Add Arizona HB 4168 (2026) individual income tax changes

changelog.d/az-hb4168-2026-income-tax.added.md

@@ -0,0 +1 @@
+Added Arizona HB 4168 (2026) individual income tax changes: $125 under-17 dependent credit, capped full-amount charitable standard deduction add-on, $10,000 itemized SALT cap, and new dependent care and IRC 530A distribution subtractions (all effective 2026).

policyengine_us/parameters/gov/states/az/tax/income/credits/dependent_credit/amount.yaml

@@ -18,11 +18,14 @@ metadata:
     href: https://azdor.gov/forms/individual/form-140a-arizona-resident-personal-income-tax-booklet
   - title: Arizona State Legislature Title 43 - Taxation of Income, Chapter 10, Article 5, 43-1073.01 (B), (1) & (2)
     href: https://www.azleg.gov/viewdocument/?docName=https://www.azleg.gov/ars/43/01073-01.htm
+  - title: Arizona HB 4168 (2026), Sec. 21 amending 43-1073.01(B)(1)
+    href: https://www.azleg.gov/legtext/57leg/2R/bills/HB4168P.pdf
 brackets:
   - threshold:
       2021-01-01: 0
     amount:
       2021-01-01: 100
+      2026-01-01: 125
   - threshold:
       2021-01-01: 17
     amount:

policyengine_us/parameters/gov/states/az/tax/income/deductions/itemized/salt_cap.yaml

@@ -0,0 +1,14 @@
+description: Arizona limits the state and local tax itemized deduction to this amount, in lieu of the federal deduction allowed under Internal Revenue Code section 164(b)(7).
+values:
+  2018-01-01: .inf
+  2026-01-01: 10_000
+
+metadata:
+  unit: currency-USD
+  period: year
+  label: Arizona itemized state and local tax deduction cap
+  reference:
+    - title: A.R.S. 43-1042(D)
+      href: https://www.azleg.gov/ars/43/01042.htm
+    - title: Arizona HB 4168 (2026), Sec. 17, amending A.R.S. 43-1042(D)
+      href: https://www.azleg.gov/legtext/57leg/2R/bills/HB4168P.pdf

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

@@ -0,0 +1,28 @@
+description: Arizona caps the increased standard deduction for charitable contributions at this amount, depending on the filing status.
+metadata:
+  label: Arizona increased standard deduction for charitable contributions cap
+  period: year
+  unit: currency-USD
+  breakdown:
+  - az_filing_status
+  reference:
+  - title: Arizona HB 4168 (2026), Sec. 16 amending 43-1041(I)(2)(a)-(b)
+    href: https://www.azleg.gov/legtext/57leg/2R/bills/HB4168P.pdf
+  - title: 43-1041. Optional standard deduction Line I
+    href: https://www.azleg.gov/viewdocument/?docName=https://www.azleg.gov/ars/43/01041.htm
+
+# HB 4168 sets the cap at $1,000 for single/married-filing-separately filers
+# and $2,000 for joint filers. The bill is silent on head of household, so we
+# apply the $1,000 single-filer cap to head of household filers.
+JOINT:
+  2018-01-01: 0
+  2026-01-01: 2_000
+HEAD_OF_HOUSEHOLD:
+  2018-01-01: 0
+  2026-01-01: 1_000
+SINGLE:
+  2018-01-01: 0
+  2026-01-01: 1_000
+SEPARATE:
+  2018-01-01: 0
+  2026-01-01: 1_000

policyengine_us/parameters/gov/states/az/tax/income/deductions/standard/increased/rate.yaml

@@ -16,10 +16,13 @@ metadata:
     href: https://azdor.gov/sites/default/files/2023-03/FORMS_INDIVIDUAL_2021_140BOOKLET.pdf#page=43
   - title: 43-1041. Optional standard deduction Line I
     href: https://www.azleg.gov/viewdocument/?docName=https://www.azleg.gov/ars/43/01041.htm
+  - title: Arizona HB 4168 (2026), Sec. 16 amending 43-1041(I)(1)-(2)
+    href: https://www.azleg.gov/legtext/57leg/2R/bills/HB4168P.pdf
 
 values:
   2019-01-01: 0.25
   2022-01-01: 0.27
   2023-01-01: 0.31
   2024-01-01: 0.33
   2025-01-01: 0.34
+  2026-01-01: 0

policyengine_us/parameters/gov/states/az/tax/income/subtractions/subtractions.yaml

@@ -27,6 +27,24 @@ values:
     - overtime_income_deduction # MCTCP worksheet Line 3 (Sch 1-A Line 21)
     - auto_loan_interest_deduction # MCTCP worksheet Line 4 (Sch 1-A Line 30)
     - additional_senior_deduction # MCTCP worksheet Line 5 (Sch 1-A Line 37)
+  # HB 4168 (2026): auto loan interest sunsets after TY2025 (43-1022(36));
+  # adds child & dependent care and IRC 530A distribution subtractions.
+  2026-01-01:
+    - us_govt_interest # Line 28
+    - az_public_pension_exclusion # Line 29a
+    - az_long_term_capital_gains_subtraction # Line 20 - 24
+    - az_military_retirement_subtraction # Line 29b
+    - taxable_social_security # Line 30
+    - military_service_income # Line 32
+    - az_529_college_savings_plan_subtraction # Line 34a
+    - az_529a_able_account_subtraction # Line 34b
+    - az_adoption_expense_subtraction # Other subtractions - Item D
+    - az_families_tax_rebate_subtraction # Line 36, Item U
+    - tip_income_deduction # 43-1022(31)
+    - overtime_income_deduction # 43-1022(32)
+    - additional_senior_deduction # 43-1022(35)
+    - az_dependent_care_expense_subtraction # 43-1022(34)
+    - az_530a_distribution_subtraction # 43-1022(33)
 metadata:
   unit: list
   period: year
@@ -48,3 +66,5 @@ metadata:
       href: https://azdor.gov/sites/default/files/2023-03/FORMS_INDIVIDUAL_2021_140BOOKLET.pdf#page=25
     - title: 43-1022. Subtractions from Arizona gross income
       href: https://www.azleg.gov/ars/43/01022.htm
+    - title: Arizona HB 4168 (2026), Sec. 15, amending A.R.S. 43-1022(31)-(36)
+      href: https://www.azleg.gov/legtext/57leg/2R/bills/HB4168P.pdf

policyengine_us/tests/policy/baseline/gov/states/az/tax/income/credits/dependent_credit/az_dependent_tax_credit.yaml

@@ -311,3 +311,99 @@
         state_code: AZ
   output:
     az_dependent_tax_credit: 100
+# HB 4168 (2026): the under-17 dependent credit amount rises from $100 to $125.
+# The 17+ amount ($25) and the AGI phase-out are unchanged.
+- name: 2026 - Single with one young dependent, increased amount
+  period: 2026
+  input:
+    people:
+      person1:
+        is_tax_unit_dependent: true
+        age: 10
+    tax_units:
+      tax_unit:
+        members:
+        - person1
+        adjusted_gross_income: 200000
+        filing_status: SINGLE
+        az_income_tax_before_non_refundable_credits: 1000000
+    households:
+      household:
+        members:
+        - person1
+        state_code: AZ
+  output:
+    # Under 17 in 2026 = $125 (was $100 in 2025)
+    az_dependent_tax_credit: 125
+- name: 2026 - Single with one older dependent, amount unchanged
+  period: 2026
+  input:
+    people:
+      person1:
+        is_tax_unit_dependent: true
+        age: 17
+    tax_units:
+      tax_unit:
+        members:
+        - person1
+        adjusted_gross_income: 200000
+        filing_status: SINGLE
+        az_income_tax_before_non_refundable_credits: 1000000
+    households:
+      household:
+        members:
+        - person1
+        state_code: AZ
+  output:
+    # Age 17+ stays $25
+    az_dependent_tax_credit: 25
+- name: 2026 - One young and one old dependent, mixed amounts
+  period: 2026
+  input:
+    people:
+      person1:
+        is_tax_unit_dependent: true
+        age: 10
+      person2:
+        is_tax_unit_dependent: true
+        age: 17
+    tax_units:
+      tax_unit:
+        members:
+        - person1
+        - person2
+        adjusted_gross_income: 200000
+        filing_status: SINGLE
+        az_income_tax_before_non_refundable_credits: 1000000
+    households:
+      household:
+        members:
+        - person1
+        - person2
+        state_code: AZ
+  output:
+    # Young: $125 + Old: $25 = $150
+    az_dependent_tax_credit: 150
+- name: 2026 - Single with partial phase-out, increased amount
+  period: 2026
+  input:
+    people:
+      person1:
+        is_tax_unit_dependent: true
+        age: 10
+    tax_units:
+      tax_unit:
+        members:
+        - person1
+        adjusted_gross_income: 205000
+        filing_status: SINGLE
+        az_income_tax_before_non_refundable_credits: 1000000
+    households:
+      household:
+        members:
+        - person1
+        state_code: AZ
+  output:
+    # Over $200,000 by $5,000: ceil(5,000/1,000) = 5 increments * 5% = 25%
+    # $125 * (1 - 0.25) = $93.75 (phase-out mechanics unchanged)
+    az_dependent_tax_credit: 93.75

policyengine_us/tests/policy/baseline/gov/states/az/tax/income/deductions/itemized/az_itemized_deductions.yaml

@@ -75,11 +75,54 @@
   period: 2022
   input:
     state_code: AZ
-    interest_deduction: 200 
-    casualty_loss_deduction: 300 
+    interest_deduction: 200
+    casualty_loss_deduction: 300
     other_medical_expenses: 600
-    charitable_deduction: 700 
+    charitable_deduction: 700
     az_charitable_contributions_credit_potential: 800
     state_sales_tax: 0
   output:
     az_itemized_deductions: 1_100
+
+# HB 4168 (2026): Arizona caps the SALT itemized deduction at $10,000
+# (A.R.S. 43-1042(D)). Before 2026 the cap is infinite, so the full SALT
+# deduction passes through unchanged.
+
+- name: Large SALT deduction passes through in 2025 (no cap)
+  absolute_error_margin: 0.01
+  period: 2025
+  input:
+    state_code: AZ
+    salt_deduction: 15_000
+    charitable_deduction: 0
+    az_charitable_contributions_credit_potential: 0
+    itemized_medical_expenses: 0
+  output:
+    # 2025 cap is infinite: full $15,000 SALT included
+    az_itemized_deductions: 15_000
+
+- name: Large SALT deduction capped at $10,000 in 2026
+  absolute_error_margin: 0.01
+  period: 2026
+  input:
+    state_code: AZ
+    salt_deduction: 15_000
+    charitable_deduction: 0
+    az_charitable_contributions_credit_potential: 0
+    itemized_medical_expenses: 0
+  output:
+    # 2026 cap is $10,000: min($15,000, $10,000) = $10,000
+    az_itemized_deductions: 10_000
+
+- name: SALT deduction below cap unaffected in 2026
+  absolute_error_margin: 0.01
+  period: 2026
+  input:
+    state_code: AZ
+    salt_deduction: 8_000
+    charitable_deduction: 0
+    az_charitable_contributions_credit_potential: 0
+    itemized_medical_expenses: 0
+  output:
+    # min($8,000, $10,000) = $8,000
+    az_itemized_deductions: 8_000

policyengine_us/tests/policy/baseline/gov/states/az/tax/income/deductions/standard/az_increased_standard_deduction_for_charitable_contributions.yaml

@@ -68,3 +68,52 @@
   output:
     # ($10,000 - $1,500) * 0.34 = $2,890
     az_increased_standard_deduction_for_charitable_contributions: 2_890
+
+# HB 4168 (2026): rate drops to 0 and the add-on becomes the full charitable
+# contribution amount, capped by filing status ($1,000 single/separate/HOH,
+# $2,000 joint). The rate-based and cap-based regimes do not overlap.
+
+- name: test for 2026 single filer over cap
+  period: 2026
+  input:
+    state_code: AZ
+    filing_status: SINGLE
+    charitable_deduction: 1_500
+    az_charitable_contributions_credit_potential: 0
+  output:
+    # rate (0) * 1_500 + min($1,500, $1,000 single cap) = $1,000
+    az_increased_standard_deduction_for_charitable_contributions: 1_000
+
+- name: test for 2026 single filer under cap
+  period: 2026
+  input:
+    state_code: AZ
+    filing_status: SINGLE
+    charitable_deduction: 600
+    az_charitable_contributions_credit_potential: 0
+  output:
+    # rate (0) * 600 + min($600, $1,000 single cap) = $600
+    az_increased_standard_deduction_for_charitable_contributions: 600
+
+- name: test for 2026 joint filer over cap
+  period: 2026
+  input:
+    state_code: AZ
+    filing_status: JOINT
+    charitable_deduction: 2_500
+    az_charitable_contributions_credit_potential: 0
+  output:
+    # rate (0) * 2_500 + min($2,500, $2,000 joint cap) = $2,000
+    az_increased_standard_deduction_for_charitable_contributions: 2_000
+
+- name: test for 2026 cap applied after charitable contributions credit
+  period: 2026
+  input:
+    state_code: AZ
+    filing_status: SINGLE
+    charitable_deduction: 1_200
+    az_charitable_contributions_credit_potential: 400
+  output:
+    # charitable after credit = max($1,200 - $400, 0) = $800
+    # rate (0) * 800 + min($800, $1,000 single cap) = $800
+    az_increased_standard_deduction_for_charitable_contributions: 800