The Hidden Tax: Phase-outs

We are all pretty familiar with the income brackets in the Federal Tax System, the more you earn, the higher percentage of your taxable income you pay on the amount over that threshold. What you may not be aware of is Congress' favorite trick: the phase-out. Phase outs are Governments way of providing a benefit in concept, but then taking it away for most people by capping the amount of income you can earn and still get the benefit. For example, creating a benefit for families with kids in college, but then only making it applicable to a small number of families. This chart shows just a few of those phase-outs.

Tax Provision	Phase-Out Range (Married Filing Jointly)	Details
Earned Income Tax Credit (EITC)	$29,640 – $66,819	The maximum credit is $7,830 for taxpayers with three or more qualifying children. Phase-out thresholds vary based on the number of qualifying children.
Social Security Phase Out (tax free)	$32,000 - $44,000	$32,000 to $44,000: Up to 50% of benefits are taxable. Over $44,000: Up to 85% of benefits are taxable.
Saver's Credit	$43,500 – $73,000	Credit rates of 10%, 20%, or 50% apply to contributions up to $2,000 ($4,000 if married filing jointly), with the rate decreasing as income increases within this range.
Traditional IRA Contributions	$116,000 – $136,000	For couples where the contributing spouse is covered by a workplace retirement plan, the deduction phases out within this range.
American Opportunity Tax Credit (AOTC)	$160,000 – $180,000	Provides up to $2,500 per eligible student for qualified education expenses, with the credit phasing out within this income range.
Lifetime Learning Credit	$160,000 – $180,000	Offers up to $2,000 per tax return for qualified education expenses, with the credit phasing out proportionally within this range..
Student Loan Interest Deduction	$150,000 – $180,000	Allows a deduction of up to $2,500 for interest paid on qualified student loans, with the deduction reduced proportionally within this range.
Roth IRA Contributions	$218,000 – $228,000	Eligibility to contribute phases out within this range, with contribution limits decreasing as income increases.
Child Tax Credit	Begins at $400,000	Provides up to $2,000 per qualifying child under 17, with the credit reduced by $50 for each $1,000 of income above the threshold.
Qualified Business Income (QBI) Deduction	$364,200 – $464,200	For specified service trades or businesses (SSTBs), the 20% deduction phases out within this range.
Alternative Minimum Tax (AMT) Exemption	Begins at $1,218,700	The AMT exemption amount of $133,300 begins to phase out at this income level.
Adoption Credit	$239,230 – $279,230	Offers a credit of up to $16,810 per child for qualified adoption expenses, with the credit reduced for incomes within this range.

These hidden taxes can often be much more expensive than you realize. Next tax season, take some time to calculate what your ta due would be if the phase-outs were not in place. Keep in mind, this is a limited list.