MAGI Phase-out
Definition
The income range over which a tax deduction, credit, or account eligibility is gradually reduced to zero.
Key Takeaways
- Gradually reduces tax deductions, credits, or account eligibility as MAGI rises.
- Ensures tax benefits target low- and middle-income taxpayers.
- Features a starting threshold (where reduction begins) and an ending limit (where benefit is zero).
- Each tax provision has distinct phase-out thresholds depending on filing status.
Detailed Explanation
A MAGI Phase-out represents the gradual reduction and eventual elimination of a tax benefit as a taxpayer's Modified Adjusted Gross Income (MAGI) increases. The IRS uses phase-outs to ensure that tax credits, deductions (such as those under the OBBBA), and retirement account contributions (like Roth IRAs) benefit low- and middle-income earners rather than high-income taxpayers.
During a phase-out, the maximum allowable tax benefit is reduced proportionally. For example, under OBBBA, the $10,000 auto loan interest deduction phases out between $100,000 and $150,000 MAGI for single filers, meaning every dollar of MAGI above $100,000 reduces the deductible cap until it reaches zero at $150,000.