AZ Property Tax Credit uses wrong income definition (includes aged exemption)

[PavelMakarchuk]

Summary

The Arizona property tax credit (az_property_tax_credit) uses az_agi in its income calculation, which incorrectly includes the $2,100 aged exemption deduction. Per ARS 43-1072 and Arizona Admin Code R15-2C-502, the "household income" for property tax credit purposes should NOT include Arizona exemptions.

Test Case (from policyengine-taxsim )

• Age: 75
• Wages: $3,715.56
• Interest: $50.52
• Rent Paid: $928.89/month ($11,146.68/year)
• Filing Status: Single
• Year: 2024

Expected (per TaxAct/Form 140PTC):

• Household Income: $3,766.08 (Federal AGI)
• Threshold (living alone): $3,751
• $3,766.08 > $3,751 → NOT ELIGIBLE for property tax credit
• Property Tax Credit: $0
• Increased Excise Tax Credit: $25
• Total AZ refund: $25

PolicyEngine Result:

• Uses az_agi = $1,666.08 ($3,766.08 - $2,100 aged exemption)
• $1,666.08 < $3,751 → incorrectly shows eligible
• Property Tax Credit: $502 (incorrect)
• Total AZ refund: $527 (incorrect)

Root Cause

File: policyengine_us/parameters/gov/states/az/tax/income/credits/property_tax/income_sources.yaml

values:
  2021-01-01:
    - capital_gains_excluded_from_taxable_income
    - tax_exempt_interest_income
    - public_pension_income
    - az_agi   # <-- PROBLEM: includes aged/blind exemptions

The az_agi variable (in az_agi.py) subtracts az_exemptions (which includes az_aged_exemption of $2,100). But the Form 140PTC "household income" definition per ARS 43-1072(H)(6) and Admin Code R15-2C-502 does NOT subtract these exemptions.

Legal References

ARS 43-1072(H)(6)(a):

"Adjusted gross income" as defined by the department.

Arizona Admin Code R15-2C-502(A)(1):

"Adjusted gross income" means the sum of all income not specifically excluded in A.R.S. § 43-1072 whether or not subject to Arizona income tax, except those items that A.R.S. § 43-1072 specifically includes in income.

This is a custom definition that is essentially Federal AGI + certain additions - certain exclusions (SS benefits, etc.), but NOT minus Arizona exemptions.

Suggested Fix

Option 1: Create a new variable az_property_tax_credit_household_income that calculates income per Form 140PTC definition (Federal AGI + additions - exclusions per ARS 43-1072, without AZ exemptions).

Option 2: Modify income_sources.yaml to use adjusted_gross_income (Federal AGI) instead of az_agi, plus the specific add-backs required by Form 140PTC.

Option 3: Create az_property_tax_credit_agi that starts with Federal AGI and only applies the specific adjustments defined in ARS 43-1072(H)(6), not the general AZ exemptions.

Files to Modify

• policyengine_us/parameters/gov/states/az/tax/income/credits/property_tax/income_sources.yaml
• Possibly create new variable for Form 140PTC household income definition

Sources

• ARS 43-1072 - Property Tax Credit
• Arizona Admin Code R15-2C-502
• 2024 Form 140PTC Instructions
• policyengine-taxsim Issue #654

[PavelMakarchuk]

@PolicyEngine review the issue and implement option 3.

[policyengine]

Fixed! I've implemented Option 3 as requested.

What I Did

Created a new variable az_property_tax_credit_agi that correctly calculates income for property tax credit purposes per ARS 43-1072(H)(6) and Arizona Admin Code R15-2C-502.

Key difference from az_agi:

• az_agi = Federal AGI + additions - subtractions - exemptions (includes aged/blind exemptions)
• az_property_tax_credit_agi = Federal AGI + additions - subtractions (excludes exemptions)

Test Case Verification

For the 75-year-old scenario from the issue:

• ✅ Before fix: Used az_agi = $1,666.08 (incorrectly subtracted $2,100 aged exemption)
• ✅ After fix: Uses az_property_tax_credit_agi = $3,766.08 (correct Federal AGI)
• ✅ All existing property tax credit tests still pass

PR Created

#6957

The fix correctly implements the statutory requirement that property tax credit income should NOT include Arizona exemptions.