96
        taxable_interest_income: 171.53
        is_tax_unit_spouse: true
    tax_units:
      tax_unit:
        members: [person1, person2]
    spm_units:
      spm_unit:
        members: [person1, person2]
    households:
      household:
        members: [person1, person2]
        state_fips: 34
  output:
    nj_gross_income: 138673  # Losses disregarded per same category rule
    nj_income_tax: 4776

Related Issues

• NJ joint 2024 -21Kpsemp 136Kswages 1Kdividends -23Kstcg -2Kltcg policyengine-taxsim#673: NJ joint 2024 -21Kpsemp 136Kswages 1Kdividends -23Kstcg -2Kltcg