For many tax credits, the amount a taxpayer can receive becomes smaller if their income is higher. The stretch of income where the credit starts shrinking is referred to as the “phaseout.” The phaseout begins once income reaches a certain level, known as the phaseout threshold. The credit decreases in value—or phases out—until it equals its minimum amount, usually zero.  

Imagine a $100 tax credit that falls in value by $1 for every additional $1,000 of income above a $100,000 threshold. Taxpayer A who earns $100,000 would be eligible for a $100 tax credit, whereas Taxpayer B who earns $150,000 would be eligible for a $50 credit. That’s because Taxpayer B is partway through the phaseout range. If either filer earns $200,000 or more, they would be ineligible because the credit phased out to its minimum value of $0.  

Phaseouts are used to target tax benefits to taxpayers within certain income or earnings levels. They are also used to assure benefits decline gradually, rather than abruptly. The two largest tax benefits for families with children, the earned income tax credit (EITC) and the child tax credit (CTC), phase out with income. Let’s look at the CTC in detail to learn more about the phaseout. 

Characteristics of a phaseout include:  

• An income or earnings level where the credit begins to decline in value
• A rate or speed at which it decreases
• A maximum income or earnings level, at which point the phaseout ends 

In Figure 1 below, the horizontal axis represents a person’s adjusted gross income, assumed to equal earnings. The vertical axis is the credit amount a person would receive. The red line demonstrates the relationship between the credit amount and earnings, with the downward slope illustrating the credit’s phaseout. If the filer has more income, they are further along the phaseout, resulting in a smaller credit amount.

The CTC phases out at incomes over $200,000 for single parents ($400,000 for married couples filing jointly (yellow zone in Figure 1). The speed of the decline in credit value depends on the phaseout rate: effectively five percent of income above $200,000 for an unmarried parent with one child. The credit value will continue to decline until the filer no longer qualifies for the benefit. In the case of the CTC, when the credit reaches $0, it has been phased out completely. 

For the CTC, the exact income level at which the credit phases down to zero depends on the taxpayer’s filing status (i.e. whether they file as married or head of household status) and the number of credit-eligible children they have.  

The CTC provides a per-child benefit for families with moderate to high incomes, but not for families with low incomes, since the credit does not phase in on a per-child basis.  

Larger families with moderate and high incomes generally qualify for larger tax credits. Since the credit phases out at the same rate regardless of the number of children, the credit reaches its minimum value of zero at higher incomes for larger families.