[MaxGhenis]

Summary

Since 2013 Arkansas has allowed a deduction, in the year of repayment, for restoring more than $3,000 of income taxed in an earlier year under a claim of right (Ark. Code § 26-51-457). It adopts 26 U.S.C. § 1341(a)(1)-(3) but not the federal choice of a credit, so the deduction applies whichever federal method governs. PolicyEngine had none of this, so a repayment changed nothing in Arkansas. This PR adds it as an itemized deduction that counts toward the 2% floor on miscellaneous itemized deductions.

• ar_claim_of_right_deduction (tax unit): the head's and spouse's repayments of income Arkansas taxed, when their total exceeds gov.states.ar.tax.income.deductions.itemized.claim_of_right.threshold ($3,000 from 2013).
• ar_claim_of_right_repayment_excluded_from_income (person input): the part of claim_of_right_repayment that Arkansas left out of gross income when received.
• A new list, gov.states.ar.tax.income.deductions.itemized.misc.sources (total_misc_deductions, plus the new deduction from 2013), which ar_misc_deduction_joint and ar_misc_deduction_indiv add before applying the 2% floor.

The law

• Act 1284 of 2013 (Ark. Code § 26-51-457), PDF p. 1 adopts § 1341(a)(1)-(3) and (b)(2) "for purposes of computing income tax liability under this chapter". It doesn't adopt § 1341(a)(4), (a)(5), (b)(1) or (b)(3)-(5), the methods of calculating the federal relief. Arkansas computes its tax by "allowing a deduction in the tax year the taxpayer restores the amount held under a claim of right" (PDF p. 2). Section 2 makes the act effective for tax years beginning on or after January 1, 2013.
• DFA's fiscal impact statement (HB1866-DFA2, PDF p. 1) says a filer whose deductible repayment exceeds $3,000 "may claim an Arkansas income tax deduction for the amount repaid". Before the act, it says, filers amended the earlier year's return.
• Ark. Code § 26-51-437, enacted by Act 382 of 1987, § 28 (PDF p. 9) treats itemized deductions other than those listed in (b) as miscellaneous itemized deductions, allowed only above 2% of adjusted gross income. (b) lists trade or business expenses (but not unreimbursed employee expenses), medical expenses, interest, taxes, losses, charitable contributions and donated art. Later amendments (Act 708 of 1991, § 3, Act 1296 of 1995, § 84 and Act 614 of 2025, § 7 (PDF p. 4)) add none that names § 26-51-457.
• No AR1000ADJ from 2015 through 2025 has a line for it, and each says "Do not enter amounts from categories that are not printed on this form" (2025). The model therefore treats it as an AR3 itemized deduction.

Placement under the 2% floor

No DFA form, instruction or rule names the deduction or a line for it. DFA's 2018 tax-exemption catalogue, PDF p. 13 lists the deduction separately under § 26-51-457 and doesn't address the floor. The 2025 AR3 has an open "list type and amount" line both inside the floor (line 21) and outside it (line 28). The model puts the deduction inside the floor, following § 26-51-437(b), whose list has no exception for § 26-51-457. The legislature has written express exceptions elsewhere: Act 708 of 1991, §§ 1 and 3 (PDF pp. 1–2) grants the disabled-child deduction in addition to other deductions, then excludes it from § 26-51-437's miscellaneous itemized deductions.

Two other readings would put it outside the floor. One treats a repayment deductible as a loss as excepted by § 26-51-437(b)(5), which claim_of_right_repayment can't separate from one deductible as an unreimbursed employee expense. The other follows DFA's treatment of the volunteer firefighter deduction, enacted in the same 2013 session and claimed on AR3 line 26, under "Other miscellaneous deductions", outside the 2% limitation (2014 booklet, PDF p. 6; 2014 AR3). Act 1452 of 2013, § 2 (PDF pp. 1–2) allows that deduction in addition to other deductions, and the claim of right provision has no such wording. For a filer with $60,000 of wages who repays $10,000, the placement changes the deduction by $1,200 ($8,800 against $10,000), or about $47 of Arkansas tax at 3.9%.

Filers therefore get no benefit unless itemizing beats the standard deduction: with $60,000 of wages and a $3,001 repayment, the $1,801 of miscellaneous deductions falls short of the $2,470 standard deduction.

Design notes

• Arkansas doesn't read the federal method. It doesn't adopt § 1341(a)(4)-(5), so the deduction applies under the federal credit as well as under the federal deduction.
• Arkansas tests $3,000 against the return's total. Section 1341(a)(3), as adopted, applies to the total restored on the return. Arkansas's own parameter holds the amount, since Arkansas adopts the 2013 text.
• Income Arkansas never taxed neither counts nor reaches the threshold. Section 26-51-457(a) adopts § 1341(a)(1) "for purposes of computing income tax liability under this chapter", which we read as requiring that Arkansas included the item. (a)(3) tests "the amount of such deduction", so the threshold applies after the exclusion.
• The deduction joins the return's miscellaneous pool in both of Arkansas's computations. ar_itemized_deductions_indiv already splits itemized deductions by each spouse's share of Arkansas AGI, as AR3 lines 31-35 do. For married filing separately on the same return (status 4), the model tests $3,000 against the couple's combined repayment, matching the one combined AR3 with a floor on combined AGI (line 23).
• Dependents file their own returns, so the deduction leaves out their repayments.

Illinois and Ohio (#10195), Indiana, Massachusetts and West Virginia (#10196), New Jersey (#10198) and Hawaii (#10200) use the same federal input in their own PRs.

Not modeled:

• Repayments of $3,000 or less. Section 26-51-457 reaches only amounts over $3,000, and no Arkansas source says whether filers can deduct smaller ones. DFA's two fiscal notes point in different directions: one describes an amended return and the other a deduction in the year of repayment.
• Repayments deducted in arriving at AGI, such as repaid business income. claim_of_right_repayment excludes them.
• The capital loss and net operating loss rules of § 26-51-457(b)(2)(B), and § 1341(b)(2) (adopted), which excludes repayments relating to inventory or property held for sale. The federal input doesn't separate them.
• The law of each year before 2021. The model's Arkansas itemized and standard deduction parameters start in 2021, and the model extends each back to 2015 (policyengine_us/system.py), so the deduction also reaches tax in 2015–2020. We haven't checked those years against each year's law.

Household examples (2025, single, age 40)

Arkansas figures include the tax-table bands and rounding.

Household	No repayment	Repays $10,000	Arkansas difference
Wages $60,000; earlier-year federal decrease $2,200	Federal $5,071.50; AR $1,795	Federal $2,871.50 (credit); AR $1,550	−$245: $10,000 − 2% × $60,000 = $8,800 itemized in place of the $2,470 standard deduction
Wages $100,000, charity $20,000; federal decrease $400	Federal $11,677.19; AR $2,669	Federal $9,477.19 (deduction); AR $2,361	−$308: $8,000 additional itemized deduction

Tests

gov/states/ar/tax/income/deductions/itemized/claim_of_right/ar_claim_of_right_deduction.yaml, 12 cases, with expected values from the cited sources:

• a $10,000 repayment; a $3,000 repayment (nothing) and a $3,001 repayment (all of it);
• the federal credit method (deduction still $10,000, federal credit $2,200);
• $8,000 of a $10,000 repayment never taxed by Arkansas (nothing, as $2,000 doesn't exceed $3,000), and $2,000 of it ($8,000 deducted, $6,800 after the floor);
• a joint return where $2,000 and $2,500 together exceed $3,000 and a dependent's $5,000 doesn't count;
• another state;
• $10,000 − 2% × $60,000 = $8,800 of miscellaneous deductions, so the return itemizes and net taxable income comes to $51,200;
• $3,001 − $1,200 = $1,801, below the $2,470 standard deduction, which the return keeps;
• $8,000 added to $20,000 of charity ($28,000 itemized);
• married filing separately on the same return (head wages $60,000, spouse wages $20,000, a $10,000 head repayment), which asserts ar_misc_deduction_indiv = 8_400 after the combined-AGI floor and ar_itemized_deductions_indiv = [6_300, 2_100] after the 75% / 25% AGI split.

The PR adds no Python test file: YAML exercises the policy rules, and the shared property file checks the state interactions.

Invariants

We ran these with a script outside the repository, which CI doesn't run, over a grid of 192 returns for each of 2021 and 2025. The grid crosses repayments from $0 to $80,000, wages of $20,000 to $150,000, charity of $0 or $20,000, and $0 or $4,000 never taxed by Arkansas, for single filers and for joint filers with a spouse repaying $1,500. The joint spouse has $10,000 of wages, and only the head has income Arkansas never taxed. All four hold in both years, and the deduction stays positive on 108 returns of each grid.

1. Exclusive. The deduction equals the head's and spouse's restored total when it exceeds $3,000, and zero otherwise.
2. Differential. Arkansas income tax equals that of a separate simulation with no repayment and the deduction entered as an unreimbursed employee business expense, which shares the 2% pool. The reference assumes the floor placement, so it can't test it.
3. Method independence. Arkansas tax stays the same with no federal method fixed and with either method fixed.
4. Never raises; monotone. Arkansas tax never exceeds its no-repayment value and never rises as the repayment grows.

Making the threshold inclusive fails 1 YAML case, gating the deduction on the federal deduction method fails 1, and counting dependents fails 1. Ignoring the Arkansas exclusion fails 2, applying the exclusion only to the threshold test fails 1, and leaving the deduction out of the 2% pool fails 5.

test_claim_of_right_section_1341_properties.py now holds an explicit, sourced map of the states whose own relief applies under the federal credit method, including Arkansas as ar_claim_of_right_deduction. Each listed state whose variable exists must lower the household's tax by more than $1, and every other state stays unchanged, apart from the three that deduct federal tax. #10195, #10196, #10198 and #10200 carry the identical file, so they merge in any order.

Microsimulation impact

We estimate no change in 2025. No record in the default dataset carries claim_of_right_repayment, and the deduction needs a repayment, so no record changes in ar_misc_deduction_joint, ar_misc_deduction_indiv, ar_itemized_deductions_indiv, ar_income_tax, state_income_tax, income_tax or household_net_income.

Axiom

axiom: TheAxiomFoundation/rulespec-us#1797 queued

rulespec-us has no Arkansas statute modules yet, and the corpus still needs Act 1284 of 2013 ingested for § 26-51-457. The 2% floor placement belongs with TheAxiomFoundation/rulespec-us#1411, which covers § 26-51-437.

impact: none in 2025; no record in the default dataset carries claim_of_right_repayment

🤖 Generated with Claude Code

[MaxGhenis]

Hand-off to the US + core hub (Arkansas; state claim of right lane, session local_d0c92ac9).

• Head: 53ccdbaf2f. MERGEABLE. The PR's own changes are unchanged since the approving review; later commits only merge Model the claim of right repayment deduction and credit (26 U.S.C. 1341) and North Carolina's rules that depend on it #10038's heads 2d36a76bca (its merge of main) and 32b0c13a6a (Montana list).
• Review: r2 (Opus 5.5) APPROVE (~/reviews/us-hub/claim-of-right-states/reviews/out-10203-r2.md).
• Passed locally at the current or reviewed head: the PR's YAML files, its property tests where it has them, and the cross-state test test_claim_of_right_section_1341_properties.py (33 tests, including 2026); details in ~/reviews/us-hub/claim-of-right-states/evidence/tests.md.
• Microsimulation: done (2025 default dataset); no record changes, and every new variable is $0 because claim_of_right_repayment is $0 on every record (~/reviews/us-hub/claim-of-right-states/impact/compare.*.2025.json).
• Pending: CI on this head.
• Depends on: Model the claim of right repayment deduction and credit (26 U.S.C. 1341) and North Carolina's rules that depend on it #10038 (federal section 1341), which must merge first; this branch carries its commits. After Model the claim of right repayment deduction and credit (26 U.S.C. 1341) and North Carolina's rules that depend on it #10038 squash-merges, merge upstream/main into this branch before landing.
• Hold for Max's ruling d1477 (inside the 2% floor, as implemented, or outside it by the (b)(5) losses exception or as DFA treats the firefighter deduction; and repayments of $3,000 or less).
• Axiom: the rulespec-us pe-parity draft is held for Max's go (d1459), with the hub's d1142 standing go as the alternative.
• Follow-ups owed: none from this PR. Kentucky is decision d1465; Pennsylvania needs no change.

[MaxGhenis]

Update to the hand-off (2026-10-14): main moved, and this PR conflicts in two places.

1. Inherited from Model the claim of right repayment deduction and credit (26 U.S.C. 1341) and North Carolina's rules that depend on it #10038: policyengine_us/tools/period_branch.py conflicts with main's Measure a branch's behavioural responses against baseline policy, with its own cache #9913 (5c51e0d). Model the claim of right repayment deduction and credit (26 U.S.C. 1341) and North Carolina's rules that depend on it #10038's owner has been told. This PR doesn't touch that file. Once Model the claim of right repayment deduction and credit (26 U.S.C. 1341) and North Carolina's rules that depend on it #10038 merges main, merge its new head into this branch.
2. This PR's own: ar_misc_deduction_joint.py conflicts with main's Fix AR, MT and NM income tax gaps found in TAXSIM comparison sweep #9585 (815ba0b). Resolution: keep both changes:

   expenses = add(tax_unit, period, p.sources)
   # A spouse's loss can make the joint AGI total negative; floor it at
   # zero so a negative AGI cannot enlarge the deduction.
   agi = max_(add(tax_unit, period, ["ar_agi_joint"]), 0)

   Then re-run ar_claim_of_right_deduction.yaml (11 cases; every case has positive AGI, so the floor changes no expected value) and the Arkansas deduction files.

#10196, #10198, #10195 and #10200 have only the inherited conflict.

[MaxGhenis]

Hand-off update (2026-10-14): new head ed83f4ec7d, MERGEABLE. It merges #10038's 6f34ccde23 (its second merge of main). The PR's own changes are unchanged since the approving review, apart from resolving main's #9585 in ar_misc_deduction_joint.py (both changes kept). Local runs at this head: Arkansas deduction and integration files 138, cross-state 33, all passing. Everything else in the hand-off comment above still holds; the hub-file line is re-appended with this head.

[codecov]

Codecov Report

✅ All modified and coverable lines are covered by tests.
✅ Project coverage is 100.00%. Comparing base (aae7f98) to head (7d826f3).
⚠️ Report is 73 commits behind head on main.

Additional details and impacted files

@@            Coverage Diff            @@
##              main    #10203   +/-   ##
=========================================
  Coverage   100.00%   100.00%           
=========================================
  Files            1         4    +3     
  Lines           37        56   +19     
=========================================
+ Hits            37        56   +19     

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unittests	100.00% <100.00%> (ø)

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David, 7d826f3 resolves each item:

• Should 1: the description's Axiom section carries the queued line for rulespec-us#1797.
• Suggestion 1: the household table now shows the amounts with the tax table bands and rounding ($1,795 to $1,550, and $2,669 to $2,361).
• Suggestion 2: "Placement under the 2% floor" gives Act 708 of 1991, Act 1452 of 2013 and DFA's 2018 catalogue.
• Suggestion 3: case 12 of ar_claim_of_right_deduction.yaml asserts the separate-filing path with your amounts ($8,400, then $6,300 and $2,100).
• Suggestion 4 (optional): each state keeps its own input, as North Carolina's merged rule does.
• The California item from #10038: main carries that fix, and this branch includes it.

[MaxGhenis]

Merging at 7d826f359f as an admin squash with --match-head-commit, past the required-review gate.

• Checks: gh pr checks passes all 38 checks at this head, including pull request run 42582302477 (36 of 36 jobs). GitHub reports the PR MERGEABLE, and no change request stands: we dismissed DTrim99's review 5522352707 on 2026-11-09 with a mapping of each point to its fix.
• An independent review approved the code at 0e9fed0f07, after the merges of Model the claim of right repayment deduction and credit (26 U.S.C. 1341) and North Carolina's rules that depend on it #10038 and main.
• An independent delta review approved 7d826f359f. The commits after 0e9fed0f07 change source_conflicts/candidates.yaml, and no formula or expected value moved.
• On a tree that composes all five claim-of-right PRs on main at fc521b4f6c, the source-conflict guard (103 of 103) and the shared section 1341 property file (58 of 58) pass. So do the Arkansas cases (12 of 12) and the description's four invariants, over 192 returns in each of 2021 and 2025.
• The review ran each mutation the description lists, and each household figure in the description matches a simulation to the cent.