Fix Arizona AGI calculation - exemptions should not be included in AGI

[DTrim99]

Summary

The current az_agi variable incorrectly subtracts Arizona exemptions (aged, blind, etc.) as part of AGI. Per Arizona Form 140 and tax statutes, exemptions are subtracted after AGI is calculated, not as part of AGI itself.

This causes issues for any calculation that uses az_agi expecting it to be true Arizona AGI.

Current Implementation

File: policyengine_us/variables/gov/states/az/tax/income/az_agi.py

def formula(tax_unit, period, parameters):
    adjusted_gross_income = tax_unit("adjusted_gross_income", period)
    additions = tax_unit("az_additions", period)
    subtractions = tax_unit("az_subtractions", period)
    exemptions = tax_unit("az_exemptions", period)  # <-- WRONG

    return max_(
        0, adjusted_gross_income + additions - subtractions - exemptions  # <-- WRONG
    )

What Arizona Form 140 Shows

Line	Description	Formula
12	Federal AGI	-
13-36	Additions and Subtractions	-
37	Arizona AGI	Fed AGI + additions - subtractions
38-42	Exemptions	-
43	AZ AGI minus exemptions	Line 37 - exemptions
44	Deductions	-
45	Taxable Income	Line 43 - deductions

Impact

1. Family Tax Credit (ARS 43-1073)

The statute says eligibility is based on:

"Arizona adjusted gross income, plus the amount subtracted for exemptions"

This means the Family Tax Credit should use true Arizona AGI (before exemptions). But currently it uses az_agi which already has exemptions subtracted, resulting in incorrect eligibility calculations.

File: policyengine_us/variables/gov/states/az/tax/income/credits/family_tax_credit/az_family_tax_credit_eligible.py

2. Any other variable using az_agi

Any variable expecting true Arizona AGI will get the wrong value.

Suggested Fix

Option 1: Rename and create new variable (Recommended)

1. Rename az_agi to az_agi_less_exemptions (or similar)
2. Create new az_agi that equals Fed AGI + additions - subtractions (no exemptions)
3. Update az_taxable_income to use az_agi_less_exemptions
4. Update az_family_tax_credit_eligible to use the new true az_agi

Option 2: Fix in place

1. Remove exemptions from az_agi calculation
2. Create az_agi_less_exemptions for use in az_taxable_income
3. Update downstream variables accordingly

Files to Modify

• policyengine_us/variables/gov/states/az/tax/income/az_agi.py
• policyengine_us/variables/gov/states/az/tax/income/az_taxable_income.py
• policyengine_us/variables/gov/states/az/tax/income/credits/family_tax_credit/az_family_tax_credit_eligible.py
• Tests in policyengine_us/tests/policy/baseline/gov/states/az/tax/income/

References

• Arizona Form 140 Instructions
• ARS 43-1073 - Family Income Tax Credit
• Related PR: Fix AZ property tax credit income definition (exclude exemptions) #6957 (Property Tax Credit fix)

Instructions for Bot

To fix this issue:

1. Create a new variable az_agi_less_exemptions that equals az_agi - az_exemptions (using the corrected az_agi)

2. Update az_agi.py to NOT subtract exemptions:

   return max_(0, adjusted_gross_income + additions - subtractions)

3. Update az_taxable_income.py to use the new flow:

   az_agi = tax_unit("az_agi", period)
   exemptions = tax_unit("az_exemptions", period)
   deductions = tax_unit("az_deductions", period)
   return max_(0, az_agi - exemptions - deductions)

4. Update az_family_tax_credit_eligible.py - it should now work correctly with the fixed az_agi

5. Update tests in az_agi.yaml to reflect the new calculation (without exemptions)

6. Run all Arizona tests to ensure nothing breaks:

   policyengine-core test policyengine_us/tests/policy/baseline/gov/states/az/ -c policyengine_us

7. Add changelog entry describing the fix

[DTrim99]

Closing - this issue was based on a misreading of the statute. Per ARS 43-1022, exemptions ARE included in the subtractions used to compute Arizona AGI. The current az_agi implementation is correct. The Family Tax Credit issue requires a different fix (adding exemptions back to az_agi per ARS 43-1073).