Need to Know Tax › Deductions, credits, and gains
High earners
The tax code for high earners: the phase-outs
For households with income somewhere between $150,000 and $250,000 and up, where tax breaks start to shrink and surcharges start to appear. Most are slopes; a few are cliffs. Either way, the practical effect is a tax rate higher than the bracket suggests, and none of it shows on the brackets.
Most tax breaks come with an income limit, and the limit is often lower than people expect. Cross it and the credit shrinks, the deduction disappears, or a surcharge appears. The IRS calls it a phase-out. The tax code has more than thirty of them, and a household that thinks of itself as comfortable rather than rich can trip several in the same year. A few are cliffs: one dollar over the line and the whole benefit is gone. Most are slopes, where the benefit drains away over a band of income. Either way, every added dollar of income is taxed and also costs part of a credit or deduction.
Worked example: the roof year
A retired couple, both over 65, with $120,000 of pension and Social Security and $60,000 of dividends and interest, take a $100,000 IRA withdrawal in 2026 to pay for a new roof and some other work.
| Line crossed at $280,000 | What it costs | Roughly |
|---|---|---|
| Senior deduction: 6% of the $130,000 over $150,000 | $7,800 of the $12,000 lost, at 24% | $1,870 |
| 3.8% investment tax above $250,000 joint | On the lesser of $60,000 of investment income or $30,000 over the line | $1,140 |
| Roth IRA contribution: not allowed above $252,000 | No contribution this year | — |
| Medicare IRMAA in 2028: $280,000 is in the second joint tier | Both spouses, a year of higher Part B and D premiums (verify tier amounts) | about $4,900 |
| The withdrawal itself at 22% and 24% | Tax on $100,000 of IRA income | about $23,000 |
| Had they taken $50,000 in December and $50,000 in January | Each year lands near $230,000: the senior deduction loses the same $9,600 over the two years either way, but no investment tax, no IRMAA tier change, and the second $50,000 taxed at 22% rather than 24% | about $7,000 less, over the two years |
Rounded. None of the $7,000 shows on the brackets. All of it shows on the bill, two of the pieces arrive a year or two later, and most of it could have been avoided by taking the roof money over two years instead of one. The roofer would have waited.
The list, in the order a rising income meets it
The thresholds are for 2026, and nearly every one uses a slightly different definition of income, which is part of why the subject is so hard to keep straight.
| Benefit | Single | Joint | Shape |
|---|---|---|---|
| Senior deduction ($6,000 per person 65+) | $75,000 | $150,000 | Slope, 6% of the excess; gone at $175,000 / $250,000 |
| Car loan interest deduction | $100,000 | $200,000 | Slope, $200 per $1,000 |
| Medicare IRMAA (two-year lookback) | $109,000 | $218,000 | Cliff, in tiers |
| Tips and overtime deductions | $150,000 | $300,000 | Slope, $100 per $1,000 |
| Roth IRA contribution | $153,000 | $242,000 | Slope to zero at $168,000 / $252,000 |
| Child tax credit ($2,200 per child) | $200,000 | $400,000 | Slope, $50 per $1,000 |
| Net investment income tax, 3.8% | $200,000 | $250,000 | Applies to the lesser of investment income or the excess; never indexed |
| Additional Medicare tax, 0.9% on wages | $200,000 | $250,000 | Employers withhold from $200,000 regardless of status, so two-earner couples are under-withheld |
| SALT cap phase-down | $505,000 | $505,000 | Slope, 30 cents per dollar, to $10,000 at about $606,000; about 45% effective in the band |
| Charitable 0.5%-of-AGI floor | All | All | Itemizers only |
| 35-cent cap on itemized deductions | 37% bracket | 37% bracket | Deductions worth 35% instead of 37% |
| AMT exemption phase-out | $500,000 | $1,000,000 | Twice as fast as before 2026 |
The senior deduction. The $6,000 deduction for each person 65 or older runs from 2025 through 2028 and phases out at 6% of income above $75,000 single and $150,000 joint. A retired couple with $200,000 of income loses $3,000 of the $12,000, and the $12,000 for two qualifying spouses is gone entirely at $350,000 ($250,000 if only one spouse is 65). A Roth conversion or a large IRA withdrawal lands squarely on this line.
Tips, overtime, and car loan interest. The deductions for tips (up to $25,000) and the premium portion of overtime (up to $12,500, or $25,000 joint) both phase out above $150,000 single and $300,000 joint, at $100 for every $1,000 over. The car loan interest deduction phases out faster, $200 per $1,000, starting at $100,000 single and $200,000 joint, so a single filer at $150,000 gets nothing.
Roth IRA contributions. Inside the band the allowed contribution shrinks in proportion; past the top, no direct contribution is allowed, and one made anyway is an excess that has to be pulled back out with its earnings. Anyone can still convert a traditional IRA to a Roth, which is why the backdoor Roth exists, but a conversion is taxable income in the year it happens and can push a household across the other lines on this page.
The child tax credit. The joint threshold is high enough that most two-earner families keep the full credit, but a single parent with a good salary and a bonus can lose part of it. Because the credit comes straight off the tax rather than off income, every dollar of it lost is a dollar of tax paid.
The 3.8% investment tax. It applies to the smaller of the investment income or the amount over the line, and it comes on top of the capital gains rate. Wages and retirement withdrawals are not investment income, but they count toward the threshold, so a pension can push dividends into the tax, and a retiree who sells a rental or a long-held stock position can owe it in a single year and never again.
Medicare premiums. One dollar over a tier line triggers the whole tier, based on the return from two years earlier. It is the phase-out seniors feel most and has its own article.
Itemized deductions at the top. The first 0.5% of AGI in charitable gifts is not deductible, so a household with $300,000 of income loses the first $1,500 of its giving. The $40,400 SALT cap phases down above $505,000, in a band where the 35% bracket works out to about 45.5%. And in the 37% bracket, itemized deductions are worth at most 35 cents on the dollar.
The rest of the list. The $25,000 allowance for rental losses against other income phases out between $100,000 and $150,000 of AGI (verify). The education credits and the student loan interest deduction have their own bands. The 20% deduction for business income is limited for doctors, lawyers, consultants and other service businesses once income passes a threshold. The alternative minimum tax still catches some households with large state tax deductions or incentive stock options. Selling a rental brings depreciation recapture at a top rate of 25%, which no planning undoes. And inheriting an IRA adds another: the ten-year payout rule can stack a parent’s retirement savings on top of a child’s peak earning years, and every dollar withdrawn counts toward every line on this page.
What can be done
Not much after December 31, which is the point. The useful moves are about timing and about which pocket income comes from. Spreading a Roth conversion or a large withdrawal over several years instead of one keeps each year under the lines. Retirement plan contributions and health savings account contributions lower the income most of these tests use. Qualified charitable distributions from an IRA after 70½ keep the gift out of income entirely, which an ordinary deduction does not. A capital gain can sometimes wait a year, or be matched with a loss. And a bonus or a rental sale that is coming anyway is worth a conversation in the fall, when there is still time to move something. The one thing that never helps is turning down income to stay under a line. Except at the true cliffs, the extra dollar is still worth keeping; it is just worth less than it looks.
Behind the scenes
There is no single number called income on a return. The senior deduction, the child credit, the investment tax, IRMAA and the Roth limit each use their own modified AGI, with different items added back. A preparer who sees a client approaching $200,000 computes four or five of them separately, because a $30,000 IRA withdrawal in December can cross two lines and miss a third. The projection happens before the withdrawal, not after, and the client usually only hears the answer: take $18,000 this year and the rest in January.
The Colorado side
Colorado’s flat 4.40% has no phase-outs of its own on the rate, but the state has three lines that behave the same way, each on federal AGI: $75,000 / $95,000 for the 55-to-64 Social Security subtraction (a cliff), $300,000 for the deduction addback (a cliff that takes nearly the whole federal deduction, charitable gifts included), and $500,000 / $1,000,000 for the full addback of the business income deduction. A Roth conversion or a large withdrawal sized for the federal lines should be checked against these three as well; the $300,000 line in particular sits right where several federal slopes are already running.
What to bring your preparer, for a fall projection
- Year-to-date income by source: pay stubs, pension and Social Security statements, brokerage year-to-date summaries
- Tax-exempt interest, which counts for IRMAA and the Social Security formula
- The planned event: the amount and timing of a withdrawal, conversion, sale, bonus or vesting
- Both ages, and whether either spouse is on Medicare or within two years of it
- Last year’s return, for the safe-harbor figure and the prior-year lines
- Expected charitable giving, in case a QCD or a stock gift should replace a check
Questions people ask
Should I turn down a raise or a bonus to stay under a line?
No. Except at the cliffs (IRMAA and Colorado’s), the extra income is taxed at a higher effective rate but is still money kept. At a cliff, the question is timing, not refusing: a bonus paid in January instead of December can be worth thousands.
We earn $260,000 in wages. Does the 3.8% tax hit us?
Only on investment income, and only to the extent of the smaller of that income or the $10,000 you are over $250,000. With $4,000 of dividends, the tax is 3.8% of $4,000, or $152. The 0.9% additional Medicare tax on wages applies to the $10,000 over the line, $90, and is probably not withheld.
Which “income” do these use?
Each its own. IRMAA uses AGI plus tax-exempt interest; the investment tax uses AGI with foreign income added back; the Roth limit removes conversion income; the senior deduction uses yet another. The differences are small for most people but can decide a line.
I inherited an IRA and have to take $40,000 a year. Is there anything to do?
Choose the years. The ten-year rule requires annual withdrawals only if the owner had reached RMD age; otherwise the timing is yours, and loading the withdrawals into lower-income years, or years when you are between jobs or newly retired, is the whole strategy.
There is no single number called income on a return
Each phase-out uses its own version of modified AGI. The only defense is to project the year in the fall, with the planned withdrawal or sale added in, and check it against each line that is close. The answer is usually a split: some this year, the rest in January.