Index the Arizona standard deduction under A.R.S. 43-1041(H)

changelog.d/az-standard-deduction-2026-indexing.fixed.md

@@ -0,0 +1 @@
+Index the Arizona standard deduction for 2026 and later under A.R.S. 43-1041(H): set the 2026 amounts to $16,100 single and separate, $24,150 head of household and $32,200 joint, and move the inert parent-level uprating onto each filing-status amount.

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

@@ -16,9 +16,18 @@ metadata:
     href: https://azdor.gov/forms/individual/form-140-arizona-resident-personal-income-tax-booklet
   - title: 2021 Arizona Form 140 Resident Personal Income Tax Booklet
     href: https://azdor.gov/sites/default/files/2023-03/FORMS_INDIVIDUAL_2021_140BOOKLET.pdf#page=43
-  # Arizona standard deduction is uprated mirroring federal standard deduction
-  # This parent uprating remains inactive pending selective propagation in PolicyEngine/policyengine-core#537.
-  uprating: gov.irs.uprating
+  - title: A.R.S. 43-1041(A) and (H)
+    href: https://www.azleg.gov/ars/43/01041.htm
+  - title: Laws 2026, ch. 140 (HB 4168), secs. 16 and 35(A)
+    href: https://www.azleg.gov/legtext/57leg/2R/laws/0140.htm
+  # 2026: 43-1041(H) indexes the subsection A amounts "in the same manner in
+  # which the federal basic standard deduction is adjusted for inflation
+  # pursuant to section 63". The Arizona and federal 2025 bases are equal, so
+  # the 2026 amounts equal the federal ones.
+  - title: Rev. Proc. 2025-32, sec. 4.14(1) (2026 federal standard deduction)
+    href: https://www.irs.gov/pub/irs-drop/rp-25-32.pdf#page=18
+  # Each filing-status amount below carries its own uprating, because
+  # policyengine-core uprates only parameters whose own metadata names one.
 
 JOINT:
   values:
@@ -27,36 +36,64 @@ JOINT:
     2023-01-01: 27_700
     2024-01-01: 29_200
     2025-01-01: 31_500
+    2026-01-01: 32_200
   metadata:
     unit: currency-USD
     period: year
+    # The federal method makes the joint amount twice the single amount
+    # (26 U.S.C. 63(c)(2)(A)). With a 2026 joint amount of twice the single
+    # amount, a $100 round-down equals twice the single amount's $50
+    # round-down.
+    uprating:
+      parameter: gov.irs.uprating
+      rounding:
+        type: downwards
+        interval: 100
 HEAD_OF_HOUSEHOLD:
   values:
     2021-01-01: 18_800
     2022-01-01: 19_400
     2023-01-01: 20_800
     2024-01-01: 21_900
     2025-01-01: 23_625
+    2026-01-01: 24_150
   metadata:
     unit: currency-USD
     period: year
+    uprating:
+      parameter: gov.irs.uprating
+      rounding:
+        type: downwards
+        interval: 50
 SINGLE:
   values:
     2021-01-01: 12_550
     2022-01-01: 12_950
     2023-01-01: 13_850
     2024-01-01: 14_600
     2025-01-01: 15_750
+    2026-01-01: 16_100
   metadata:
     unit: currency-USD
     period: year
+    uprating:
+      parameter: gov.irs.uprating
+      rounding:
+        type: downwards
+        interval: 50
 SEPARATE:
   values:
     2021-01-01: 12_550
     2022-01-01: 12_950
     2023-01-01: 13_850
     2024-01-01: 14_600
     2025-01-01: 15_750
+    2026-01-01: 16_100
   metadata:
     unit: currency-USD
     period: year
+    uprating:
+      parameter: gov.irs.uprating
+      rounding:
+        type: downwards
+        interval: 50

policyengine_us/tests/core/test_state_uprating_rounding.py

@@ -265,3 +265,46 @@ def test_mt_old_age_subtraction_uses_published_2025():
     assert amount.brackets[0].amount("2025-01-01") == 0
     assert amount.brackets[1].amount("2024-01-01") == 5_500
     assert amount.brackets[1].amount("2025-01-01") == 5_660
+
+
+AZ_STANDARD_DEDUCTION_STATUSES = ("SINGLE", "SEPARATE", "HEAD_OF_HOUSEHOLD")
+
+
+@pytest.mark.parametrize("status", AZ_STANDARD_DEDUCTION_STATUSES)
+def test_az_standard_deduction_is_indexed_like_the_federal_basic_amount(status):
+    # A.R.S. 43-1041(H): the subsection A amounts are adjusted "in the same
+    # manner in which the federal basic standard deduction is adjusted for
+    # inflation pursuant to section 63". Laws 2026, ch. 140 set those amounts
+    # to the federal 2025 amounts, so under current law the Arizona amounts
+    # equal the federal ones in every later year. A parent-level uprating key
+    # used to leave Arizona at its 2025 amounts from 2026 on. After 2026 this
+    # checks the model's projection, which uprates the rounded 2026 amount.
+    arizona = getattr(
+        SYSTEM.parameters.gov.states.az.tax.income.deductions.standard.amount, status
+    )
+    federal = getattr(SYSTEM.parameters.gov.irs.deductions.standard.amount, status)
+    uprating = SYSTEM.parameters.gov.irs.uprating
+    base_2026 = arizona("2026-01-01")
+    previous = arizona("2025-01-01")
+    for year in range(2025, 2036):
+        period = f"{year}-01-01"
+        amount = arizona(period)
+        assert amount == federal(period), (status, year)
+        assert amount >= previous, (status, year)
+        previous = amount
+        if year > 2026:
+            # 26 U.S.C. 63(c)(7)(B)(ii): round increases down to a multiple
+            # of $50.
+            factor = uprating(period) / uprating("2026-01-01")
+            assert amount == base_2026 * factor // 50 * 50, (status, year)
+    assert arizona("2035-01-01") > base_2026
+
+
+def test_az_joint_standard_deduction_is_twice_the_single_amount():
+    # 26 U.S.C. 63(c)(2)(A): the federal basic standard deduction for a joint
+    # return is 200% of the single amount, so the Arizona joint amount,
+    # indexed in the same manner, is twice the Arizona single amount.
+    amount = SYSTEM.parameters.gov.states.az.tax.income.deductions.standard.amount
+    for year in range(2025, 2036):
+        period = f"{year}-01-01"
+        assert amount.JOINT(period) == 2 * amount.SINGLE(period), year

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

@@ -83,3 +83,45 @@
   output:
     # Per 2025 Form 140 Instructions: HOH standard deduction is $23,625
     az_base_standard_deduction: 23_625
+
+# 2026 tax year tests
+# A.R.S. 43-1041(A), as amended by Laws 2026, ch. 140 (HB 4168), sec. 16 and
+# made retroactive to tax year 2025 by sec. 35(A), sets $15,750 / $23,625 /
+# $31,500 "subject to subsection H". 43-1041(H) indexes those amounts "in the
+# same manner in which the federal basic standard deduction is adjusted for
+# inflation pursuant to section 63". 26 U.S.C. 63(c)(7)(B)(ii) indexes the same
+# $15,750 and $23,625 bases from 2024, and Rev. Proc. 2025-32 sec. 4.14(1) gives
+# the 2026 results: $16,100 single and separate, $24,150 head of household and
+# $32,200 joint. PolicyBench reference audit 2026-10-05, scenario_018.
+
+- name: Single filer 2026 indexed under A.R.S. 43-1041(H)
+  period: 2026
+  input:
+    state_code: AZ
+    az_filing_status: SINGLE
+  output:
+    az_base_standard_deduction: 16_100
+
+- name: Joint filer 2026 indexed under A.R.S. 43-1041(H)
+  period: 2026
+  input:
+    state_code: AZ
+    az_filing_status: JOINT
+  output:
+    az_base_standard_deduction: 32_200
+
+- name: Separate filer 2026 indexed under A.R.S. 43-1041(H)
+  period: 2026
+  input:
+    state_code: AZ
+    az_filing_status: SEPARATE
+  output:
+    az_base_standard_deduction: 16_100
+
+- name: Head of household filer 2026 indexed under A.R.S. 43-1041(H)
+  period: 2026
+  input:
+    state_code: AZ
+    az_filing_status: HEAD_OF_HOUSEHOLD
+  output:
+    az_base_standard_deduction: 24_150

policyengine_us/tests/policy/baseline/gov/states/az/tax/income/integration.yaml

@@ -62,8 +62,9 @@
     az_dependent_tax_credit: 125
     # Charitable add-on: min($1,500, $1,000 HOH cap) = $1,000
     az_increased_standard_deduction_for_charitable_contributions: 1_000
-    # Standard deduction: $23,625 base + $1,000 add-on = $24,625
-    az_standard_deduction: 24_625
+    # Standard deduction: $24,150 base (2026 head of household amount under
+    # A.R.S. 43-1041(H)) + $1,000 add-on = $25,150
+    az_standard_deduction: 25_150
     # Dependent care: cdcc_relevant_expenses = min($5,000, $3,000 §21 cap for
     # 1 QI, $80,000 earnings) = $3,000; subtraction = max($3,000 - $1,200, 0)
     # = $1,800
@@ -74,12 +75,12 @@
     az_subtractions: 2_800
     # AZ AGI = $80,000 - $2,800 = $77,200
     az_agi: 77_200
-    # Taxable income = $77,200 - $24,625 = $52,575
-    az_taxable_income: 52_575
-    # Tax before credits = $52,575 * 2.5% = $1,314.375
-    az_income_tax_before_non_refundable_credits: 1_314.375
-    # AZ income tax = $1,314.375 - $125 dependent credit = $1,189.375
-    az_income_tax: 1_189.375
+    # Taxable income = $77,200 - $25,150 = $52,050
+    az_taxable_income: 52_050
+    # Tax before credits = $52,050 * 2.5% = $1,301.25
+    az_income_tax_before_non_refundable_credits: 1_301.25
+    # AZ income tax = $1,301.25 - $125 dependent credit = $1,176.25
+    az_income_tax: 1_176.25
 
 # Confirms the pre-2026 regime is UNCHANGED for the identical household.
 # In 2025: dependent credit is $100, charitable add-on uses the 0.34 rate
@@ -124,3 +125,32 @@
     az_income_tax_before_non_refundable_credits: 1_396.625
     # AZ income tax = $1,396.625 - $100 dependent credit = $1,296.625
     az_income_tax: 1_296.625
+
+# PolicyBench reference audit 2026-10-05, scenario_018: a single wage earner
+# in tax year 2026. AZ AGI equals federal AGI (no Arizona additions or
+# subtractions apply). The standard deduction is $16,100 under A.R.S.
+# 43-1041(A)(1) and (H) (Rev. Proc. 2025-32 sec. 4.14(1)), not the
+# unindexed 2025 amount of $15,750.
+- name: AZ 2026 single filer uses the inflation-indexed standard deduction
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    people:
+      person1:
+        age: 53
+        employment_income: 61_592
+    tax_units:
+      tax_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: AZ
+  output:
+    az_filing_status: SINGLE
+    az_agi: 61_592
+    az_standard_deduction: 16_100
+    # Taxable income = $61,592 - $16,100 = $45,492
+    az_taxable_income: 45_492
+    # Tax = $45,492 * 2.5% = $1,137.30
+    az_income_tax_before_non_refundable_credits: 1_137.30