US Tax Code Phaseouts: Key Credits, Deductions, and Income Limits

Phaseouts in the U.S. tax code gradually reduce the value of a credit or deduction as your modified adjusted gross income rises past a set threshold, so a benefit shrinks proportionally rather than disappearing at a single dollar of extra income. Nearly every major tax benefit uses one, and the thresholds, reduction rates, and formulas vary sharply from one provision to the next. Many of the 2026 figures shifted after passage of the One Big Beautiful Bill Act.

How a Phaseout Actually Works

Almost every phaseout turns on a single number: modified adjusted gross income. Adjusted gross income is your total income minus a specific list of above-the-line deductions like retirement contributions, student loan interest, and self-employment taxes.¹ To get from AGI to MAGI, you add back certain items that were previously subtracted, such as foreign earned income or tax-exempt interest. The specific add-backs vary depending on which credit or deduction you’re calculating, so MAGI for Roth IRA purposes can differ from MAGI for education credit purposes.

Once you know your MAGI, the phaseout works like a dial. Below the starting threshold you get the full benefit. Between the starting and ending thresholds the benefit shrinks at a formula-driven rate. Above the ending threshold it hits zero. Some phaseouts use a simple dollar-per-dollar formula (the Child Tax Credit drops $50 for every $1,000 of excess income); others use a ratio that reduces the benefit proportionally across a fixed income window.

Earned Income Tax Credit

The EITC is one of the largest phaseouts in the code, and unusual because the benefit both phases in and phases out. At low earnings the credit grows with each dollar earned, up to a ceiling. It then sits flat across a plateau range before shrinking at a fixed rate for each additional dollar above the phaseout threshold.² The rates and income levels vary with how many qualifying children you have.

For the 2026 tax year, the maximum credits are:³

Three or more children: up to $8,231, phasing out completely at $62,974 single or $70,224 joint
Two children: up to $7,316, phasing out at $58,629 single or $65,899 joint
One child: up to $4,427, phasing out at $51,593 single or $58,863 joint
No children: up to $664, phasing out at $19,540 single or $26,820 joint

The rate is steeper than many people expect. A family with two children loses 21.06 cents of credit for every additional dollar earned above the phaseout threshold. That implicit marginal rate stacks on top of regular income and payroll taxes, which is why families in the phaseout range sometimes face effective marginal rates above 40%.

Child Tax Credit

The Child Tax Credit was made permanent and increased to $2,200 per qualifying child under age 17 starting in 2026, with future inflation indexing built in. The phaseout thresholds stayed at $200,000 for single filers and $400,000 for married couples filing jointly. For every $1,000 of income above those thresholds (or any fraction of $1,000), the credit drops by $50.⁴

In practice: a married couple filing jointly with two children and MAGI of $430,000 exceeds the $400,000 threshold by $30,000. Divide $30,000 by $1,000 to get 30 increments, each reducing the credit by $50, for a $1,500 reduction. Their combined credit of $4,400 (two children at $2,200) drops to $2,900. A couple earning $488,000 or more would see the entire credit wiped out.

The refundable portion is capped at $1,700 per child for 2026 and requires at least $2,500 in earned income before it kicks in. Low-income families whose tax liability is already zero benefit only from that refundable piece, which phases in at 15% of earnings above the $2,500 floor rather than phasing out.

Child and Dependent Care Credit

This credit offsets childcare costs you pay so you can work, and its phaseout adjusts the percentage of expenses that qualifies rather than a flat dollar amount. The maximum percentage starts at 50% for the lowest-income households and drops by one percentage point for every $2,000 of AGI above $15,000, bottoming out at 35%. Above $75,000 for single filers ($150,000 for joint filers), the percentage continues dropping by one point per $2,000 ($4,000 for joint filers) until it reaches a floor of 20%.⁵

Qualifying expenses max out at $3,000 for one dependent or $6,000 for two or more. A family earning $25,000 with $6,000 in childcare costs applies a 45% rate (50% minus 5 points for income $10,000 above $15,000), yielding a $2,700 credit. A family earning $200,000 with the same costs applies the 20% floor, yielding $1,200. The credit is nonrefundable.

Education Credits and the Student Loan Interest Deduction

The American Opportunity Tax Credit and the Lifetime Learning Credit share identical phaseout windows for 2026. The full credit is available when MAGI is at or below $80,000 ($160,000 joint). Above that, the credit shrinks proportionally across a $10,000 window ($20,000 joint) and disappears at $90,000 ($180,000 joint).³

The AOTC is worth up to $2,500 per eligible student for the first four years of postsecondary education, and 40% is refundable. The Lifetime Learning Credit maxes out at $2,000 per return (not per student) and covers any level of higher education, but it’s nonrefundable. A single filer with $85,000 MAGI sits halfway through the phaseout, so either credit is cut in half.⁶

The student loan interest deduction lets you write off up to $2,500 of interest paid on qualified education loans, above the line.⁷ The statute sets base phaseout thresholds of $50,000 single and $100,000 joint, with the deduction eliminated across the next $15,000 ($30,000 joint), but those figures are indexed for inflation. In recent years the phaseout has started near $80,000 for single filers and $165,000 for joint filers. Confirm the current year’s Revenue Procedure before filing.

Retirement Account Phaseouts

Roth IRA Contributions

Direct Roth IRA contributions phase out based on MAGI. For 2026, single filers see the range at $153,000 to $168,000; married couples filing jointly face $242,000 to $252,000.⁸ The statute sets lower base thresholds that are adjusted for inflation annually.⁹

Within the window your maximum contribution shrinks proportionally. A single filer earning $160,500 sits halfway through the $15,000 window, so their Roth contribution limit for 2026 is roughly half of the $7,500 cap. Above $168,000, direct Roth contributions are off the table.

Traditional IRA Deduction

If you or your spouse participates in an employer-sponsored retirement plan, the tax deduction for Traditional IRA contributions phases out as income rises. The 2026 ranges depend on your situation:⁸

Single filer covered by a workplace plan: full deduction up to $81,000 MAGI, partial from $81,000 to $91,000, none at or above $91,000
Married filing jointly, both covered: full up to $129,000, partial from $129,000 to $149,000, none at or above $149,000
Not covered but spouse is (filing jointly): full up to $242,000, partial from $242,000 to $252,000, none at or above $252,000

The third scenario catches people off guard. You might not participate in any workplace plan yourself, but if your spouse does, your IRA deduction is still subject to a phaseout, albeit at a much higher threshold. If neither spouse has a workplace plan, the deduction has no income-based limit.¹⁰

Saver’s Credit

The Retirement Savings Contributions Credit (the Saver’s Credit) rewards lower-income taxpayers for contributing to IRAs or employer plans. Instead of a gradual reduction, it uses tiers where the credit rate drops sharply at specific AGI thresholds. For 2026:

50% credit rate: AGI up to $24,250 single, $48,500 joint
20% credit rate: $24,251–$26,250 single, $48,501–$52,500 joint
10% credit rate: $26,251–$40,250 single, $52,501–$80,500 joint
0% credit: above $40,250 single, $80,500 joint

The maximum contribution eligible for the credit is $2,000, so the ceiling is $1,000. A single filer earning $25,000 who saves $2,000 gets a $400 credit at the 20% rate, while someone earning $24,000 gets $1,000 for the same contribution. A $1,000 raise costs that taxpayer $600 in lost credit. These cliff-like transitions make the Saver’s Credit one of the sharpest phaseouts in the code.

Business Income, Investment, and AMT Phaseouts

Qualified Business Income Deduction

Owners of pass-through businesses like sole proprietorships, partnerships, and S corporations can deduct up to 20% of their qualified business income under Section 199A. The One Big Beautiful Bill made the deduction permanent and expanded the phaseout thresholds.¹¹ For 2026, the phaseout begins at approximately $201,750 single and $403,500 joint, and the deduction is fully eliminated at roughly $276,750 and $553,500 respectively.

The phaseout bites hardest for service-based businesses like law, medicine, consulting, and financial services. Below the starting threshold, those businesses qualify for the full 20% deduction. Once income enters the phaseout range, the deductible amount shrinks based on the ratio of excess income to the $75,000 window ($150,000 joint). Above the endpoint, service businesses lose the deduction entirely. Non-service businesses face a different limitation tied to wages paid and property held.

Net Investment Income Tax

The Net Investment Income Tax works in reverse. Instead of reducing a benefit, it phases in an additional 3.8% tax on investment income (interest, dividends, capital gains, rental income) once MAGI exceeds $200,000 single or $250,000 joint.¹² These thresholds aren’t adjusted for inflation, so more taxpayers cross them each year. The tax applies to the lesser of your net investment income or the amount by which MAGI exceeds the threshold.¹³

AMT Exemption

The AMT exemption shields a portion of income from the alternative minimum tax. For 2026, unmarried filers get a $90,100 exemption that starts phasing out at $500,000 of AMT income. Married couples filing jointly get a $140,200 exemption that phases out starting at $1,000,000.³ The exemption decreases by 25 cents for every dollar above the threshold, disappearing entirely at $860,400 single and $1,560,800 joint.

New Itemized Deduction Limit for High Earners

The One Big Beautiful Bill permanently repealed the old Pease limitation and replaced it with a new limit that only hits taxpayers in the 37% bracket. For 2026, that bracket starts at $640,600 single and $768,700 joint.¹⁴ State and local tax deductions are reduced by 5/37ths of the lesser of those deductions or the income falling in the 37% bracket; other itemized deductions use a parallel 2/37ths calculation. The net effect is that filers in the top bracket get roughly the tax benefit of someone in the 35% bracket. If your taxable income stays below the 37% threshold, this limit doesn’t touch you.

Premium Tax Credit: A Cliff, Not a Phaseout

The Premium Tax Credit helps households buying health insurance on the Marketplace afford their premiums. From 2021 through 2025, expanded rules removed the income cap entirely, so households above 400% of the federal poverty level could still qualify if their benchmark plan cost more than 8.5% of income. That expansion expired at the end of 2025.¹⁵

For 2026, the original ACA rules are back. Households earning above 400% of the federal poverty level lose access to premium tax credits entirely. For a family of four, 400% of the federal poverty level is roughly $130,000. A household earning $129,000 might receive thousands of dollars in subsidies while one earning $131,000 gets nothing. This is a full cutoff rather than a gradual phaseout, and it’s likely to catch people who got accustomed to the more generous rules of recent years.

1
Office of the Law Revision Counsel. 26 U.S. Code 62 – Adjusted Gross Income Defined
2
Office of the Law Revision Counsel. 26 USC 32 – Earned Income
3
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
4
Office of the Law Revision Counsel. 26 USC 24 – Child Tax Credit
5
Office of the Law Revision Counsel. 26 U.S. Code 21 – Expenses for Household and Dependent Care Services Necessary for Gainful Employment
6
Office of the Law Revision Counsel. 26 USC 25A – American Opportunity and Lifetime Learning Credits
7
Office of the Law Revision Counsel. 26 U.S. Code 221 – Interest on Education Loans
8
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
9
Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
10
Office of the Law Revision Counsel. 26 USC 219 – Retirement Savings
11
Office of the Law Revision Counsel. 26 U.S. Code 199A – Qualified Business Income
12
Office of the Law Revision Counsel. 26 U.S. Code 1411 – Imposition of Tax
13
Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
14
Congressional Research Service. The Limitation on Itemized Deductions in H.R. 1, the One Big Beautiful Bill Act
15
Congressional Research Service. Enhanced Premium Tax Credit and 2026 Exchange Premiums