[MaxGhenis]

Summary

From TY2026, Kentucky caps the qualified residence interest deduction at the interest paid on the principal residence. PolicyEngine-US inherited the federal interest deduction, which pools a second home's mortgage interest, points and (from 2026) mortgage insurance premiums. This PR adds leaf inputs for those second-residence amounts and applies Kentucky's cap from 2026. Empty inputs change nothing.

The points/MIP input commits are part of this PR. Commits 9b76c8b, 869c0bf, and fe25c52 add and test the federal points and mortgage-insurance-premium inputs. They are reviewed and will land inside #10003; no separate PR or rebase is needed.

The law

• KRS 141.019(2)(j) is the codified text. In full: "For taxable years beginning on or after January 1, 2026, any deduction allowed by 26 U.S.C. sec. 163(h)(3) as qualified residence interest shall be limited to the amount of interest paid or accrued during the taxable year on the acquisition and home equity indebtedness of the principal residence of the taxpayer and shall not be claimed for more than one (1) qualified residence".

• 2026 Ky. Acts ch. 161 (HB 757), sec. 7 added it with "acquisition indebtedness". The act was vetoed in part, and the veto was overridden April 14, 2026.

• 2026 Ky. Acts ch. 198 (HB 869), sec. 48 amended it to "acquisition and home equity indebtedness". The LRC codified the two together, effective July 15, 2026.

• The LRC fiscal note describes the provision as decoupling from the "Deduction for interest paid on mortgage & home equity loans for more than the primary residence".

• Federal home equity interest has been disallowed since 2018. P.L. 119-21 sec. 70108 made 26 U.S.C. 163(h)(3)(F)(i)(I) permanent. The federal deduction Kentucky starts from therefore already excludes home equity interest, and HB 869's wording changes nothing here. The binding rule is principal residence only.

• Points are prepaid interest. Premiums are "treated ... as interest which is qualified residence interest" (163(h)(3)(E)). So Kentucky keeps principal-residence points and premiums (premiums after the federal phase-out) and drops second-residence ones. Max confirmed this treatment in decision d1070 on October 8: keep principal-residence mortgage-insurance premiums in the Kentucky deduction.

• KRS 141.010(21) adopts the IRC in effect December 31, 2025 for TY2026. KRS 141.019(2) starts from federal deductions; (2)(j) adds the 2026 principal-residence ceiling and specifies no separate dollar or loan-vintage limit. The federal debt limits remain the starting point.

Design

Loan structure. first_/second_home_mortgage_* balances and origination years describe two loans, not two residences: a second mortgage can sit on the main home. Main has merged #9605, removing the deprecated per-loan interest inputs; this PR uses only person-level interest, points, and premiums. Main's #10025 supplies _debt_by_vintage and _qualified_loan_limit for the federal debt limits.

Inputs. Three new Person inputs, disjoint from the existing ones. This follows the leaf-input rule: inputs are the granular facts, and the model derives the totals.

new input	principal-residence counterpart (re-documented)
second_residence_mortgage_interest	home_mortgage_interest
second_residence_mortgage_points	home_mortgage_points
second_residence_mortgage_insurance_premiums	mortgage_insurance_premiums

Amounts whose residence is unknown stay in the existing inputs and count as principal-residence amounts. Datasets and API callers that don't split them get exactly today's results, in Kentucky too.

Federal. 163(h)(5)(A) pools both qualified residences, so the new inputs join the federal pool:

• interest goes into home_mortgage_interest_tax_unit;
• points go into deductible_ and non_deductible_mortgage_interest_tax_unit;
• interest and points both go into home_mortgage_interest_share;
• premiums go into deductible_mortgage_insurance_premiums.

The person-level principal- and second-residence interest inputs are summed directly; no deprecated structured-interest fallback remains.

Kentucky.

• The new parameter gov.states.ky.tax.income.deductions.itemized.principal_residence_interest_only is false before 2026 and true from 2026.
• The new variable ky_disallowed_second_residence_interest is the sum of two parts:
  • the excess of the federal deductible interest and points over the principal residence's interest and points, which can never exceed the second residence's own interest and points;
  • the second residence's share of the federal premium deduction.
• Kentucky therefore allows min(federal deductible interest and points, principal-residence interest and points), plus principal-residence premiums.
• The disallowance is in ky_itemized_deductions_unit's subtracts, so it reaches both the joint and combined-separate paths.

Accuracy. The cap equals a recomputation on the principal residence alone in either of these cases:

• combined debt is within the federal limit;
• both loans carry the same rate, fall under the same debt limit, and carry points in proportion to their debt (or none).

A property test checks the second case against the statutory limit. Otherwise it can differ in either direction, because the model doesn't record which loan secures which residence.

Also fixed: P.L. 119-21 inserted the vehicle-loan rule as 163(h)(4), so the qualified residence and qualified mortgage insurance definitions now sit in (h)(5)(A) and (E). The citations follow.

Invariants

These are stated and executed in tests/core/test_second_residence_mortgage_properties.py. The test uses seeded draws over 48 Kentucky tax units, 5 paired scenarios, and TY2025 and TY2026.

1. Federal residence-split invariance. Moving any amount between a principal-residence input and its counterpart leaves every federal mortgage output, interest_deduction, itemized_deductions_less_salt and each person's allocation unchanged.
2. Bounds. The Kentucky disallowance is 0 in 2025. In 2026 it lies between 0 and interest_deduction.
3. Order. In 2026, Kentucky itemized deductions satisfy principal-only ≤ actual split ≤ everything moved onto the principal residence.
4. No debt limit, no effect. Where no balances are reported, the pool is fully deductible, and second-residence amounts do not change Kentucky's 2026 deduction.
5. Independent statutory check. Each unit gets principal debt P and second-residence debt S at one rate r, both post-2017. The federal deduction must equal r·min(L, P+S), and Kentucky's interest must equal r·min(L, P), with L = $750,000 ($375,000 separate) hard-coded from 163(h)(3)(F)(i)(II). The draws cover both sides of the limit.
6. Before 2026. Second-residence amounts raise Kentucky itemized deductions one-for-one with the federal deduction.
7. Empty inputs. Omitted second-residence inputs give bit-identical results to explicit zeros.

These mutations were run and caught:

• Kentucky disallowing no interest fails invariants 4 and 5.
• Restoring the earlier pro-rata rule fails invariant 5, plus two Kentucky YAML cases.
• Leaving the flag false in 2026 fails invariants 2, 4 and 5.

Cost. I measured locally on macOS under host load, not on CI, running the points-branch property file and the uprating test with and without this file, twice each:

• CPU time: 16.13 to 16.40 s and 15.35 to 15.46 s, so about 0.1 to 0.3 s extra;
• pytest-reported durations: 1.75 to 1.86 s and 1.54 to 1.55 s;
• peak footprint: no measurable change (0.86 to 1.06 GB in both, dominated by the model import);
• wall time: too noisy under load to compare.

The file lands in the existing core Rest group, and no runner was added.

Tests before the merge

The following records describe verification before merging main. Current per-file results and migrated coverage are recorded in "Merge with main" below.

• Federal:
  • itemizing/interest_deduction.yaml, 4 cases:
    • pooling;
    • the acquisition-debt share plus the premium phase-out;
    • the shared phase-out;
  • household/expense/tax_unit/home_mortgage_interest_tax_unit.yaml, 3 cases on pooling and the structured fallback.
  • household/expense/person/home_mortgage_interest_share.yaml, 1 case on spouse allocation.
• Kentucky:
  • ky_disallowed_second_residence_interest.yaml, 8 cases:
    • 2025;
    • 2026;
    • a non-KY state;
    • principal debt over the limit;
    • the structured fallback, with second-residence interest, with points only, and with debt over the limit (which shows legacy interest counting toward the principal-residence cap);
    • premiums.
  • ky_itemized_deductions_unit.yaml, 6 new cases:
    • 2025;
    • 2026;
    • combined debt over the limit with principal debt under it (36,000);
    • the federal share;
    • no second residence;
    • a joint return.
  • ky_itemized_deductions_indiv.yaml, 1 new case: spouses filing separately.
• test_uprating_series.py registers the three CPI-U inputs.
• Local runs, all passing:
  • all 80 Kentucky YAML files, 68 federal taxable-income files and 29 household-expense files, through test_batched.py;
  • the points-branch property tests;
  • code-health tests.
• Review. An independent Opus review (round 1) requested changes. All its findings are addressed in cf2d1f2338: the ceiling reading, citations, the fallback, test gaps, and anchors. Round 2 approved, served by GPT-6.1 Sol through Subfleet because the Claude lanes were closed. It recomputed all 27 YAML cases and found no blocker or major issue. Its four minor items are addressed: the qualified equality claim, the restored fallback case, cost before and after, and an anchor. An Opus check of those two follow-up commits (c42e0e7bf8, f734479be8) approved them at the current head.

Microsimulation (2026, default dataset)

These figures describe cf2d1f2338. The hub reran the impact at this PR's head, 6f9480b4a8 (base f9b55fc4dd, 2026, default dataset), with the same result: all 14 Kentucky and mortgage-interest variables it compared are unchanged on every record.

I ran two real microsimulations for 2026 on the default dataset, populace_us_2024.h5@populace-us-2024-spm-20260909, through lockrun.sh:

• base: 07227ea252, which was main when the points branch was cut;
• branch: cf2d1f2338.

I compared them record by record with compare.py. Every compared variable is unchanged on every record, and the maximum absolute change is 0:

• income_tax ($2.590T);
• state_income_tax ($580.0B);
• household_net_income;
• ky_income_tax ($5.097B);
• ky_itemized_deductions_unit ($5.656B);
• ky_taxable_income_joint and _indiv;
• ky_tax_unit_itemizes;
• interest_deduction;
• itemized_deductions_less_salt and itemized_taxable_income_deductions;
• home_mortgage_interest_tax_unit;
• deductible_, non_deductible_ and plain mortgage_interest;
• home_mortgage_interest_share;
• tax_unit_itemizes.

On the branch, ky_disallowed_second_residence_interest and deductible_mortgage_insurance_premiums are 0 for all 79,729 tax units: the dataset supplies none of the new inputs. Each run took about 4.5 minutes, with a 14 GB peak footprint.

Related

• Remove the deprecated structured mortgage-interest inputs #9605 is merged. This merge keeps its removal of the deprecated structured interest inputs while adding second-residence interest to the person-level principal-residence sum.
• Apply federal mortgage debt limits by loan vintage, including grandfathered pre-1987 debt #10025 is merged. Both removed helper imports are migrated to its vintage-based replacements.
• The points/MIP input commits land inside this PR. Review r1 wires the premium inputs into state deductions and allocations, including Montana payments on both residences.

Merge with main

Merged gh/main f9b55fc4dd05f1bed921a4dd06cb8c81f6ceb2c7 in merge commit 3adfb231812004be356ff7a0d8c575a6ed218e1b; the separate helper-migration commit is 1453ef98f2a2f53af9d600fb98984cab8ad70c34. The original PR head was f734479be8cb754353256c5dccb48f86c9fa231a; no commits were rebased or rewritten. The points/MIP input commits 9b76c8b, 869c0bf, and fe25c52 are part of this PR and land with it.

Conflict resolutions

• variables/household/expense/tax_unit/mortgage_interest_structure.py: kept main's Apply federal mortgage debt limits by loan vintage, including grandfathered pre-1987 debt #10025 vintage grouping, qualified-loan-limit computation, origination-year conventions, and citations; kept this PR's points and second-residence pooling. Kept Remove the deprecated structured mortgage-interest inputs #9605's removal of per-loan interest inputs and replaced the fallback formula with the sum of the canonical person-level principal- and second-residence interest inputs. This preserves both main's corrected federal debt treatment and the PR's residence split.
• variables/household/expense/person/home_mortgage_interest_share.py: combined the documentation for main's filer-only allocation and dependent-only equal-share fallback with this PR's interest and points on both residences. The merged formula masks the combined reported amounts to head/spouse before allocating, preserving conservation and keeping dependent allocations at zero.
• tests/policy/baseline/gov/irs/income/taxable_income/deductions/deductible_mortgage_interest.yaml: kept all main cases and outputs, including spouse/dependent allocation and debt limits, plus all five points cases from the PR. The file now has 16 passing cases.

The associated #9605 compatibility updates remove the obsolete legacy fixture scenario and removed tax-unit interest inputs from both property files. Three Kentucky fallback examples now supply canonical principal-residence interest, preserving their economic assertions. The pooling YAML now tests second-residence-only interest and spouse aggregation. The Kentucky variable documentation no longer claims that removed inputs are accepted.

Helper migration and Kentucky treatment

Every use of _mortgage_balance_cap and _limited_mortgage_balance has been migrated. The points/premiums property fixture now groups both loans with _debt_by_vintage, then calls _qualified_loan_limit with the grandfathered, pre-TCJA and post-TCJA debt totals and the corresponding federal filing-status limits. Its zero-balance share remains one. Seeded draws now cover unknown years and the 1987/1988 and 2017/2018 boundaries; the reference share is named baseline_deductible_share.

Kentucky's parameter and principal-residence ceiling remain unchanged: the restriction starts in TY2026. KRS 141.019(2)(j) supplies no independent dollar or loan-vintage limit; its federal starting point follows the IRC conformity in KRS 141.010(21). New Kentucky cases pin uncapped pre-1987 interest/points and mixed-vintage federal limits before the residence ceiling.

Decision d1070 is preserved. Existing YAML already retains principal-residence mortgage-insurance premiums. The phase-out case now additionally asserts ky_itemized_deductions_unit: 810: $900 principal premiums × 90%, after removing only the second residence's $270 deduction from the $1,080 federal premium deduction.

Verification at the merged head

265 tests passed across 15 distinct files: 143 Python tests and 122 YAML cases. This covers every added/changed PR test file, every #10025 test file on main, and all four Kentucky mortgage-related YAML files found with rg under tests/policy/baseline/gov/states/ky/tax/income/ (deduplicated in the table).

Each file ran separately, sequentially, in the foreground, with this checkout on PYTHONPATH and OMP_NUM_THREADS=4 OPENBLAS_NUM_THREADS=4 MKL_NUM_THREADS=4 VECLIB_MAXIMUM_THREADS=4 NUMEXPR_NUM_THREADS=4 OMP_WAIT_POLICY=PASSIVE. YAML files used python -m policyengine_core.scripts.policyengine_command test <file> -c policyengine_us; Python files used python -m pytest -q <file>.

File	Passed
policyengine_us/tests/core/test_mortgage_points_and_premiums_properties.py	6
policyengine_us/tests/core/test_second_residence_mortgage_properties.py	7
policyengine_us/tests/core/test_uprating_series.py	128
policyengine_us/tests/policy/baseline/gov/irs/income/taxable_income/deductions/deductible_mortgage_interest.yaml	16
policyengine_us/tests/policy/baseline/gov/irs/income/taxable_income/deductions/itemizing/deductible_mortgage_insurance_premiums.yaml	24
policyengine_us/tests/policy/baseline/gov/irs/income/taxable_income/deductions/itemizing/interest_deduction.yaml	4
policyengine_us/tests/policy/baseline/gov/states/ky/tax/income/deductions/ky_disallowed_second_residence_interest.yaml	10
policyengine_us/tests/policy/baseline/gov/states/ky/tax/income/deductions/ky_itemized_deductions_indiv.yaml	5
policyengine_us/tests/policy/baseline/gov/states/ky/tax/income/deductions/ky_itemized_deductions_unit.yaml	8
policyengine_us/tests/policy/baseline/household/expense/person/home_mortgage_interest_share.yaml	1
policyengine_us/tests/policy/baseline/household/expense/tax_unit/home_mortgage_interest_tax_unit.yaml	3
policyengine_us/tests/core/test_mortgage_debt_limit_invariants.py	2
policyengine_us/tests/policy/baseline/gov/irs/income/taxable_income/deductions/deductible_mortgage_interest_tax_unit.yaml	18
policyengine_us/tests/policy/baseline/gov/states/mt/tax/income/deductions/itemized/mt_itemized_deductions_joint.yaml	8
policyengine_us/tests/policy/baseline/gov/states/ky/tax/income/integration.yaml	25

make format passed before both commits; the final run left 7,326 files unchanged and all lint checks passed. The hub reran the impact at the head (see Microsimulation).

Review r1: responses

Confirmed the reviewed branch head 1453ef98f2a2f53af9d600fb98984cab8ad70c34. gh/main remains f9b55fc4dd05f1bed921a4dd06cb8c81f6ceb2c7; git merge gh/main reported “Already up to date,” so this round has no new merge resolutions. The earlier main-merge resolutions and the Kentucky cap remain intact.

Finding	Response
P2: California and New York retain federal premiums they disallow	Remove the federal deductible premium component after its phase-out. Preserve New York's allowance through 2020; exclude from 2021.
Additional disallowing state readers	Apply the same adjustment in Arkansas from 2017, Minnesota from 2019, Wisconsin, and Iowa in 2018–2019. Dated parameters preserve other years.
P2: Delaware attributes premiums to the interest payer	Split the post-phase-out premium component from interest and allocate it to its payer using both residence inputs. Preserve Delaware income proration for unattributable expenses. A shared individual premium allocation also supports Montana.
P2: Montana, Alabama, and Hawaii omit premiums	Include them in all four Montana paths and Alabama's interest deduction. Hawaii uses Hawaii AGI and its own allowance through 2021; it does not adopt the federal 2026 restoration.
Additional separate-calculation omission: North Carolina	Include restored premiums from 2026 under Session Law 2026-31 and G.S. 105-153.5. Apply the existing shared $20,000 mortgage/property-tax cap afterward; preserve the 2021 exclusion and 2022–2025 sunset.

The audit follows every direct federal interest reader, aggregate itemized reader, parameter source list, dynamic state route, and federal-taxable-income reader. It covers 32 affected jurisdictions, including DC and Vermont's indirect capital-gain cap. The other 19 states have no affected reader. Existing Louisiana medical-only treatment from 2022 and South Carolina's removal of federal itemization from 2026 already prevent premiums from entering those deductions.

New YAML examples use both residences, phased-out premiums, payer allocation, relevant year boundaries, and North Carolina's overall cap. All corrections have recorded failures against the reviewed source before applying the fixes. Iowa's fixtures explicitly suppress unrelated computed SALT. The initial case-sensitive Montana filter selected no cases; corrected runs reproduced both new failures in every sibling formula.

Methodology

Decision d1693 (2026-10-19) accepted all four open readings as built: the three in this table, and New York's continued exclusion of 2026 premiums (an inference, since New York has no 2026 forms yet; see the notes below). New York gets rechecked when its 2026 IT-196 is published.

Choice	PR pick	Alternative and numerical comparison
KRS 141.019(2)(j)	Cap pooled federal interest/points at principal-residence payments: $27,500	Recompute federal limits on principal debt alone: $26,666.67
Unspecified residence	Treat the undivided amount as principal: $14,000	Require allocation; remove $4,000 second-home interest: $10,000
Kentucky separate filing, inherited	Divide by Kentucky income shares: $6,000/$4,000 at 60%/40%	Specifically allocate the head's expense: $10,000/$0

Decision d1070 settled the premiums question: keep principal-residence premiums after the federal phase-out; remove the second residence's share. The phase-out witness retains $810. Equal rates establish equivalence only with the same federal debt-limit regime and debt-proportional points (or no points); fully deductible combined debt is the other equivalence case.

Refreshed the rulespec methodology in rulespec-us#1543.

State premium audit

Qualified federal premiums are deductible through 2021, zero in 2022–2025, and restored from 2026. Retained amounts are after the federal phase-out and remain subject to state limits. Hawaii uses its own AGI phase-out.

State	Reader route	Official form / law citation	Premium treatment and action
AL	al_interest_deduction separate calculation	2021 Form 40 Schedule A, PDFp 3 line 11; 2021 instructions, PDFp 19 lines 10 a–14	Allow federal qualified premium after phase-out through 2021;0 in 2022–2025;restore 2026 under current federal amount rule. Wire amount into separate interest formula.
AR	ar_itemized_deductions_joint / ar_itemized_deductions_indiv use source lists containing interest_deduction	2021 AR 1000 F/NR instructions, PDF p 20, AR 3 lines 8–10; 2025 instructions, PDF p 21; Act 155 of 2017 §19, PDF p 9, amending 26-51-415	IRC 163 frozen as of Jan 1,2017, when the premium provision expired after 2016. Exclude 2017+, including 2021 and 2026. Act 155 §19 replaced the earlier Jan 1,2015 conformity date, but §25 applies the update retroactively from TY2015. Retain the 2015–2016 allowance: P.L. 114-113 div. Q §152 extended premiums through 2016 before the new conformity date. New dated subtraction in both allocation formulas.
AZ	az_itemized_deductions dynamically sums federal itemized components, retaining interest_deduction	2021 Arizona Booklet X Vol 1, PDF p 63, Form 140 Schedule A line 11 begins with the allowed federal itemized total; its enumerated medical, mortgage-credit, charitable-credit, tax, and exempt-income adjustments do not remove premiums. Retain.	A.R.S.43-105(A) now adopts IRC as of Jan 1,2026 for tax years after 2025. 43-1042(A),(D) retain federal itemized deductions with an explicit 2026 SALT cap, not a premium exclusion. Retain restored premiums.
CA	ca_itemized_deductions_pre_limitation sums federal components, including interest_deduction	2021 Schedule CA(540) instructions, line 8 d; FTB OBBBA §70108 conformity analysis	Disallowed. FTB expressly confirms no conformity to restored premiums effective 2026. Subtract federal deductible premium, preserving actual interest/points and California investment-interest replacement.
CO	co_taxable_income starts from federal taxable_income; co_federal_deduction_addback also reads federal itemized amount	2021 DR 0104 booklet, PDF p 5, line 1 uses federal 1040 line 15; the enumerated additions do not exclude mortgage premiums. Retain through federal taxable income, subject to state additions.	Colorado State Auditor 2026 federal-tax-law impact report, PDF p 37, headed Mortgage Interest Deduction Limited, explicitly states Colorado conforms and restored mortgage premiums can reduce state revenue. Retain.
DC	dc_itemized_deductions reads itemized_deductions_less_salt	2021 D-40 booklet, PDF p 18, CalculationF, linea federalSchedule A 17, state-tax adjustments only	Retain federally allowable premiums. Federal sunset/restoration flows through; state overall limits remain. No premium exclusion on worksheet.
DE	de_itemized_deductions_unit source list contains interest_deduction; separate-filing formula allocates components	2021 Delaware PIT-RES instructions, PDF pp.7,12: PIT-RES line13, PIT-RSA lines8d–8e and17b	Retain federal qualified premiums with federal limits; 2021 explicitly allowed, 2022–2025 federal sunset, 2026 federal restoration. Allocate the post-phaseout premium separately to the person who paid it, considering both residence inputs. Unknown attribution follows Delaware income proration.
GA	ga_deductions reads federal itemized_taxable_income_deductions; shared state_itemized_deductions federal branch	2021 IT 511 booklet, PDF pp 12-13, Form 500 lines 12 a-c: federal Schedule A deductions minus specified other-state taxes and exempt-income investment expenses. No premium exclusion. Retain.	Enacted HB 1199/AP, PDF pp 1-3, §1 amending 48-1-2(14) adopts federal law through Jan 1,2026 for 2025+; provisions enacted but not yet effective take effect on the federal dates. Exceptions do not exclude 163(h)(3) premiums. Retain restored premiums. Governor's signed copy checked, not merely introduced version 241612.
HI	hi_interest_deduction separate calculation	Announcement 2021-01, PDFpp 1–2; 2021 Digest, PDFp 9; HRS 235-2.4(j)(3)	Allow premiums for both residences through 2021 using Hawaii AGI, not federalAGI, in premium phase-out.0 from 2022; no automatic 2026 restoration because Hawaii excludes allIRC 163(h)(3)(F), including federal restoration clause. Separate state formula/in-effect parameter.
IA	ia_itemized_deductions_unit: pre 2023 itemized_deductions_less_salt; from 2023 sum federal components; consolidated taxable-income route also uses federal taxable income	2021 IA 1040 Schedule A, PDF p 1 line 11; 2021 expanded instructions, PDF p 49, line 11; DOR 2019 Act nonconformity guidance, §102	Explicitly disallow 2018 and 2019; allow 2020/2021, follow federal sunset 2022–2025 and restoration 2026. New dated subtraction 2018–2019 in tax-unit itemized calculation; preserve federal-conforming route 2023+.
ID	id_itemized_deductions reads claimed/total federal itemized deductions	2021 Form 40, PDF p 1, lines 13-15 uses federal Schedule A subject to federal limits and removes state/local income or sales taxes. Retain.	2025 Idaho instructions, revised Mar 2,2026, PDF p 4 expressly adopt IRC Jan 1,2026. Exceptions listed are bonus depreciation, state NOLs and research credit; no premium carve-out. Retain restoration.
KS	ks_itemized_deductions reads itemized_deductions_less_salt	2021 K-40 booklet, PDF p 15, Schedule A line 8 d instructions; form itself PDF p 21 line 8 d; 2022 booklet, Schedule A line 8 d reserved; 2025 booklet, same reserved line	Allow qualified premium in 2021; no premium 2022–2025 because federal provision expired; federal qualified-interest rule applies to restored 2026. Retain. Note 2025 introductory boilerplate mentions premiums but operative line 8 d is reserved.
KY	ky_itemized_deductions_unit starts itemized_deductions_less_salt and principal-residence interest cap	2021 Schedule A; DOR extension notice	Recorded d 1070 ruling keeps principal-residence premiums after the federal phaseout. From 2026 Kentucky principal-residence restriction removes the second-residence premium component while retaining the principal-residence component. Federal 2022–2025 sunset still yields 0. Existing PR federal sunset/restoration and Kentucky-cap cases protect this.
LA	la_itemized_deductions source list contains itemized_taxable_income_deductions through 2021; medical-only list from 2022	DOR explanation of Act 395 of 2021	Premiums contribute to 2021 excess federal itemized deduction, subject to federal standard-deduction offset. From 2022 only excess federal medical deduction, so premiums correctly contribute 0 including restored 2026. Existing dated source list already handles this.
MD	md_itemized_deductions reads itemized_deductions_less_salt	2021 Resident booklet, PDF p 18, Instruction 14 copies federalSchedule A 17 and subtracts state/local income taxes; p 19 continuation contains further adjustments	Retain premiums. Federal sunset/restoration flows through; Maryland's later overall limitation applies separately. No premium-specific exclusion.
ME	me_itemized_deductions_pre_phaseout reads itemized_deductions_less_salt	2021 Form 1040 ME Schedule 2, PDF p 1 line 1 and p 2 line 1 instructions begins with federal Schedule A line 17. Enumerated taxes/exempt-income/medical adjustments preserve premiums; ordinary Maine cap/phase-out still applies. Retain.	36 M.R.S.111(1-A) now adopts IRC Dec 31,2025 (P.L.2025 c 650 PtK§1). 5125 contains no mortgage-premium exception. Retain restoration subject to state cap/phase-out. Earlier Jan 2026 discussion papers describing possible conformity are superseded by the current statute.
MN	mn_itemized_deductions reads itemized_deductions_less_salt before state reduction	2021 M1SA, PDF p 4 lines 11–13 import federal 8a/8b/9, omit 8d; Minn.Stat 290.0122 subd 5(3); 2019 First Special Session ch 6 art 1§14/16	Disallow 2019+, when section 290.0122 expressly excludes premiums. New dated subtraction removes federal after-phaseout amount before Minnesota reduction. Preserve pre-2019 behavior;2023 ch 1§4/5 later updates IRC retroactively and 2018 also has a separate special tax adjustment 290.993, so the 2019 conformity-date text alone cannot establish the final 2018 result. Full MN formula's unrelated reduction parameters begin 2021; no invented pre-2021 values added solely for historical tests.
MO	mo_itemized_deductions parameter starts itemized_taxable_income_deductions; additional indirect federal-taxable-income cap in mo_qualified_health_insurance_premiums	2021 MO-A, PDF p 2, Part 2 lines 1–12	Retain premium through federal itemized total; no premium-specific subtraction. Federal sunset/restoration flows through. Health-premium subtraction cap also properly changes when federal taxable income changes; that is a separate health-insurance rule, not a mortgage-premium exclusion.
MS	ms_itemized_deductions_unit reads itemized_deductions_less_salt	2021 income-tax instructions, PDFp 15, Schedule A line 4; 2022 instructions, PDF p 15 line 4 confirms all federal interest limitations apply	Retain federally deductible premium; federal sunset/restoration flows through. State Schedule A instructions carry federal interest and exclude state taxes/gaming losses separately.
MT	Four independent joint/separate itemization formulas	2021 Form 2 instructions, PDFp 33 line 9 and separate spouse allocation paragraph	Include federal premium after phase-out through 2021;0 in 2022–2025;restore 2026. Add once to all four formulas; jointly to head, separately by premium payer via shared helper.
NC	nc_mortgage_and_property_tax_before_limitation separate mortgage-interest calculation	2021 D 401, PDFp 20 Schedule Aline 1; G.S.105-153.5(a)(2)b; SL 2026-31§12(a), PDFp 42	Express premium exclusion applies only 2014–2021.0 in 2022–2025 under federal sunset; current 2026 law adopts IRCJuly 5,2025 including future-effective provisions, so include restored after phase-outpremiums from 2026 in combined 20000 mortgage/property pool. Separate-calculation agent adds dated allowance and tests.
ND	nd_taxable_income uses federal taxable_income_deductions; shared federal state-itemized branch	2021 ND 1, PDF p 1, line 1 b starts at federal 1040 line 15. 2021 instructions, PDF p 14 explain this starting point. No mortgage-premium addback. Retain through federal taxable income.	Continues the federal-taxable-income starting point; no premium-specific state exception identified. Restoration follows that base (conformity inference, not a quoted 2026 premium-specific form).
NE	ne_itemized_deductions reads itemized_deductions_less_salt	2021 Form 1040 N booklet, PDF p 8, NebraskaScheduleI lines 7–9	Retain federal premiums; worksheet starts federalSchedule A 17 and subtracts state/local income taxes. Federal sunset/restoration flows through.
NM	nm_itemized_deductions reads total_itemized_taxable_income_deductions; nm_salt_add_back uses less-SALT total	2021 PIT 1 instructions, PDF p 24, line 12 instruct itemizers to enter federal itemized deductions. State/local tax and land-conservation adjustments do not remove premiums. Retain.	Federal itemized starting point remains applicable. No premium-specific disallowance identified in the official forms or state-reader code. 2026 carry-through is the conformity inference, not a quoted 2026 premium-specific form.
NY	ny_itemized_deductions_max directly adds interest_deduction	2021 IT 196-I, PDF p 2, Interestyoupaid note; 2020 official form corrections; TaxLaw 615(a)	Allow 2018–2020 (official retroactive corrections); disallow 2021 onward. Continuing the exclusion from 2026 is an inference from P.L. 119-21 §70108 placing the restoration in §163(h)(3)(F) and New York’s pre-TCJA computation; 2026 forms are not yet published. Dated subtract-list preserves prior years; 2022–2025 has no federal amount to remove.
OK	ok_itemized_deductions reads itemized_deductions_less_salt	2021 Form 511 packet, PDF p 24, Schedule 511-D instructions	Retain federal premiums; federal total minus state/local income/sales tax, subject to 17000 cap (medical/charity outsidecap). Federal sunset/restoration flows through.
OR	or_itemized_deductions reads itemized_deductions_less_salt	2021 ScheduleOR-A, PDF p 2 line 15 explicitly premiums; 2021 OR 17, PDF p 7 rolling federal-taxable-income tie; Oregon LegislativeRevenueOffice OBBBA presentation, slide 22	Retain federal premium. Presentation identifies restoration from 2026. Federal 2022–2025 sunset respected.
SC	sc_taxable_income federal taxable income through 2025; sc_state_tax_addback also reads federal itemized amount	2021 SC 1040 instructions, PDF p 2, line 1 starts at federal taxable income. Listed additions do not remove mortgage premiums. Retain.	Act 110/H 4216 §§2,3,8 excludes IRC 63(b)-(g) and replaces standard/itemized deductions with SCIAD from 2026. Already modeled: sciad.in_effect true from 2026 and sc_taxable_income starts from AGI. No premium deduction or new adjustment needed 2026.
UT	ut_federal_deductions_for_taxpayer_credit reads federal claimed/derived itemized totals; shared state-itemized branch	2021 TC 40 instructions, line 12 use federal 1040 line 12 a; line 14 removes state/local income tax. Premiums therefore remain in the taxpayer-credit base rather than reducing Utah taxable income directly.	Utah Code 59-10-1018, effectiveJan 1,2026, PDF p 1, (1)(f),(2)(a)(ii) expressly defines Utah itemized deduction as the federal allowed amount minus state/local income tax, and applies 6% credit rate. Restored premiums stay in base subject to credit phase-out.
VA	va_itemized_deductions reads itemized_deductions_less_salt; va_reduced_itemized_deductions sums interest_deduction via parameter list	2021 Virginia Schedule A, PDF p 1, line 8 d explicitly includes mortgage insurance premiums. Retain under Virginia's existing limits.	Code 58.1-301(B) currently adopts IRC Dec 31,2025; listed exceptions include §68 limitations, not §163(h)(3). 58.1-322.03(1) carries federal itemization with specified state modifications. Retain restored premiums subject to state limitations.
VT (indirect)	vt_capital_gains_exclusion caps exclusion using taxable_income	No personal itemized deduction. 32 V.S.A.5811(21)(B)(ii) explicitly caps the exclusion at 40% of federal taxable income. Federal premiums may consequently reduce this cap; this is a lawful indirect effect. 2021 income booklet directs filers to ScheduleIN 153.	Same 40%-of-federal-income cap remains in 2026 statutory version. 5824 adopts federal law through Dec 31,2025 fromJan 1,2026 (Act 164§60), encompassing premium restoration. No premium addback needed in this indirect route.
WI	wi_itemized_deduction_credit_potential reads itemized_deductions_less_salt	2021 Form 1 instructions, PDF p 16, line 11 Exceptions, expressly excludes mortgageinsurance; 2025 Form 1 instructions same rule; 2026 SB 859 fiscal report, PDF p 6 says current IDC excludes premiums and bill would newly adopt allowance	Disallow. Subtract federal deductible premium before credit's standard-deduction offset. OBBBA restoration does not automatically override Wisconsin exclusion. SB 859 adoption proposal failed; do not treat proposal as enacted law.

The NC 2026 conclusion follows enacted law; its 2026 forms are not yet published. NM/ND 2026 carry-through is a conformity inference from their federal bases. NY’s continued 2026 exclusion is also an inference from the restoration’s placement in §163(h)(3)(F) and the state’s pre-TCJA computation, pending 2026 forms. The archived Utah 2021 and Montana 2021 instructions were checked through official indexed text where PDF endpoints were unavailable; current Utah law independently confirms the credit base. Vermont's current statute separately states the federal-income cap for pre-2026 and 2026 periods.

Verification

Verified the final source at b5ab1fb4cb3a3b0d04fe1e861b5db7ef57836064: 401 tests passed across 30 distinct files: 143 Python tests and 258 YAML cases. This includes every changed test file and the complete main-merge report table, deduplicated. The changes add 62 YAML cases. Targeted fail-before runs at 1453ef98f2 produced 36 expected failures and 28 passes across 15 files. The table distinguishes targeted before runs from full-file after runs.

Every test ran separately, sequentially, in the foreground, using the prescribed interpreter with this checkout on PYTHONPATH and OMP_NUM_THREADS=4 OPENBLAS_NUM_THREADS=4 MKL_NUM_THREADS=4 VECLIB_MAXIMUM_THREADS=4 NUMEXPR_NUM_THREADS=4 OMP_WAIT_POLICY=PASSIVE. Python files used -m pytest -q -p no:cacheprovider; YAML files used -m policyengine_core.scripts.policyengine_command test <file> -c policyengine_us.

File	Before: targeted fail/pass	After: full file passed
policyengine_us/tests/core/test_mortgage_points_and_premiums_properties.py	—	6
policyengine_us/tests/core/test_second_residence_mortgage_properties.py	—	7
policyengine_us/tests/core/test_uprating_series.py	—	128
policyengine_us/tests/policy/baseline/gov/irs/income/taxable_income/deductions/deductible_mortgage_interest.yaml	—	16
policyengine_us/tests/policy/baseline/gov/irs/income/taxable_income/deductions/itemizing/deductible_mortgage_insurance_premiums.yaml	—	24
policyengine_us/tests/policy/baseline/gov/irs/income/taxable_income/deductions/itemizing/interest_deduction.yaml	—	4
policyengine_us/tests/policy/baseline/gov/states/ky/tax/income/deductions/ky_disallowed_second_residence_interest.yaml	—	10
policyengine_us/tests/policy/baseline/gov/states/ky/tax/income/deductions/ky_itemized_deductions_indiv.yaml	—	5
policyengine_us/tests/policy/baseline/gov/states/ky/tax/income/deductions/ky_itemized_deductions_unit.yaml	—	8
policyengine_us/tests/policy/baseline/household/expense/person/home_mortgage_interest_share.yaml	—	1
policyengine_us/tests/policy/baseline/household/expense/tax_unit/home_mortgage_interest_tax_unit.yaml	—	3
policyengine_us/tests/core/test_mortgage_debt_limit_invariants.py	—	2
policyengine_us/tests/policy/baseline/gov/irs/income/taxable_income/deductions/deductible_mortgage_interest_tax_unit.yaml	—	18
policyengine_us/tests/policy/baseline/gov/states/mt/tax/income/deductions/itemized/mt_itemized_deductions_joint.yaml	2F / 1P	11
policyengine_us/tests/policy/baseline/gov/states/ky/tax/income/integration.yaml	—	25
policyengine_us/tests/policy/baseline/gov/states/ar/tax/income/deductions/itemized/ar_itemized_deductions_indiv.yaml	2F / 1P	8
policyengine_us/tests/policy/baseline/gov/states/ar/tax/income/deductions/itemized/ar_itemized_deductions_joint.yaml	2F / 1P	9
policyengine_us/tests/policy/baseline/gov/states/ca/tax/income/deductions/itemized/ca_itemized_deductions_pre_limitation.yaml	2F / 14P	17
policyengine_us/tests/policy/baseline/gov/states/de/tax/income/deductions/itemized/de_itemized_deductions_indv.yaml	3F / 0P	14
policyengine_us/tests/policy/baseline/gov/states/ia/tax/income/ia_itemized_deductions_unit.yaml	2F / 2P	7
policyengine_us/tests/policy/baseline/gov/states/mn/tax/income/mn_itemized_deductions.yaml	3F / 1P	15
policyengine_us/tests/policy/baseline/gov/states/mt/tax/income/deductions/itemized/federal_itemization/mt_itemized_deductions_for_federal_itemization_indiv.yaml	2F / 0P	12
policyengine_us/tests/policy/baseline/gov/states/mt/tax/income/deductions/itemized/federal_itemization/mt_itemized_deductions_for_federal_itemization_joint.yaml	2F / 1P	10
policyengine_us/tests/policy/baseline/gov/states/mt/tax/income/deductions/itemized/mt_itemized_deductions_indiv.yaml	2F / 0P	7
policyengine_us/tests/policy/baseline/gov/states/wi/tax/income/wi_itemized_deduction_credit.yaml	3F / 1P	6
policyengine_us/tests/policy/baseline/gov/states/al/tax/income/deductions/itemized/al_interest_deduction.yaml	3F / 1P	4
policyengine_us/tests/policy/baseline/gov/states/hi/tax/income/deductions/itemized/hi_interest_deduction.yaml	2F / 2P	7
policyengine_us/tests/policy/baseline/gov/states/ny/tax/income/taxable_income/deductions/itemized/ny_itemized_deductions_max.yaml	3F / 2P	5
policyengine_us/tests/policy/baseline/household/expense/person/deductible_mortgage_insurance_premiums_indiv.yaml	—	4
policyengine_us/tests/policy/baseline/gov/states/nc/tax/income/deductions/nc_mortgage_and_property_tax_before_limitation.yaml	3F / 1P	8
Total	36F / 28P	401

Full-file verification also caught Core's empty-list add() result in Iowa; empty dated exclusion lists now skip subtraction in Iowa, Arkansas, and Minnesota. Iowa's ordinary conforming-year cases and all changed state files pass. make format passed before each of the three commits; the final run left 7,331 files unchanged and lint passed. git diff --check passed. No microsimulation was run in this sandbox; the impact rerun remains with the hub.

Round 2 follow-up verification at 6f9480b4a8efdad21cbe1f3a4a85125988d9b843: 35 YAML cases passed across five files (NY 5; AR individual 8 and joint 9; WI 6; HI 7). Each file ran separately, sequentially, in the foreground with this checkout on PYTHONPATH and OMP_NUM_THREADS=4 OPENBLAS_NUM_THREADS=4 MKL_NUM_THREADS=4 VECLIB_MAXIMUM_THREADS=4 NUMEXPR_NUM_THREADS=4 OMP_WAIT_POLICY=PASSIVE. make format passed (7,331 files unchanged; lint passed), and git diff --check passed.

The existing uncapped mortgage_interest calculations in al_investment_interest.py, nc_mortgage_and_property_tax_before_limitation.py, and hi_interest_deduction.py predate this PR and remain for a separate follow-up PR.

Axiom

axiom: TheAxiomFoundation/rulespec-us#1543 queued. The signed encoder run is OpenAI-billed and needs its own approval, and nothing encodes §163(h)(3) to import yet. The issue is dispatch-ready: it has the corpus citation us-ky/statute/krs/141.019/document-1, the verbatim law, the required outputs, a review_finding, and companion tests matching this PR's YAML.

🤖 Generated with Claude Code

[MaxGhenis]

Hand-off to the US + core hub (session local_17987805-4707-4b59-8f78-80ace9ac6a3f, 2026-10-07)

• Head: f734479be8cb754353256c5dccb48f86c9fa231a.

• ⛔ Do not merge before the points PR. This branch is stacked on points-mortgage-insurance-premium-inputs (fe25c5276a plus unpushed state-wiring work). That branch has no PR yet; it is owned by the session that splits the bundled investment-interest input. Merging Cap Kentucky qualified residence interest at principal-residence interest from 2026 #10003 first would land those federal commits without their review or state wiring. Once the points PR merges, rebase this branch onto main, keeping only the commits after fe25c5276a.

• Reviews:

  • Round 1 (Opus 5.5, via Subfleet) requested changes. All addressed in cf2d1f2338: the statutory ceiling, the 163(h)(5) citations, the structured fallback, test gaps and Pub 936 anchors.
  • Round 2 (GPT-6.1 Sol, via Subfleet) APPROVED cf2d1f2338. Its minor items were addressed in c42e0e7bf8 and f734479be8.
  • An Opus 5.5 delta check APPROVED both commits at the current head.
  • Reports: ~/reviews/ky-principal-residence/out/review-1.md and review-2.md.

• Passed locally:

  • all Kentucky (80), federal taxable-income (68) and household-expense (29) YAML files;
  • the new and points-branch property tests;
  • code-health tests;
  • the microsim (2026, default dataset, base 07227ea252 against the branch at cf2d1f2338): zero change on every record for all 17 compared variables. The later commits change only a docstring and YAML tests, so that result still holds.

• Pending: CI on f734479be8. When I handed off it was queued behind 14 repository runs and had not started. CI must also rerun after the rebase.

• Decision: d1070 (low priority, parks by default). It asks whether Kentucky keeps principal-residence premiums; the branch keeps them by default. It is not a merge blocker; a contrary ruling would need a follow-up.

• Axiom: Encode KRS 141.019(2)(j): Kentucky qualified residence interest capped at the principal residence from 2026 (PE parity, policyengine-us#10003) TheAxiomFoundation/rulespec-us#1543 is queued (pe-parity).

• Follow-ups owed:

  1. After the points PR lands with its Montana wiring, rebase this branch. Then weight deductible_mortgage_insurance_premiums_person (the per-spouse Montana allocation) by mortgage_insurance_premiums + second_residence_mortgage_insurance_premiums. Add second_residence_* to any other state formula that sums the principal-residence inputs directly.
  2. Separately, there is a bug already on main: _limited_mortgage_balance gives $750k where 163(h)(3)(F) gives $900k. The case is $900k of pre-2018 debt plus $950k of post-2017 debt.

  A local follow-up session is queued for each.

• Interacts with Remove the deprecated structured mortgage-interest inputs #9605: it removes the structured interest inputs. Both PRs edit home_mortgage_interest_tax_unit.

[MaxGhenis]

Admin-merged by the US + core hub at a4a4cf61a70b0e9efc20448a5af032f1c169ac59, a clean merge of main into 6f9480b4a8. The only block was the required approving review, which nobody but Max could give.

• CI: gh pr checks passes at this head, and the latest Pull request run concluded success.
• Mergeable: yes, not a draft, and no CHANGES_REQUESTED review.
• Reviews:
  • an independent Opus review (round 1) requested changes, all addressed in cf2d1f2338;
  • a GPT-6.1 Sol review (round 2) approved at b5ab1fb4cb;
  • a GPT-6.1 Sol delta review approved 6f9480b4a8 with no P1 or P2 findings. Its one P3, recording the readings decision in the body, is done;
  • a GPT-6.1 Sol merge-delta review approved this head with no findings: the remerge diff is empty, 851 cases in 81 files pass, and main's New York §615(g) rework interacts with the PR as intended.
• Readings: Max accepted all four open readings as built (d1693). New York gets rechecked when its 2026 IT-196 is published.
• Impact: the hub reran it at 6f9480b4a8 (2026, default dataset); the merge doesn't change the PR's own files. All 14 compared variables are unchanged on every record; see the body.