Sneaky IRS: Federal Income Tax Phase-Outs and Limitations for 2025

This is my least favorite thing about the US Income Tax System: Congress gives taxpayers a deduction, and then takes it away with a limitation or cap. Essentially, this raises you effective tax rate. Here’s a handful of tax phase-outs and limitations for 2025.

Business and Investment Limitations

1. Excess Business Loss (EBL) Limitation

   • Business owners can deduct up to $610,000 (MFJ) or $305,000 (single) in business losses against other income. Any excess must be carried forward as a net operating loss.

2. Qualified Business Income (QBI) Deduction Phase-Out

   • The 20% pass-through deduction phases out for service businesses when taxable income exceeds $394,600 (MFJ) or $197,300 (single).

3. Section 179 Deduction Phase-Out

   • Businesses can deduct up to $1,220,000 in asset purchases, but this phases out dollar-for-dollar when total purchases exceed $3,050,000.

4. Bonus Depreciation Phase-Down

   • The bonus depreciation percentage decreases to 60% in 2025, continuing its phase-down toward elimination in 2027.

5. Capital Loss Deduction Limitation

   • Taxpayers can deduct up to $3,000 ($1,500 if married filing separately) of net capital losses against ordinary income per year, with excess losses carrying forward.

   
   

Retirement and Investment Contribution Phase-Outs

6. Traditional IRA Deduction Phase-Out (if covered by a workplace plan)

   • Phases out for incomes between $79,000–$89,000 (single) and $126,000–$146,000 (MFJ).

7. Roth IRA Contribution Phase-Out

   • Phases out for incomes between $150,000–$165,000 (single) and $236,000–$246,000 (MFJ).

8. Savers Credit Phase-Out

   • The credit for low-income retirement savers phases out at $73,000 (MFJ), $54,750 (Head of Household), and $36,500 (single).

   
   

Tax Credits for Families and Individuals

9. Child Tax Credit Phase-Out

   • Begins to phase out at $400,000 (MFJ) and $200,000 (single) at a rate of $50 per $1,000 over the threshold.

10. Earned Income Tax Credit (EITC) Phase-Out

    • The phase-out thresholds vary by filing status and number of qualifying children, with the maximum credit reaching $8,046 for families with three or more children.

11. Adoption Credit Phase-Out

    • Begins phasing out at $239,230 and is eliminated at $279,230.

12. American Opportunity Tax Credit (AOTC) Phase-Out

    • The education credit phases out for incomes between $160,000–$180,000 (MFJ) and $80,000–$90,000 (single).

13. Lifetime Learning Credit Phase-Out

    • Begins to phase out at $160,000 (MFJ) and $80,000 (single), disappearing completely at $180,000 (MFJ) and $90,000 (single).

14. Premium Tax Credit Phase-Out (ACA Health Insurance Subsidy)

    • The subsidy decreases as income rises, phasing out for households earning more than 400% of the federal poverty level unless extended by special legislation.

    
    

Additional Tax Limitations

15. Alternative Minimum Tax (AMT) Exemption Phase-Out

    • The exemption begins phasing out for incomes over $1,366,200 (MFJ) and $578,150 (single).

16. Social Security Tax Earnings Cap

    • Wages above $168,600 in 2025 are not subject to Social Security tax.

17. Net Investment Income Tax (NIIT) Threshold

    • A 3.8% surtax applies to investment income if AGI exceeds $200,000 (single) or $250,000 (MFJ).