The OBBBA Phase-Out: How MAGI Reduces All Four Deductions

The One Big Beautiful Bill Act created four income-sensitive tax benefits, and each one has its own phase-out (or phase-down) mechanism. The tips and overtime deductions share the same thresholds and rate. The senior bonus deduction uses lower thresholds and a different rate. The SALT cap has the highest threshold and the steepest reduction rate. Understanding how these four mechanisms differ is essential for taxpayers who qualify for multiple benefits.

Four deductions, four different phase-outs

Each OBBBA provision reduces as income rises, but the speed, starting point, and floor vary. Here is a summary of how each works:

• Tips deduction: Reduced by 10% of MAGI above the threshold. Maximum deduction of $25,000 can reach $0.
• Overtime deduction: Same 10% rate and same thresholds as tips. Maximum deduction of $12,500 (single) or $25,000 (MFJ).
• Senior bonus deduction: Reduced by 6% of MAGI above a lower threshold. The $6,000 amount is eliminated faster because of the higher rate and lower starting point.
• SALT cap: The $40,400 cap is reduced by 30% of MAGI above $505,000, but never falls below $10,000.

Side-by-side comparison table

Note that the SALT cap threshold of $505,000 applies to single, head of household, and MFJ filers alike. Only MFS filers have a different SALT threshold.

Tips and overtime: shared thresholds, same rate

The tips deduction (IRC Section 224) and overtime deduction (IRC Section 225) use identical phase-out mechanics:

• Threshold: $150,000 (single/HoH) or $300,000 (MFJ)
• Reduction rate: 10% of MAGI above the threshold
• Both reach $0 when the reduction equals the applicable cap

Because the tips cap ($25,000) is larger than the overtime cap ($12,500for single filers), the tips deduction survives longer at higher income levels. The overtime deduction is fully eliminated at $275,000 MAGI for single filers, while the tips deduction lasts until $400,000.

If you claim both deductions, each is reduced independently. The phase-out reduction is calculated separately for each deduction using the same excess MAGI amount.

Senior bonus: lower thresholds, different rate

The senior bonus deduction phases out faster and starts at a lower income level:

• Threshold: $75,000 (single/HoH) or $150,000 (MFJ)
• Reduction rate: 6% of MAGI above the threshold
• Fully eliminated at $175,000 (single) or $250,000 (MFJ)

The 6% rate is lower than the tips/overtime rate of 10%, but the starting threshold is also much lower ($75,000 vs. $150,000for single filers). The combination means the $6,000 deduction disappears at a much lower income than the tips or overtime deductions.

A single filer with exactly $175,000 in MAGI loses the entire senior bonus but may still have a partial tips deduction, since that phase-out does not even begin until $150,000.

SALT cap: highest threshold, steepest rate

The SALT cap phase-down operates differently from the other three in two important ways:

1. It has a floor: The SALT cap never drops below $10,000, even at very high income levels. The three above-the-line deductions can reach $0.
2. It starts much higher: The phase-down does not begin until MAGI exceeds $505,000, well above the tips/overtime threshold of $150,000.

The reduction rate is 30% of MAGI above $505,000, which is the steepest of the four. The SALT cap drops from $40,400 to the $10,000 floor at approximately $606,333 MAGI for single and MFJ filers.

For a detailed look at SALT scenarios, see the SALT cap phase-down worked scenarios.

Worked example: single filer at $200K MAGI

Consider a single filer, age 67, who earned $25,000 in qualified tips, $12,500in overtime premium, and has $200,000 in MAGI. This taxpayer is subject to phase-outs on all three above-the-line deductions but is below the SALT phase-down threshold.

This taxpayer keeps most of the tips deduction but loses the entire senior bonus (the6% rate at the lower $75,000 threshold eliminates the $6,000 amount well before $200,000). The SALT cap is unaffected because the phase-down starts at $505,000.

Planning considerations

When multiple phase-outs apply, MAGI reduction strategies have a multiplied effect. Every dollar of MAGI reduction preserves benefits across all applicable deductions simultaneously:

• Quantify the combined marginal rate: If you are in the phase-out range for both tips and overtime, each additional $1,000 of MAGI costs you $100 in tips deduction reduction plus $100 in overtime deduction reduction. That is $200 of lost deductions per $1,000 of income.
• Prioritize the senior bonus: Because the senior phase-out starts at $75,000 (single), seniors with moderate income should focus on keeping MAGI below this lower threshold first, as the senior deduction disappears earliest.
• Pre-tax contributions are doubly valuable: Traditional 401(k), HSA, and traditional IRA contributions reduce MAGI. For a 67-year-old single filer with tips and overtime near the phase-out zones, these contributions can preserve multiple deductions at once.
• Use the OBBBA phase-out calculator: The OBBBA phase-out calculator models all four phase-outs together and shows the net effect on your total deductions. You can also explore the MAGI phase-out glossary entry for background on how phase-outs work across the tax code.