What is a 'Phase Out'

A phase-out in the financial world refers to the gradual reduction of a tax credit that a taxpayer is eligible for as their income approaches the limit to qualify for that credit. A specified income range determines who qualifies for a specific tax credit. The lower income is eligible for the maximum amount, and the higher income is eligible for the minimal amount. Taxpayer's income that exceeds the upper limit is ineligible for the credit.


A phase-out applies to several credits recognized by the Internal Revenue Service (IRS). It refers to tax credits designed to benefit low-to-middle income households. Since it targets taxpayers in a specific income bracket, it "phases out" or shrinks beyond a specified income threshold, before disappearing altogether.  

Which Credits Phase Out?

For the tax year 2018, the federal Child Tax Credit begins to phase out for married taxpayers filing jointly when their modified adjusted gross income (MAGI) reaches $400,000 ( $110,000 for the tax year 2017). If their MAGI falls below this number, they may claim the full $400,000. If it falls above this limit, the credit gradually reduces until the reaching the income limit. For the tax year 2018, the income limit is $440,000. If the couple filing jointly makes a MAGI beyond that limit, they can't claim the Child Tax Credit. 

The phase-out also applies to the Saver's Credit, formerly known as the Retirement Savings Contributions Credit. This credit was designed to help low-to-middle income Americans saving for retirement through qualified plans, like a 401(k) and Individual Retirement Accounts (IRA). 

The most a taxpayer may get in the form of a nonrefundable Saver's Credit is 50% of the first $2,000 worth of contributions for the year, or $1,000. To be eligible for the maximum credit, Adjusted Gross Income (AGI), as a single tax filer, needs to be $19,000 or less for the tax year 2018 ($18,500 or less for the tax year 2017). 

After these thresholds, the credit begins to "phase out." Taxpayers earning more may claim a smaller percentage of their contributions to the funds. For the tax year 2018, a single filer with an AGI above $31,500 can't claim the credit ($31,000 for the tax year 2017). 

The Student Loan Interest Credit also undergoes a phase-out. This credit aims to reduce the tax bills for low-to-middle income taxpayers paying off eligible student loans. Qualifying taxpayers may deduct from their tax bill the amount they paid in student loan interest. The maximum tax credit they may receive is $2,500. 

To deduct all the student loan interest below the maximum, the MAGI must be $65,000 or less if filing single (the same as for tax year 2017). The student loan credit begins to phase out beyond this point, allowing less of the student loan interest paid deduction. The maximum MAGI for deducting any student loan interest is $80,000 if filing single (the same as for tax year 2017).

  1. Foreign Tax Credit

    The foreign tax credit is a non-refundable tax credit for income ...
  2. Additional Child Tax Credit

    The Additional Child Tax Credit is the refundable portion of ...
  3. Child Tax Credit

    The child tax credit is a credit given to taxpayers for each ...
  4. Student Loan Interest Deduction

    A student loan interest deduction is a tax deduction for interest ...
  5. Tax Credit

    An amount of money that taxpayers are permitted to subtract dollar ...
  6. Hope Credit

    Hope Credit, or the Hope Scholarship Tax Credit, is a nonrefundable ...
Related Articles
  1. Taxes

    Give Your Taxes Some Credit

    A few tax credits can greatly increase the amount of money you get back on your return.
  2. Personal Finance

    Are You Taking Advantage of the College Tuition Tax Credit?

    Parents with a child enrolled in college should check out the college tuition tax credit, a boon that can help defray the cost of a university education.
  3. Taxes

    Money-Saving Tax Breaks For College Grads

    Even if you graduate from college with a heavy debt load – especially if you do – use these tax benefits to ease your transition into the 'real world.'
  4. Taxes

    How the GOP Tax Bill Affects You

    Here's how the new tax bill changes the taxes you file in 2018.
  5. Taxes

    9 Ways the New Tax Law Affects Millennials

    The new tax bill, the Tax Cuts and Jobs Act, includes some important changes for Millennials.
  6. Retirement

    IRA Contribution Limits in 2018

    Find out about the 2018 (and 2017) limits for contributions and income thresholds for individual retirement accounts, including traditional IRAs and Roth IRAs.
  7. Taxes

    This Explains $0 Federal Income Tax for Millions

    Understand how the earned income tax credit works and whether it applies to you.
  8. Taxes

    How To Get The Most Money Back On Your Tax Return

    These tips will help you get a larger refund this year, while teaching you how to pay less taxes going forward.
  9. Personal Finance

    Can I Pay Off Student Loans with My 529 Plan?

    Not yet. A bill that would let people use 529 plans to pay off student loans is working its way through Congress.
  10. Financial Advisor

    The Impact of 2015 Tax Extender Bill on Savers

    The passage of the PATH legislation at the end of 2015 gives advisors more clarity on how to help clients with tax and financial planning.
Trading Center