Charles Trautman, EA · Since 1969
Some taxpayers call these insults.
Others call them phase-outs.
The IRS calls them Tuesday.
Your former CPA called them billable hours.
We call them a reason to come see us.
We wish we could do more. We do what we can.
Welcome. We’re glad to serve you.
The tax code is full of breaks. Credits for college, credits for kids, deductions for retirement savings, deductions for state taxes. Most of them come with an income limit, and the limit is often not what people expect. Once you cross it, the break shrinks and then disappears. The IRS calls this a phase-out. Below is the list, what each one does, and, in blue, what the person paying for it tends to think about it.
The United States tax code is complex. I like to think it reflects our social code, whatever that means. One thing that code seems sure about: it wants to favor lower-income taxpayers and ask more of high earners. This page is the list of how it does that.
Figures are for the 2026 tax year and are rounded. Thresholds change, and a few of the newer rules are still settling, so call us before you plan around any single number.
Medicare Part B and Part D premiums are not a flat rate. Once your income passes $109,000 single or $218,000 joint, Social Security adds a surcharge to your monthly premium. There are five tiers, and at the top, Part B alone runs about $690 a month per person. The surcharge is based on your income from two years ago, so a big year in 2024 shows up on your 2026 premium. You can appeal if your income has dropped because of retirement, a death, or a divorce, and we can help with that form.
So let me get this straight. I paid into Medicare for forty-five years, and now that I’m finally on it, I pay more than everybody else for the same card. And it’s based on the income I had before I retired, and on my retirement income too. Irma never stops looking.
↑ Back to topThe credit is $2,200 per qualifying child under 17. It starts shrinking once income passes $200,000 single or $400,000 joint, dropping $50 for every $1,000 over the line. The old personal exemption, the one that let you deduct a fixed amount for every dependent, was eliminated in 2018 and is not coming back. So the credit is all there is, and above the line, there isn’t that either.
My kids still eat. They still go to the orthodontist. They still need shoes every four months. The tax code has simply decided they don’t exist. I’d like to introduce them to Congress sometime.
↑ Back to topUp to $2,500 per student for the first four years of college. It phases out between $80,000 and $90,000 single, $160,000 and $180,000 joint. Those numbers were set in 2009 and have never been adjusted for inflation. Tuition, as you may have noticed, has been.
The university raised tuition nine percent this year. The credit limit has not moved since the first iPhone. I pay full freight and get nothing, and my neighbor two doors down, who makes forty thousand less, gets a check. I’m not saying he doesn’t deserve it. I’m saying the bursar didn’t give me a discount.
↑ Back to topUp to $2,000 a year for graduate school, continuing education, or job-skills courses. Same income limits as the American Opportunity Credit: gone between $80,000 and $90,000 single, $160,000 and $180,000 joint.
It’s called the Lifetime Learning Credit, and apparently the lifetime ends at $90,000. I’m taking a certification course so I can keep doing the job that pays the taxes. No credit for that.
↑ Back to topUp to $2,500 of student loan interest is deductible without itemizing. It phases out at roughly $85,000 to $100,000 single, $175,000 to $205,000 joint. The deduction exists to help people pay for the education that raised their income. Then the income cancels the deduction.
I borrowed $200,000 to become a doctor. The loan did exactly what it was supposed to do. Now I’m paying it off at full price with no deduction, because the loan did what it was supposed to do. The deduction is for people whose degrees didn’t pan out. Somewhere a committee thought this through.
↑ Back to topNew for 2025 through 2028: up to $10,000 a year of interest on a loan for a new, U.S.-assembled personal vehicle is deductible without itemizing. It phases out between $100,000 and $150,000 single, $200,000 and $250,000 joint, at $200 for every $1,000 over the line.
They finally made car loan interest deductible, for the first time since 1986. Then they drew the line at exactly the income of the people who buy new cars. I bought American, I bought new, I financed it like they asked. The deduction went to someone else.
↑ Back to topA credit of up to about $17,000 per child for adoption expenses, partly refundable starting in 2025. It phases out over a $40,000 range beginning around $265,000 of income, single or joint, and is gone entirely around $305,000. The same limit applies to the exclusion for employer-paid adoption assistance.
The adoption cost us $38,000 in legal fees, travel, and agency charges. The credit would have covered nearly half. We make too much. So the government’s position is that we can afford the child, which is true, and that we therefore don’t deserve the help, which is a different thing.
↑ Back to topInterest on U.S. savings bonds cashed to pay college tuition can be tax-free, but the exclusion phases out at roughly $101,000 to $116,000 single, $152,000 to $182,000 joint in the year you cash them. The bonds must be in the parent’s name, not the child’s, which trips up more families than the income limit does.
My mother bought those bonds in 1998 so the grandkids could go to college tax-free. She did everything right. Twenty-five years later I cash them in and the interest is fully taxable, because I turned out to be the wrong parent to hold them.
↑ Back to topA Coverdell lets you save $2,000 a year per child for school, including K-12 expenses, with tax-free growth. The ability to contribute phases out at $95,000 to $110,000 single, $190,000 to $220,000 joint. Those numbers have never been indexed. Most high earners use a 529 plan instead, which has no income limit, so this one is mostly an annoyance rather than a loss.
Two thousand dollars a year. That’s the whole account. And I make too much to put two thousand dollars into it. I’ve left bigger tips.
↑ Back to topIf you actively manage a rental and it loses money, you can deduct up to $25,000 of that loss against your wages and other income. The allowance phases out between $100,000 and $150,000 of income. Those numbers were written in 1986 and have never been indexed. Above $150,000, the losses aren’t gone, they’re suspended, and you can use them when the property eventually shows a profit or when you sell. We track suspended losses year to year so nothing gets lost.
The furnace died in January. The tenant left in March. I lost real money on that house, and the IRS says I can deduct it later. Later. When I sell. Possibly from the nursing home. The $150,000 line was set when a gallon of gas was 89 cents.
↑ Back to topThe ability to contribute directly to a Roth IRA phases out between roughly $153,000 and $168,000 single, $242,000 and $252,000 joint. Above that, you can’t contribute directly. You can, however, contribute to a non-deductible traditional IRA and convert it, which is the “backdoor Roth.” It’s legal, it’s common, and it has a trap involving other IRA balances that we check before anyone does it. See our Roth IRA guide.
The government built a tax-free retirement account, then said I make too much to use it. So I use the back door. The back door is right next to the front door and leads to the same room. Nobody can explain why the front door is locked.
↑ Back to topIf you or your spouse has a retirement plan at work, the deduction for a traditional IRA contribution phases out at about $81,000 to $91,000 single, $129,000 to $149,000 joint. If neither of you has a plan at work, there is no limit. The contribution is still allowed above the line, it just isn’t deductible, which is where the backdoor Roth comes in.
I have a 401(k). Good for me. Therefore I’m not allowed to deduct an IRA. Having one retirement account disqualifies you from the other one. It’s like being told you can’t have a savings account because you already have a checking account.
↑ Back to topNew for 2025 through 2028: taxpayers 65 and older get an extra $6,000 deduction ($12,000 for a couple who are both 65+). It phases out starting at $75,000 single, $150,000 joint, at six cents per dollar over the line. It’s gone entirely at $175,000 single, $250,000 joint.
They announced it as the senior tax break. I’m a senior. I read the whole press release before I found out it’s not for me. It’s for seniors who did a worse job saving. I’m not bitter. I’m just reading the footnotes now.
↑ Back to topAlso new: up to $25,000 of tip income and up to $12,500 ($25,000 joint) of overtime premium pay can be deducted. Both phase out above $150,000 single, $300,000 joint, at ten cents per dollar. Note that only the overtime premium counts, the “half” in time-and-a-half, not the whole overtime check.
So the nurse who works doubles all year to get ahead works her way right past the line and loses the overtime break. The break for working extra goes away if you work extra. That’s not a loophole. That’s a trapdoor.
↑ Back to topOwners of pass-through businesses (sole proprietors, partnerships, S corporations) can deduct 20% of their business income. But if the business is a “specified service trade or business,” meaning health, law, accounting, consulting, financial services, athletics, performing arts, or any business where the main asset is the owner’s reputation or skill, the deduction phases out above roughly $200,000 single, $400,000 joint and is gone entirely about $75,000 single / $150,000 joint later. A plumber with the same income keeps the full deduction. A dentist loses it.
The tax code looked at my profession and decided it wasn’t a real business. I employ eleven people. I sign the front of the checks. But because I went to dental school instead of trade school, I’m the wrong kind of business. The guy who fixes my sink gets the deduction. He also charges more per hour than I do.
↑ Back to topThe deduction for state income tax and property tax was capped at $10,000 in 2018. For 2025 through 2029 the cap rises to $40,000, but it phases back down once income passes $500,000, falling 30 cents for every dollar over, until it lands back at $10,000 around $600,000. If you own a business, there may be a workaround through Colorado’s SALT parity election, and we’ll check whether it fits.
They raised the cap. Then they put a cap on the cap. I pay more state tax than almost anyone in the county, and I get to deduct the same ten thousand as a guy in a studio apartment. The state cashed my check. The feds pretend it never happened.
↑ Back to topAn extra 3.8% tax on interest, dividends, capital gains, rental income, and other investment income once total income passes $200,000 single, $250,000 joint. Those thresholds were set in 2013 and are not indexed for inflation, so every year more people cross them without a raise in real terms. This is not a phase-out, it’s a phase-in: the tax starts at the line and never stops.
I saved. I invested. I was patient. And when the investment finally pays, there’s a separate extra tax for having been patient. They didn’t even give it a friendly name. It’s just the Net Investment Income Tax, because “Surcharge for Doing It Right” was taken.
↑ Back to topAn extra 0.9% Medicare tax on wages and self-employment income above $200,000 single, $250,000 joint. Your employer withholds the regular 1.45% and starts the extra 0.9% at $200,000 regardless of your filing status, which means two-earner couples are often under-withheld and owe it at filing time. We watch for that.
So I pay Medicare tax on every dollar, then extra Medicare tax above $200,000, and then when I actually get Medicare, Irma charges me more for it. I’ve now paid for Medicare three separate ways and I haven’t seen a doctor.
↑ Back to topLong-term gains are taxed at 0%, 15%, or 20% depending on your total income. For 2026 the 0% rate covers taxable income up to about $49,000 single / $98,000 joint, and the 20% rate starts around $545,000 single / $613,000 joint. Add the 3.8% from above and the top effective rate is 23.8%. Same stock, same holding period, same gain. The only variable is you.
My brother-in-law and I bought the same shares the same week. He sold and paid zero. I sold and paid 23.8%. We had the same idea, the same timing, and the same broker. The only difference was my W-2.
↑ Back to topStarting in 2026, taxpayers in the top bracket (taxable income above roughly $640,000 single / $768,000 joint) have their itemized deductions reduced by 2/37 of the amount that would otherwise be deductible at 37%. The practical effect: your deductions, including charitable gifts, save you tax at 35 cents on the dollar instead of 37. Separately, charitable deductions for everyone who itemizes now carry a floor of 0.5% of income.
I gave fifty thousand dollars to the children’s hospital. The hospital sent a thank-you note. The IRS sent a haircut. Apparently my generosity is worth 35 cents on the dollar and the next guy’s is worth 37. The kids at the hospital didn’t notice. Treasury did.
↑ Back to topMedical expenses are deductible only to the extent they exceed 7.5% of your adjusted gross income, and only if you itemize. There is no phase-out, but the floor rises with your income. At $80,000 of income the first $6,000 of medical bills is yours to eat; at $400,000 it’s the first $30,000. Same surgery, same hospital, different deduction.
I had a $28,000 year. Knee, physical therapy, the whole program. My neighbor with the same knee and a smaller paycheck got a deduction. I got a bill and a lecture about how I should be grateful I could afford it.
↑ Back to topThe AMT is a second tax calculation that disallows certain deductions and taxes the result at 26% or 28%; you pay whichever is higher, regular tax or AMT. Everyone gets an exemption that keeps most people out of it, but starting in 2026 the exemption phases out faster, at 50 cents per dollar, once income passes $500,000 single, $1,000,000 joint. Large capital gains, incentive stock options, and big state tax deductions are the usual triggers.
There’s a whole second tax system that only exists to check whether the first one was too nice to me. It wasn’t. But they run the numbers both ways every year just to be sure.
↑ Back to topThese phase out so early that high earners rarely know they exist. The Earned Income Credit ends around $60,000 for a family. The Saver’s Credit for retirement contributions ends about $40,000 single / $80,000 joint. The Premium Tax Credit for marketplace health insurance is tied to the poverty line. The Child and Dependent Care Credit doesn’t vanish, but it drops to its lowest percentage well before six figures. You never had them. You just funded them.
I’m told there’s a credit for saving for retirement. There’s a credit for working. There’s a credit for health insurance. I do all three. I qualify for none of them. I’m an honorary member of a club I’m not allowed into.
↑ Back to topUp to 85% of your Social Security benefits are taxable once “provisional income” (your other income plus half your benefits) passes $34,000 single or $44,000 joint. Those numbers were set in 1993 and have never been indexed, so what was a tax on the well-off is now a tax on nearly every retiree with a pension or an IRA. Strictly speaking this one catches the middle class, not just high earners, but everyone Irma visits gets this one too. The new senior deduction above was meant to soften it, and for higher earners, it doesn’t.
They taxed my wages to fund Social Security. Now they tax the Social Security. Eighty-five percent of it, because I was foolish enough to also have a pension. The line was drawn in 1993. I had a car phone in 1993.
↑ Back to topIf you start Social Security before your full retirement age and keep working, benefits are withheld at $1 for every $2 you earn above about $24,500 a year (2026). The year you reach full retirement age the rule softens, and after that it goes away. The withheld benefits are credited back over time, so it’s more of a loan to the government than a loss, but nobody told the retiree that.
I took Social Security at 63 and kept the consulting going. They took half of everything over twenty-four thousand. So the government’s advice is: retire, but don’t be useful.
↑ Back to topTo avoid the underpayment penalty, most people need to pay in 100% of last year’s tax through withholding and estimates. If your prior-year income was over $150,000, the requirement is 110%. Not a phase-out, just a higher bar, and one that catches people who had a big year and didn’t adjust their estimates.
I paid in every dollar of last year’s tax. All of it. And I still got a penalty, because for people like me, 100% isn’t 100%. It’s 110%. I’d love to see that math on a restaurant check.
↑ Back to topEvery year you own a rental, you deduct depreciation, roughly 3.6% of the building’s cost. Whether you took it or not, the IRS treats it as taken. Think of it as a loan: the government lends you the deduction while you own the property, and when you sell, you pay it back. When you sell, all of that depreciation is taxed at up to 25%, not the 15% or 20% capital gain rate, and the 3.8% Net Investment Income Tax usually lands on top. Twenty years of depreciation on a $400,000 building is about $290,000 of recapture, which is roughly $83,000 of tax before the gain on the appreciation is even counted. A 1031 exchange defers it; see our page on selling a rental property.
I took the depreciation because my preparer said I had to. Now I’m selling, and the IRS wants it back at 25%. Plus the 3.8%. The building didn’t depreciate. It doubled in value. The only thing that depreciated was my enthusiasm for landlording.
↑ Back to topGain on the sale of your home is tax-free up to $250,000 single, $500,000 joint, if you lived there two of the last five years. Those amounts were set in 1997 and have never been indexed. Along the Front Range, a house bought twenty-five years ago can clear the $500,000 line without trying, and the gain above it is taxed as a capital gain, plus the 3.8% for higher earners. See our home sale exclusion page.
We bought in Highlands Ranch in 1999 for $240,000. It’s worth $1.1 million. I didn’t do anything clever; I just stayed put and raised kids. The exclusion covers the first half-million of gain. The rest is taxable, because in 1997 nobody imagined a house in Douglas County could gain that much. I didn’t either.
↑ Back to topBonuses, commissions, and vested stock (RSUs) are typically withheld at a flat 22%, no matter what bracket you’re in, until supplemental wages pass $1 million in a year. If you’re in the 32%, 35%, or 37% bracket, every bonus dollar is under-withheld by 10 to 15 cents, and the difference shows up as a balance due in April, sometimes with an underpayment penalty attached. Not a phase-out, but the single most common surprise we see on high-income W-2 returns.
The company withheld on my bonus. I saw it on the stub. Then in April I owed $18,000, because “withheld” apparently means 22% and my rate is 35%. Nobody at HR mentioned that part. The stock vested the same way. I made more money and ended the year with a payment plan.
↑ Back to topIf you inherit an IRA from anyone other than a spouse, you generally must empty it within ten years, and if the original owner had already started required distributions, you must take annual withdrawals along the way. Every withdrawal is ordinary income on top of whatever you already earn. For a high earner in peak years, that means an inheritance meant to be stretched over a lifetime is taxed at 35% or 37%, and can push Irma and the 3.8% tax into the picture too.
Dad saved his whole life in that IRA so it would last. The law says I have to drain it in ten years, during the ten highest-earning years of my life, at the highest rate I’ll ever pay. Dad paid 12% on the way in. I’m paying 37% on the way out. He’d have hated that.
↑ Back to topA child’s investment income above about $2,700 a year is taxed at the parents’ marginal rate, not the child’s. It applies through age 17, and through age 23 for full-time students. The rule exists to stop parents from shifting stock and interest to kids in a lower bracket. It also catches the grandparent who sets up a custodial account and the teenager whose crypto did well.
Grandma put some stock in an account for my daughter. It paid dividends. My daughter is nine. The IRS taxed the nine-year-old at 35%, because she lives with me. I’ve never seen a kid so disappointed in her own tax bracket.
↑ Back to topColorado starts with your federal return and then makes its own adjustments, and several of them land on higher earners. That’s a page of its own. Colorado income tax: what the state adds back and takes away → (coming soon)
↑ Back to topMost of these can’t be avoided. Some can be managed. Roth conversions in a low-income year, timing a property sale, bunching charitable gifts, paying attention to the two-year lag on Irma, an S corporation at the right income level, suspended rental losses tracked properly so they’re there when you need them. That’s the work. It isn’t glamorous, but it adds up, and it costs a lot less here than it did at your former CPA.
Call 303-734-1040 or stop by the office in Lone Tree. We’ve been reading the footnotes for Douglas County and the Denver area since 1969.
Figures reflect 2026 tax year thresholds as currently published and are rounded for readability. Last updated October 4, 2026.