What Is a Phase-Out Range?

How a Phase-Out Range Works

Phase-out ranges apply to tax credits or deductions certain taxpayers may qualify for—if their income meets eligibility requirements. Once your income enters a phase-out range, you may be eligible for a lesser tax break or none at all.

The expanded 2021 child tax credits are a good example of a phase-out range in action. You may have qualified for these child tax credits if you have children and your modified adjusted gross income (MAGI) met IRS guidelines.

• Eligibility: Families with MAGIs less than $75,000 for single taxpayers, $112,500 for heads of household and $150,000 for married couples filing jointly were eligible for a full 2021 credit of $3,600 for each child under 6 and $3,000 for children under 18. (You may have received half of your available credit as monthly advance payments from July to December 2021.)
• Phase-out range: If your 2021 income exceeded the limits listed above, your child tax credit would be reduced by $50 for every $1,000 of income over the limit. A single mom who earned $80,000, for example, would receive a tax credit of $2,750 for her qualifying middle schooler: $3,000 - ($50 x 5) = $2,750.
• Alternative phase-out range: If your income exceeded guidelines for the 2021 expanded child tax credit, you may instead claim a $2,000 tax credit for any qualifying child under 17. The phase-out range for this tax credit begins at $200,000 in income ($400,000 for married couples filing jointly).

Similar types of phase-out ranges exist for a variety of tax deductions and credits. A few examples include:

• IRA contributions
• The American Opportunity Tax Credit (AOTC) for college expenses
• The Retirement Savings Contributions Credit (also known as the Saver's Credit)
• Last year's stimulus payment under the American Rescue Plan Act

It's important to familiarize yourself with income limits and phase-out ranges on any deduction or credit you're claiming, especially if your income is at or near the phase-out range. An increase in your income could reduce or eliminate your eligibility for the tax break and cause your tax bill to rise.

IRA Phase-Out Ranges

Contributions to traditional IRA accounts can be tax-deductible, depending on your filing status and income, and whether you or your spouse are covered by a retirement plan at work. In response to a higher-than-usual cost of living increase in 2021, the IRS has updated its income guidelines for 2022, including new phase-out ranges shown below.

Source: IRS

For Roth IRAs, phase-out ranges apply to your eligibility to contribute (you won't receive a tax deduction since Roth IRAs are funded after-tax). The IRS updated income phase-out ranges for Roth IRA contributions for 2022, giving more earners the ability to contribute.

Source: IRS

Tax Credit Phase-Out Ranges

Phase-out ranges for tax credits are common, since many are targeted at low- or middle-income taxpayers. Along with requirements for the 2021 child tax credit listed above, the AOTC and Saver's Credit both have phase-out ranges to keep in mind.

American Opportunity Tax Credit

The AOTC provides up to $2,500 in tax credits per eligible student for qualified college education expenses. Taxpayers can receive 100% of the first $2,000 of qualified expenses and 25% of the next $2,000 for costs associated with the first four years of higher education. If you have more than one qualifying student, you can claim AOTC credits for each one. Credits are partially refundable, so if your credit wipes out your total tax bill, you can have up to 40% of any remaining credit refunded to you.

To qualify for the full credit, taxpayers must have a MAGI of $80,000 or less ($160,000 if married filing jointly). The credit phases out if your income is between $80,000 and $90,000 ($160,000 to $180,000 if married) and disappears entirely for incomes over these amounts.

Saver's Credit

In addition to the tax advantages built into employer-sponsored retirement plans, traditional IRAs and Roth IRAs, the Saver's Credit offers tax credits of up to $1,000 ($2,000 if married filing jointly) for low- to moderate-income taxpayers. The credits decrease as your income rises. Income eligibility levels are going up in 2022, as shown in the following tables.

*Single, married filing separately or qualifying widow(er); Source: IRS

*Single, married filing separately, or qualifying widow(er); Source: IRS

The Bottom Line

Work with your tax pro or visit the IRS website when you're ready to do the hard math on tax credits and deductions—including the specifics on how phase-out ranges may apply to you.