What does it mean when a tax credit 'phases out,' and how does that affect me?

A phase-out is the income range over which a credit or deduction gradually shrinks and eventually disappears. Below the starting threshold you get the full amount; above the ending threshold you get nothing; in between, the benefit drops as income rises. The IRS ties most phase-outs to modified adjusted gross income (MAGI). This matters because earning a bit more can quietly reduce a credit, so an extra dollar of income effectively costs you more than just its tax. Strategies like making pre-tax 401(k) or HSA contributions lower your MAGI and can help you keep a credit you would otherwise lose. Always check the current-year phase-out ranges, since the IRS adjusts many of them for inflation each year.