Income Phaseouts: When Tax Rates Rise and Tax Benefits Phase Out

When your income increases, it’s a great thing for your bank account. But how does more income affect your taxes? Can you claim as many tax breaks as you once did?

Tax Planning Starts With Knowing Your Tax Bracket

Your income and filing status help determine which tax benefits you qualify for and what tax bracket you’re in. As a taxpayer, you can influence an important component of your income to achieve the best overall financial result — l. namely, you can low your adjusted gross income (AGI) for a tax advantage. Lowering your AGI means lowering your taxable income, and may even move you into a lower tax bracket. It can also mean that you qualify for tax benefits, as explained in the next section.

[2016 Tax Rates]

IRS Tax Rate 2016

[2017 Tax Rates]

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Tax Benefit Phase Outs

Why is it important to understand your income level and filing status, you wonder? A key reason is that most tax benefits actually phase out as your income increases. At a certain point, the tax benefit may be eliminated altogether or it may be available only at a small amount. If taxpayers are close to a phaseout range of a tax benefit they’re otherwise eligible for, they could try to lower their adjusted gross income (AGI) so they can claim the tax benefit.

AGI Phaseout Ranges for Various Tax Benefits (2017)

Child Tax Credit AGI      

Single / HH       $75,000-$95,000

MFJ                  $110,000-$130,000

MFS                  $55,00-$75,000

American Opportunity Credit    

Single / HH       $80,000 – $90,000

MFJ                  $160,000 – $180,000

MFS                  not allowed

Lifetime Learning Credit     

Single / HH       $56,000 – $66,000

MFJ                  $112,000 – $132,000

MFS                  not allowed

Tuition and Fees Deduction         

Single / HH       $65,000 – $80,000

MFJ                  $130,000 – $160,000

MFS                  not allowed

Student Loan Interest Deduction        

Single / HH       $65,000-$80,000

MFJ                  $135,000-$165,000

MFS                  not allowed


Your Tax Outcome Isn’t Just a Tax Season Effort

Did you know you can influence your tax outcome throughout the year? Looking at your overall financial and tax picture proactively will usually show you options to explore. Look, run the math and see what offers the best outcome.

Tax brackets range from 10 percent to 39.6 percent of taxable income. Taxpayers on the edge between two tax brackets may want to find ways to decrease their taxable income, for example through charitable donations or pre-tax retirement plan contributions which lower both AGI and taxable income.

Similarly, taxpayers who forecast a change in income that will move them to a different tax bracket in the coming year could use that information to make other financial decisions.

As with all other aspects of tax planning, taxpayers should always think of a minimum of a two-year horizon. That means if they defer income or do something else to lower this year’s AGI or taxable income they should consider the effect on next year’s return.

Get the help of a Tax Advisor at Block Advisors. Find an office location near you now.


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