diff --git a/changelog_entry.yaml b/changelog_entry.yaml
index e69de29bb2d..f79f9097492 100644
--- a/changelog_entry.yaml
+++ b/changelog_entry.yaml
@@ -0,0 +1,4 @@
+- bump: minor
+  changes:
+    fixed:
+      - Arizona Family Tax Credit now correctly uses Arizona AGI plus exemptions for income eligibility determination per ARS 43-1073.
diff --git a/policyengine_us/tests/policy/baseline/gov/states/az/tax/income/credits/az_family_tax_credit_eligible.yaml b/policyengine_us/tests/policy/baseline/gov/states/az/tax/income/credits/az_family_tax_credit_eligible.yaml
index c2cd8bc95b7..c1261a443de 100644
--- a/policyengine_us/tests/policy/baseline/gov/states/az/tax/income/credits/az_family_tax_credit_eligible.yaml
+++ b/policyengine_us/tests/policy/baseline/gov/states/az/tax/income/credits/az_family_tax_credit_eligible.yaml
@@ -1,59 +1,87 @@
-- name: Family tax credits for joint filers with 5 dependents ($30000 income)
+- name: Family tax credits for joint filers with 5 dependents ($30000 income, no exemptions)
   period: 2023
   input:
     state_code: AZ
     az_filing_status: JOINT
     az_agi: 30_000
+    az_exemptions: 0
     tax_unit_dependents: 5
   output:
     az_family_tax_credit_eligible: true
 
-- name: Family tax credits for single filers without dependents ($9000 income)
+- name: Family tax credits for single filers without dependents ($9000 income, no exemptions)
   period: 2023
   input:
     state_code: AZ
     az_filing_status: SINGLE
     az_agi: 9_000
+    az_exemptions: 0
     tax_unit_dependents: 0
   output:
     az_family_tax_credit_eligible: true
 
-- name: Family tax credits for separate couple with 2 dependents ($11000 income)
+- name: Family tax credits for separate couple with 2 dependents ($11000 income, no exemptions)
   period: 2023
   input:
     state_code: AZ
     az_filing_status: SEPARATE
     az_agi: 11_000
+    az_exemptions: 0
     tax_unit_dependents: 2
   output:
     az_family_tax_credit_eligible: false
 
-- name: Family tax credits for head of household with 5 dependents ($26000 income)
+- name: Family tax credits for head of household with 5 dependents ($26000 income, no exemptions)
   period: 2023
   input:
     state_code: AZ
     az_filing_status: HEAD_OF_HOUSEHOLD
     az_agi: 26_000
+    az_exemptions: 0
     tax_unit_dependents: 5
   output:
     az_family_tax_credit_eligible: true
 
-- name: Family tax credits for surviving spouse with 3 dependents ($23000 income)
+- name: Family tax credits for surviving spouse with 3 dependents ($23000 income, no exemptions)
   period: 2023
   input:
     state_code: AZ
     filing_status: SURVIVING_SPOUSE
     az_agi: 23_000
+    az_exemptions: 0
     tax_unit_dependents: 3
   output:
     az_family_tax_credit_eligible: true
 
-- name: Family tax credits for head of household with 5 dependents (no income)
+- name: Family tax credits for head of household with 5 dependents (no income, no exemptions)
   period: 2023
   input:
     state_code: AZ
     az_filing_status: HEAD_OF_HOUSEHOLD
     az_agi: 0
+    az_exemptions: 0
     tax_unit_dependents: 5
   output:
     az_family_tax_credit_eligible: true
+
+- name: Family tax credits with exemptions - eligible case (AGI $19900 + exemptions $2100 = $22000, limit $23600)
+  period: 2023
+  input:
+    state_code: AZ
+    az_filing_status: JOINT
+    az_agi: 19_900
+    az_exemptions: 2_100
+    tax_unit_dependents: 2
+  output:
+    az_family_tax_credit_eligible: true
+
+- name: Family tax credits with exemptions - ineligible case (AGI $23000 + exemptions $2100 = $25100, limit $23600)
+  period: 2023
+  input:
+    state_code: AZ
+    az_filing_status: JOINT
+    az_agi: 23_000
+    az_exemptions: 2_100
+    tax_unit_dependents: 2
+  output:
+    az_family_tax_credit_eligible: false
diff --git a/policyengine_us/variables/gov/states/az/tax/income/credits/family_tax_credit/az_family_tax_credit_eligible.py b/policyengine_us/variables/gov/states/az/tax/income/credits/family_tax_credit/az_family_tax_credit_eligible.py
index acdb8820cc1..1526c765a2f 100644
--- a/policyengine_us/variables/gov/states/az/tax/income/credits/family_tax_credit/az_family_tax_credit_eligible.py
+++ b/policyengine_us/variables/gov/states/az/tax/income/credits/family_tax_credit/az_family_tax_credit_eligible.py
@@ -6,13 +6,18 @@ class az_family_tax_credit_eligible(Variable):
     entity = TaxUnit
     label = "Eligible for the Arizona Family Tax Credit"
     definition_period = YEAR
+    reference = "https://www.azleg.gov/ars/43/01073.htm"
     defined_for = StateCode.AZ
 
     def formula(tax_unit, period, parameters):
         p = parameters(
             period
         ).gov.states.az.tax.income.credits.family_tax_credits
-        income = tax_unit("az_agi", period)
+        # Per ARS 43-1073: "Arizona adjusted gross income, plus the amount
+        # subtracted for exemptions under section 43-1023"
+        az_agi = tax_unit("az_agi", period)
+        exemptions = tax_unit("az_exemptions", period)
+        income = az_agi + exemptions
         filing_status = tax_unit("az_filing_status", period)
         status = filing_status.possible_values
         dependents = tax_unit("tax_unit_dependents", period)