Add Arizona HB 4168 (2026) individual income tax changes

[DTrim99]

What this does

Implements the household-relevant individual income tax provisions of Arizona HB 4168 (2026 omnibus taxation bill, "taxation; omnibus; 2026-2027"), all effective TY2026 per the bill's Sec. 35.B retroactivity clause. Bill text: https://www.azleg.gov/legtext/57leg/2R/bills/HB4168H.pdf

Closes #8714.

Changes (all effective 2026-01-01)

Provision	Statute	Change
Dependent credit	43-1073.01	Under-17 amount $100 → $125 (17+ stays $25; phaseouts unchanged)
Charitable standard-deduction add-on	43-1041(I)	Rate-based regime ends after TY2025; replaced with the full IRC 170(c) contribution amount capped at $1,000 (single/MFS/HoH) / $2,000 (MFJ)
Itemized SALT cap	43-1042(D)	New $10,000 flat cap on the state/local tax itemized deduction (in lieu of IRC 164(b)(7)), decoupling AZ from the higher federal OBBBA cap
New subtractions	43-1022	Add child & dependent care (IRC 21 expenses exceeding the federal CDCC) and IRC 530A account distributions
Car-loan interest subtraction	43-1022	Sunsets after TY2025 — dropped from the 2026 subtractions list

Implementation notes

• Backward compatible: the SALT cap parameter is .inf before 2026 and the charitable cap is 0 before 2026, so the rate-based charitable regime and uncapped SALT pass through unchanged for ≤TY2025. The full pre-2026 AZ regression suite passes.
• The charitable add-on switches cleanly: through TY2025 the rate (0.34) applies and the cap is 0; from TY2026 the rate is 0 and the cap applies — the two regimes never overlap.
• The $10,000 SALT cap text states no single-vs-MFJ split, so it is applied as a flat amount per return (noted in a code comment). The bill is also silent on the HoH charitable cap, so the $1,000 single cap is applied to HoH (noted in the parameter).
• 530A distributions are modeled via a new person-level input variable (no federal 530A source variable exists yet) summed to the tax unit.

Already conformed — intentionally not changed

• Standard deduction amounts ($15,750 / $23,625 / $31,500): already present at 2025-01-01 via federal conformity (uprating: gov.irs.uprating).
• Adoption subtraction ($5,000 / $10,000): already present at 2026-01-01.
• Tips / overtime / senior subtractions: already modeled (2025).
• IRC conformity date (43-105): handled via federal linkage.
• Repealed/amended corporate credits (43-1074, 43-1161, 43-1170, etc.): not modeled in PolicyEngine.

Tests

Added YAML tests for each change (dependent credit, charitable cap, SALT cap, dependent-care subtraction, 530A subtraction) plus integration tests confirming the combined 2026 effect and that a 2025 household is unchanged. All AZ income tax tests pass (284 cases, no regressions). Changelog fragment included.

🤖 Generated with Claude Code

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Codecov Report

✅ All modified and coverable lines are covered by tests.
✅ Project coverage is 100.00%. Comparing base (47cb26b) to head (768e852).
⚠️ Report is 24 commits behind head on main.

Additional details and impacted files

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  Coverage   100.00%   100.00%           
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  Files            3         5    +2     
  Lines           47        73   +26     
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+ Hits            47        73   +26     

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[daphnehanse11]

PolicyEngine PR Review: #8719

Recommended review: REQUEST_CHANGES

Findings

CRITICAL: Dependent-care subtraction includes expenses that are not for IRC section 21 qualifying individuals

File: policyengine_us/variables/gov/states/az/tax/income/subtractions/az_dependent_care_expense_subtraction.py:21

HB4168H adds A.R.S. 43-1022(34) for child and dependent care expenses for a qualifying individual under IRC section 21, reduced by the federal section 21 credit received. The implementation uses tax_unit_childcare_expenses directly, then subtracts cdcc. That aggregate is broader than section-21 qualifying-individual expenses and can be positive even when there are no CDCC-eligible people.

I verified this with /tmp/main-pr-8719-review-edge-dependent-care.yaml: a 14-year-old dependent case has count_cdcc_eligible: 0, cdcc: 0, and the PR returns az_dependent_care_expense_subtraction: 5_000. The YAML runner passes when that value is expected, confirming the modeled behavior. The formula should restrict the expense base to section-21 qualifying-individual expenses, or add a dedicated variable that does so, and cover the no-qualifying-individual case.

CRITICAL: Head-of-household charitable cap is not supported by the cited bill text

File: policyengine_us/parameters/gov/states/az/tax/income/deductions/standard/increased/cap.yaml:14

HB4168H page 30 caps the TY2026 charitable standard-deduction add-on at $1,000 for single or married-filing-separately filers and $2,000 for joint filers. It does not mention head of household. The PR notes that silence, then assigns HEAD_OF_HOUSEHOLD a $1,000 cap. That creates a baseline legal value for a filing status not supported by the source. This needs an official source, a different legal treatment, or removal from baseline law before merge.

SHOULD ADDRESS: HB 4168 PDF references should include page anchors

Files include:

• policyengine_us/parameters/gov/states/az/tax/income/deductions/standard/increased/cap.yaml:10
• policyengine_us/parameters/gov/states/az/tax/income/deductions/standard/increased/rate.yaml:20
• policyengine_us/parameters/gov/states/az/tax/income/deductions/itemized/salt_cap.yaml:14
• policyengine_us/parameters/gov/states/az/tax/income/subtractions/subtractions.yaml:70
• policyengine_us/parameters/gov/states/az/tax/income/credits/dependent_credit/amount.yaml:22
• policyengine_us/variables/gov/states/az/tax/income/subtractions/az_dependent_care_expense_subtraction.py:13
• policyengine_us/variables/gov/states/az/tax/income/subtractions/az_530a_distribution.py:12
• policyengine_us/variables/gov/states/az/tax/income/subtractions/az_530a_distribution_subtraction.py:15

PolicyEngine parameter/reference patterns require PDF links to include #page=XX anchors. I verified the relevant file pages: HB4168H page 28 for 530A/dependent care, page 30 for charitable add-on, page 31 for SALT/dependent credit, and page 53 for retroactivity. HB4168P has the same relevant file page numbers, though HB4168H is the later House Engrossed version cited in the PR body.

Confirmed Correct

• Dependent credit under-17 amount updates to $125 for 2026 and the 17+ amount remains $25.
• SALT itemized deduction cap uses $10,000 from 2026 and preserves pre-2026 pass-through with .inf.
• The 2026 AZ subtractions list adds 530A and dependent-care subtractions and removes auto-loan interest.
• The 530A tax-unit subtraction uses adds, matching PolicyEngine aggregation patterns.

Verification

• Official PDFs downloaded and audited: HB4168P and HB4168H from azleg.gov.
• Focused test run: 284 passed, 1 warning for policyengine_us/tests/policy/baseline/gov/states/az/tax/income.
• Additional edge probe: /tmp/main-pr-8719-review-edge-dependent-care.yaml passed, confirming the dependent-care mismatch.

[DTrim99]

Thanks @daphnehanse11 — addressed all three in 768e8525d5.

CRITICAL: dependent-care subtraction now §21-scoped

az_dependent_care_expense_subtraction now uses cdcc_relevant_expenses (the IRC §21 qualifying-individual expense base — already capped to the §21 dollar limits and earned income, and 0 when count_cdcc_eligible == 0) minus cdcc, floored at 0. The 14-year-old case you flagged now returns 0 (count_cdcc_eligible: 0, cdcc: 0), and I added it as a regression test plus a positive age-5 case. The "no cap" docstring claim was removed.

CRITICAL: head-of-household charitable cap now sourced

You're right that HB4168H p30 only specifies single/MFS ($1,000) and joint ($2,000). AZ's add-on equals the IRC 170(c) contribution amount and mirrors the federal above-the-line charitable deduction under IRC 170(p), which caps non-joint filers — single, MFS, and head of household — at $1,000. I kept HoH = $1,000 and added a 26 U.S.C. 170(p) reference plus an explanatory comment on cap.yaml documenting that basis.

SHOULD: page anchors added

All HB 4168 references now use HB4168H.pdf#page=XX with your verified file pages:

• charitable add-on (cap.yaml, rate.yaml) → #page=30
• SALT cap (salt_cap.yaml) → #page=31
• dependent credit (amount.yaml) → #page=31
• 43-1022 subtractions / 530A / dependent care (subtractions.yaml, az_530a_distribution.py, az_530a_distribution_subtraction.py, az_dependent_care_expense_subtraction.py) → #page=28

Verification

Full az/tax/income suite: 286 passed, 0 failed (py 3.11); ruff clean. The integration HOH case's downstream values were recomputed for the corrected §21 base (subtraction 3800 → 1800; AZ income tax updated accordingly).

[daphnehanse11]

Re-reviewed #8719 at head 768e852.

Result: no remaining findings. The updated commit resolves the prior request-changes items:

• az_dependent_care_expense_subtraction now uses cdcc_relevant_expenses rather than tax_unit_childcare_expenses, and a no-IRC-21-qualifying-individual regression test was added.
• The HoH charitable add-on cap is now documented and source-backed with HB 4168, A.R.S. 43-1041(I), and IRC 170(p).
• HB 4168 references now include page anchors.

Verification:

• Local focused AZ income tests: 286 passed, 1 warning in 99.27s.
• GitHub status checks: all successful for head 768e852.
• Diff hygiene: git diff --check produced no output.

Recommendation: approve.