Many phase-outs are based on modified adjusted gross income, or MAGI. MAGI is the adjusted gross income shown on your tax return as "modified" by adding back certain deductions. The "add-backs" vary with specific phase-outs. That means you might have to choose between conflicting opportunities. For instance, if you have a child in college this semester, the American Opportunity Credit and the Lifetime Learning Credit may be on your mind. Both benefits are education-related, yet the qualifying rules differ – including the MAGI threshold.
Here are some common federal tax benefits with MAGI phase-outs.
Education credits. The American Opportunity Credit is a partially refundable, dollar-for-dollar reduction of your tax bill, with a maximum of $2,500 per student. This year the credit starts to shrink when your MAGI reaches $160,000 if you're married filing jointly ($80,000 if you're single). The credit disappears completely when your MAGI is greater than $180,000 for joint returns ($90,000 if your filing status is single).
For 2015, the Lifetime Learning Credit begins to phase out at $110,000 when you're married filing a joint return and $55,000 when you're single. Once your MAGI reaches $130,000 (married) or $65,000 (single), the credit is no longer available.
Retirement plans. Phase-outs affect retirement planning too. The deduction for contributions to your traditional IRA is limited when you are eligible to participate in your employer's plan and your MAGI exceeds $98,000 ($61,000 when you're single).
While Roth IRA contributions are not tax-deductible, the amount you can contribute for 2015 begins to phase out when your MAGI reaches $183,000 and you're married filing jointly ($116,000 if you're single).
In addition, the federal "saver's" credit for contributing to retirement plans phases out when your 2015 MAGI is more than $61,000 and your filing status is married filing jointly ($30,500 for singles).
Other phase-outs. The phase-out for the exclusion of social security benefits from taxable income is calculated on the amount of your MAGI over the base amount of $32,000 when you're married filing jointly. The base amount is $25,000 when you're single.
Phase-outs also reduce personal exemptions, itemized deductions, and the alternative minimum tax exclusion.
Contact our office for guidance in managing your income for maximum tax breaks.