DEFINITION of 'Phase Out'
1. The gradual reduction of a tax credit as a taxpayer approaches the income limit to qualify for that credit.
2. The gradual reduction of a taxpayer's eligibility to contribute to a tax-advantaged retirement account as the taxpayer approaches an income limit.
BREAKING DOWN 'Phase Out'
1. For example, the federal Child Tax Credit begins to phase out for married taxpayers filing jointly when their modified adjusted gross income (MAGI) reaches $110,000. If their MAGI falls below this number, they can claim the full credit. If it falls above this number, the credit is gradually reduced until the income limit is reached. Above that limit, the taxpayer cannot claim the Child Tax Credit.
2. In 2009, single taxpayers whose MAGI was more than $55,000 could not fully deduct contributions to a traditional IRA from their taxes. This tax credit phased out for MAGI between $55,000 and $65,000, meaning that contributions were only partly deductible. Single taxpayers with MAGI above $65,000 could not deduct their traditional IRA contributions from their taxes at all.