The Income Phaseout & Hidden Tax Guide for High Earners
A master reference of every income phaseout, surtax, and hidden tax cliff that affects earners above $150K, with strategies to manage your MAGI around each threshold.
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The tax code is full of invisible walls. As your income rises, deductions vanish, credits disappear, and surtaxes appear — often without warning. These aren’t in your W-2 or on your pay stub. They silently increase your effective tax rate by 5-10+ percentage points.
This guide maps every income phaseout, hidden tax, and surtax cliff that affects earners above $150,000. Use it as a reference to understand your true marginal rate and find opportunities to manage your MAGI strategically.
Understanding Your True Marginal Rate
Most people think of their marginal rate as their federal bracket — 32%, 35%, or 37%. But your actual marginal rate includes hidden taxes and phaseout effects that stack on top.
Example: A single filer with $250,000 in income
| Tax Component | Rate |
|---|---|
| Federal marginal bracket | 35% |
| Additional Medicare Tax (above $200K) | 0.9% |
| Net Investment Income Tax (on investment income) | 3.8% |
| State income tax (varies) | 5-13.3% |
| True marginal rate | 41-53% |
And that’s before accounting for phaseouts. If your income increase causes a deduction or credit to phase out, the effective marginal rate on that dollar of income is even higher.
Master Phaseout Reference: 2026 Tax Year
Surtaxes (These Add to Your Tax Bill)
| Tax | Threshold (Single) | Threshold (MFJ) | Rate | Indexed? |
|---|---|---|---|---|
| Additional Medicare Tax | $200,000 wages | $250,000 wages | 0.9% on excess | No |
| Net Investment Income Tax (NIIT) | $200,000 MAGI | $250,000 MAGI | 3.8% on lesser of NII or excess MAGI | No |
| Alternative Minimum Tax (AMT) | $88,100 exemption | $137,000 exemption | 26-28% on AMTI above exemption | Yes |
| AMT exemption phaseout | $626,350 | $1,252,700 | Lose $0.25 exemption per $1 over threshold | Yes |
Key insight: The NIIT and Additional Medicare Tax thresholds have never been indexed for inflation since their introduction in 2013. They were originally designed to hit roughly the top 2-3% of earners, but bracket creep means they now affect a much broader group.
Retirement Account Limits
| Account / Benefit | Phaseout Start (Single) | Phaseout End (Single) | Phaseout Start (MFJ) | Phaseout End (MFJ) |
|---|---|---|---|---|
| Roth IRA (direct contribution) | $153,000 | $168,000 | $242,000 | $252,000 |
| Traditional IRA deduction (with employer plan) | $77,000 | $87,000 | $126,000 | $146,000 |
| Traditional IRA deduction (spouse has plan) | N/A | N/A | $236,000 | $246,000 |
| Saver’s Credit | $38,250 (50%) | $76,500 (0%) | $76,500 (50%) | $153,000 (0%) |
Strategy: The Roth IRA phaseout is irrelevant if you use the backdoor Roth strategy. The traditional IRA deduction phaseout is irrelevant if you’re contributing to a 401(k) — non-deductible traditional IRA contributions are only useful as a backdoor Roth stepping stone.
Child & Family Credits
| Credit / Benefit | Phaseout Start (Single) | Phaseout Start (MFJ) | Rate of Phaseout | Notes |
|---|---|---|---|---|
| Child Tax Credit ($2,000/child) | $200,000 | $400,000 | $50 per $1,000 over threshold | Fully gone at $240K single / $440K MFJ (1 child) |
| Child & Dependent Care Credit | $125,000 (reduced %) | $125,000 (reduced %) | Credit % drops from 35% to 20% | At $43K+, credit is 20% of up to $3,000-$6,000 |
| Adoption Credit | $259,190 | $259,190 | Phases out over $40K | Fully gone at $299,190 |
| EV Tax Credit (new) | $150,000 | $300,000 | All-or-nothing cutoff | $0 credit if above threshold |
| EV Tax Credit (used) | $75,000 | $150,000 | All-or-nothing cutoff | $0 credit if above threshold |
Key insight: The Child Tax Credit phaseout is relatively generous for MFJ filers — a couple with 2 children doesn’t lose the full $4,000 credit until $440,000 MAGI. But single filers lose it much faster.
Education Benefits
| Benefit | Phaseout Start (Single) | Phaseout End (Single) | Phaseout Start (MFJ) | Phaseout End (MFJ) |
|---|---|---|---|---|
| American Opportunity Credit ($2,500) | $80,000 | $90,000 | $160,000 | $180,000 |
| Lifetime Learning Credit ($2,000) | $80,000 | $90,000 | $160,000 | $180,000 |
| Student Loan Interest Deduction ($2,500) | $80,000 | $95,000 | $165,000 | $195,000 |
| Education Savings Bond exclusion | $96,800 | $111,800 | $145,200 | $175,200 |
| Coverdell ESA contribution ($2,000) | $95,000 | $110,000 | $190,000 | $220,000 |
Strategy: At $300K+ income, all education credits and deductions are unavailable. The 529 plan is your only education tax strategy — and thanks to the SECURE 2.0 529-to-Roth rollover, it’s actually quite powerful. See our 529 Plans for High Earners guide.
Passive Activity & Real Estate
| Rule | Threshold | Effect |
|---|---|---|
| Passive loss deduction (rental real estate) | $100,000 AGI (phases out) | $25,000 allowance phases out between $100K-$150K AGI |
| Passive loss deduction above $150K | $150,000 AGI | $0 deduction — all passive losses suspended |
| Real estate professional exception | No income limit | Requires 750+ hours AND majority of personal services in real estate |
| Short-term rental material participation | No income limit | Requires material participation; losses treated as non-passive |
| Section 199A QBI deduction | $197,300 single / $394,600 MFJ | Phases out over $50K single / $100K MFJ for specified service businesses |
Strategy: The passive loss phaseout at $150K means most high earners can’t use rental losses to offset W-2 income — unless they qualify as a real estate professional or use the short-term rental material participation strategy. See our Short-Term Rental Tax Strategy guide.
Medicare (IRMAA) Surcharges
IRMAA surcharges are based on your MAGI from 2 years prior. If you retire or have a life-changing event, you can appeal using Form SSA-44.
| 2026 MAGI (Single) | 2026 MAGI (MFJ) | Monthly Part B Premium | Monthly Part D Surcharge |
|---|---|---|---|
| ≤$106,000 | ≤$212,000 | $185.00 (standard) | $0 |
| $106,001-$133,000 | $212,001-$266,000 | $259.00 | $13.70 |
| $133,001-$167,000 | $266,001-$334,000 | $370.00 | $35.50 |
| $167,001-$200,000 | $334,001-$400,000 | $481.00 | $57.30 |
| $200,001-$500,000 | $400,001-$750,000 | $554.00 | $74.20 |
| >$500,000 | >$750,000 | $578.00 | $81.00 |
Annual cost at the highest tier: $7,908 for Part B + $972 for Part D = $8,880 per person in extra premiums. For a married couple, that’s $17,760/year in hidden taxes.
Strategy: IRMAA uses a 2-year lookback. If you’re planning a Roth conversion, a year with unusually high income, or early retirement, model the IRMAA impact 2 years out. A large Roth conversion in 2026 increases your 2028 IRMAA premiums.
ACA Marketplace Subsidies
For early retirees or self-employed individuals buying health insurance on the exchange:
| MAGI Level | Subsidy Impact |
|---|---|
| Below 150% FPL ($29,580 individual / $60,840 family of 4) | Maximum subsidy, minimal premiums |
| 150-400% FPL | Sliding scale subsidy |
| Above 400% FPL ($59,160 individual / $121,680 family of 4) | No subsidy cliff (since 2021 extension) but premium capped at 8.5% of income |
Strategy: For early retirees, managing MAGI to stay below 400% FPL can save $15,000-$30,000+ per year in health insurance costs. Strategies include Roth conversions (which add to MAGI) vs. living off Roth withdrawals (which don’t). See our Healthcare in Early Retirement guide.
SALT Cap Phase-Up (New for 2026)
| MAGI (MFJ) | SALT Cap |
|---|---|
| Below $500,000 | $40,000 |
| $500,000-$600,000 | Phases down from $40,000 to $10,000 |
| Above $600,000 | $10,000 |
Effective marginal rate impact: In the $500K-$600K range, each additional dollar of MAGI reduces your SALT cap by $0.30. If your state/local taxes exceed $40,000 (likely in CA, NY, NJ), this creates a hidden 30¢ marginal rate on top of your federal bracket. Combined with the 35% federal rate, NIIT, and state taxes, your true marginal rate in this band can exceed 75%.
The “Stealth Tax” Zones: Where Your Marginal Rate Spikes
Certain income ranges create unusually high effective marginal rates due to stacking surtaxes and phaseouts. Here are the worst zones for 2026:
Zone 1: $200,000-$250,000 (Single) / $250,000-$300,000 (MFJ)
What hits: Additional Medicare Tax (0.9%) + NIIT (3.8%) both kick in. If you’re right at the threshold, a $50,000 bonus could cost an extra $2,350 in surtaxes you weren’t expecting.
Zone 2: $500,000-$600,000 (MFJ)
What hits: New SALT cap phase-down adds up to 30% effective rate on the phaseout amount, stacking with the 35% federal bracket, NIIT, and state taxes.
Zone 3: $609,351+ (Single) / $731,201+ (MFJ)
What hits: The 37% bracket. Combined with NIIT (3.8%), Additional Medicare Tax (0.9%), and state taxes (up to 13.3% in CA), the true marginal rate on earned income can reach 55%+.
Zone 4: IRMAA Cliff Zones (For Medicare Beneficiaries)
What hits: IRMAA premiums jump in discrete steps. Going $1 over a threshold can cost $1,000-$4,000+ per year in extra premiums. These are the cliffs most worth managing around.
MAGI Reduction Strategies
These are the levers you can pull to reduce your MAGI and avoid or minimize phaseout impacts.
Strategies That Reduce MAGI
| Strategy | MAGI Reduction | Notes |
|---|---|---|
| Traditional 401(k) contributions | Up to $24,500 ($32,500 if 50+) | Most impactful for most people |
| HSA contributions | Up to $8,750 (family) | Reduces MAGI dollar-for-dollar |
| Traditional IRA (if deductible) | Up to $7,500 | Only deductible below income limits |
| Self-employed health insurance | Premium amount | Above-the-line deduction |
| SE tax deduction (50%) | ~7.65% of SE income | Automatic if self-employed |
Strategies That Do NOT Reduce MAGI (But Still Help)
| Strategy | Why It Doesn’t Reduce MAGI | Still Valuable Because |
|---|---|---|
| Roth 401(k) contributions | After-tax, no deduction | Tax-free growth and withdrawals |
| Backdoor Roth IRA | No deduction | Tax-free growth, no RMDs |
| Mega backdoor Roth | After-tax contributions | Tax-free growth |
| Itemized deductions | Below-the-line | Reduce taxable income, not MAGI |
| Tax-loss harvesting | Reduces taxable income, not AGI* | *Realized losses do reduce AGI up to $3,000 + any gains offset |
Important nuance: Tax-loss harvesting can reduce your MAGI in a limited way. If you have $50,000 in capital gains and harvest $50,000 in losses, your MAGI drops by $50,000. But if you have no gains, you can only use $3,000 in losses against ordinary income.
Case Study: Managing MAGI Around the SALT Phase-Down
Profile
- Names: Jennifer and Michael
- Combined W-2 income: $540,000
- Investment income: $30,000 (dividends + interest)
- Projected MAGI: $570,000
- State/local taxes paid: $55,000
- Filing status: MFJ
The Problem
At $570,000 MAGI, they’re in the middle of the SALT phase-down zone ($500K-$600K). Their SALT cap is approximately $19,000 instead of $40,000 — costing them $21,000 in lost deductions, or about $7,350 in additional federal tax.
The Optimization
By maximizing MAGI reduction strategies, they can potentially move below $500,000:
| Strategy | MAGI Reduction |
|---|---|
| Both max traditional 401(k)s | $49,000 |
| HSA (family) | $8,750 |
| Tax-loss harvesting (offset investment income) | $30,000 |
| Total MAGI reduction | $87,750 |
| Revised MAGI | $482,250 |
By getting below $500,000, they qualify for the full $40,000 SALT cap instead of $19,000. The additional $21,000 SALT deduction saves them $7,350 in federal taxes — on top of the direct tax savings from the 401(k) and HSA contributions themselves.
The Lesson
The SALT phase-down zone creates a powerful incentive to get MAGI below $500K. For earners in the $500K-$600K range, every dollar of MAGI reduction is worth more than its face value because it simultaneously restores the SALT deduction.
Case Study: The Early Retiree Navigating IRMAA and ACA
Profile
- Name: Robert, age 63
- Status: Recently retired with $4.2M portfolio
- Income sources: $120,000/year from taxable account withdrawals (mix of capital gains and dividends)
- Health insurance: ACA marketplace until Medicare at 65
- Medicare Part B starts: 2028
The Balancing Act
Robert wants to do Roth conversions to reduce future RMDs, but each conversion dollar:
- Increases current-year MAGI (potentially reducing ACA subsidies)
- Increases MAGI for IRMAA purposes in 2028 (2-year lookback)
The Optimal Strategy
2026 (Age 63): Convert $80,000 to Roth. This brings MAGI to $200,000 — well below the 400% FPL threshold for his family, preserving ACA subsidies. This MAGI will be used for 2028 IRMAA, but $200,000 is below the first IRMAA threshold ($212,000 MFJ / $106,000 single).
2027 (Age 64): Convert $100,000 to Roth. MAGI of $220,000. Since he’s single, this pushes him above the $106,000 IRMAA threshold — meaning his 2029 Part B premium increases. But the Roth conversion tax savings over 20+ years outweigh the temporary IRMAA cost.
2028+ (Age 65+, on Medicare): Reduce conversions to stay below IRMAA thresholds, or accept the surcharge if the long-term Roth math justifies it.
The Numbers
| Year | Roth Conversion | Total MAGI | ACA Subsidy Impact | IRMAA Impact (2 years later) |
|---|---|---|---|---|
| 2026 | $80,000 | $200,000 | Minimal | Below threshold |
| 2027 | $100,000 | $220,000 | Moderate | +$74/mo Part B |
| 2028 | $50,000 | $170,000 | N/A (Medicare) | Below threshold |
Quick Reference: What Still Works at $300K+ Income
For high earners frustrated by phaseouts, here’s what’s still available at any income level:
Always available (no income limit):
- 401(k) contributions (traditional or Roth)
- HSA contributions (with HDHP)
- Backdoor Roth IRA (via conversion)
- Mega backdoor Roth (if plan allows)
- Standard deduction
- Mortgage interest deduction
- Charitable deductions (subject to AGI caps, not phaseouts)
- Tax-loss harvesting
- Municipal bond interest exclusion
- 529 plan contributions (some states offer deductions)
- Donor-Advised Funds
- Dependent Care FSA ($5,000 limit)
Phased out but partially available at some income levels:
- Child Tax Credit (gone above $240K single / $440K MFJ per child)
- SALT deduction (full $40K cap below $500K MFJ, phases to $10K)
- QBI deduction (phases out for service businesses above $197K single / $394K MFJ)
Completely unavailable at $300K+:
- Direct Roth IRA contributions
- Deductible traditional IRA contributions (with employer plan)
- Education credits (AOTC, LLC)
- Student loan interest deduction
- EV tax credits (new vehicles above $150K single / $300K MFJ)
- Saver’s Credit
The Bottom Line
The tax code isn’t a single rate — it’s a landscape of cliffs, walls, and hidden traps. High earners who understand this landscape can navigate around the worst of it.
The core principles:
- Know your thresholds. Print this guide and mark the ones within $50K of your income.
- Manage MAGI actively. Traditional 401(k) and HSA contributions are your most powerful MAGI reduction tools.
- Model before acting. Before a Roth conversion, RSU sale, or any income-generating event, calculate the full marginal cost including surtaxes and phaseouts.
- Think multi-year. IRMAA uses a 2-year lookback. ACA subsidies are annual. Roth conversions have a 5-year rule. The best tax planning spans decades, not just this April.
Every dollar you keep out of a phaseout zone is worth more than you think.
Related Resources
- W-2 Tax Playbook — The complete order of operations for W-2 tax optimization
- Maximizing Retirement Contributions — Stacking every tax-advantaged account
- RSU Tax Strategies — How equity comp interacts with phaseouts
- Estimated Tax Payments — Avoiding underpayment penalties when managing income timing
- Healthcare in Early Retirement — ACA subsidy optimization for early retirees
- Tax Calculator — Model your marginal rate including surtaxes
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