Summary

PolicyEngine may be incorrectly calculating Missouri taxable income for elderly taxpayers receiving pensions and Social Security benefits. Missouri provides significant exemptions for these income types starting in 2024, with the AGI limitation removed. The discrepancy suggests PolicyEngine may not be correctly applying the public pension exemption, social security deduction, or the coordination between them.

Background: Missouri 2024 Tax Changes

Starting January 1, 2024, Missouri made significant changes to pension and Social Security taxation:

1. Removed AGI limitation: The Missouri adjusted gross income limitation based on filing status is no longer used when calculating public pension or social security deductions.

2. 100% Social Security exemption: Missouri does not tax 100% of social security benefits for individuals age 62 or older (and 100% of social security disability benefits regardless of age), to the extent included in federal AGI.

3. Public pension exemption: Up to $46,381 (the maximum Social Security benefit for 2024) of public pension income can be excluded.

4. Coordination rule: If a taxpayer claims both the social security deduction AND the public pension exemption, the public pension exemption is reduced by the amount of the social security deduction. The combined exemption cannot exceed $46,381.

Root Cause

PolicyEngine and TAXSIM disagree on Missouri taxable income for elderly taxpayers with both pension and Social Security income. This suggests PolicyEngine may:

1. Not be applying the 100% Social Security exemption correctly for taxpayers 62+
2. Not be applying the public pension exemption correctly
3. Not be correctly coordinating the two exemptions (they cannot both be claimed in full)
4. Still be applying the old AGI limitation that was removed for 2024

Legal Reference

Missouri Form MO-A, Section 3 (Pension Exemption and Social Security Deduction):

• Calculates the pension exemption and SS deduction
• Maximum exemption: $46,381 for 2024
• Coordination required when both types of income are present

From Missouri Department of Revenue:

"For all tax years beginning on or after January 1, 2024, the Missouri adjusted gross income limitation based on filing status will be removed when calculating a taxpayer's public pension or social security/social security disability deduction."

"If a taxpayer also takes the social security/social security disability deduction, then the public pension exemption is reduced by the amount of the social security/social security disability deduction."

Example (from policyengine-taxsim issue #667)

Input:

• Filing status: Single
• Tax year: 2024
• Age: 75
• Wages: $0
• Interest: $131
• Taxable pension: $25,717
• Gross Social Security: $24,087

Federal calculations:

• Federal AGI: $33,656
• Social Security in AGI: $7,808 (per IRC §86 calculation)
• Standard deduction: $16,550
• Federal taxable income: $17,106
• Federal tax: $1,821

TAXSIM calculates:

• MO taxable income: $3,692
• MO tax: $54

PolicyEngine calculates:

• Different MO taxable income (disagreement with TAXSIM)

The discrepancy likely arises from differences in how the Social Security exemption and pension exemption are calculated and coordinated.

Expected Calculation for This Case

For a 75-year-old with $25,717 pension and $7,808 SS in AGI:

1. SS exemption (age 62+): $7,808 fully exempt
2. Pension exemption available: $46,381 - $7,808 = $38,573
3. Pension actually received: $25,717 (less than available exemption)
4. Pension exemption claimed: $25,717
5. Total MO subtractions: $7,808 + $25,717 = $33,525
6. MO taxable income: Federal AGI - MO subtractions + standard deduction adjustment

Suggested Fix

Review and update Missouri pension/SS exemption variables:

1. Ensure 100% SS exemption applies for taxpayers age 62+
2. Ensure public pension exemption up to $46,381 is available
3. Implement coordination: reduce pension exemption by SS deduction claimed
4. Remove any AGI limitation that may still be in the code
5. Ensure Form MO-A Section 3 calculation is correctly implemented

Integration Test

- name: MO elderly pension and SS exemption for age 75
  period: 2024
  absolute_error_margin: 10
  input:
    people:
      person1:
        age: 75
        employment_income: 0
        taxable_interest_income: 131
        taxable_pension_income: 25717
        social_security: 24087
        is_tax_unit_head: true
    tax_units:
      tax_unit:
        members: [person1]
    spm_units:
      spm_unit:
        members: [person1]
    households:
      household:
        members: [person1]
        state_fips: 29  # Missouri
  output:
    mo_taxable_income: 3692
    mo_income_tax: 54

Related Issues

• MO single elderly 2024 25Kpensions 24Kgssi policyengine-taxsim#667