Phase-Out
Tax Glossary Term
Definition
A phase-out is an income range over which a tax deduction, credit, or benefit gradually reduces to zero. Instead of an abrupt cutoff where you either get the full benefit or nothing, a phase-out smoothly tapers the benefit as your income rises above a threshold. The tax code uses phase-outs extensively. The OBBBA tips and overtime deductions phase out at 10.0% of MAGI above $150,000 for single filers or $300,000 for married filing jointly, so for every $1 of MAGI above the threshold, you lose 10.0% of the deduction. At $10,000 over the threshold, a $25,000 deduction shrinks by $1,000 to $24,000. The senior bonus deduction has a steeper phase-out at 6.0% of MAGI above $75,000 single or $150,000 MFJ, and the $6,000 deduction is fully phased out at $175,000 single. The Child Tax Credit phases out at 5% of AGI above $200,000 ($400,000 MFJ). Roth IRA contributions phase out over a $15,000 range. Phase-outs create implicit marginal tax rates above the statutory bracket rate — if earning an extra dollar costs you 10.0% of deduction in the 22.0% bracket, your effective marginal rate on that dollar is actually 24.2%. Understanding phase-outs is essential for year-end tax planning because small income adjustments near a threshold can save or cost you hundreds of dollars in benefits.
Example
OBBBA tips deduction phase-out (single):
Qualified tips: $25,000
MAGI: $170,000 (excess over $150,000 = $20,000)
Phase-out: $20,000 x 10.0% = $2,000 reduction
Allowed deduction: $25,000 - $2,000 = $23,000