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 and you’re married filing jointly ($80,000 when 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).
● Social Security
The phase-out for the exclusion of social security benefits from taxable income is calculated on the amount of your “combined income” (one half of social security benefits plus other income) 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.