How to Calculate a Means-Tested Benefit
A means-tested benefit equals the maximum benefit minus the phase-out rate times income above the eligibility threshold, and it stops at zero rather than going negative.
The Means-Tested Benefit formula
Calculator
Enter the maximum benefit, phase-out rate, threshold and income to get the benefit and the effective marginal tax rate.
What a household with income at or below the threshold receives.
Cents of benefit lost per extra dollar earned above the threshold, written as a percent.
Monthly income at which the benefit starts shrinking.
Earnings the phase-out is measured against.
Income and payroll tax the household also pays on extra earnings.
The phase-out removes $300 of the maximum, leaving $300 a month.
- Total monthly resources
- $2,700
- Income where the benefit runs out
- $3,600
- Effective marginal tax rate
- 35%
- Kept from the next dollar earned
- $0.65
Earnings plus benefit come to $2,700 a month.
The benefit reaches zero at $3,600 of monthly income, which is the threshold plus the maximum divided by the phase-out rate.
Losing benefit and paying tax on the same dollar stacks up to 35%, which is the rate that shapes the decision to work more.
An extra dollar of earnings raises what the household actually has by $0.65.
How to calculate Means-Tested Benefit, step by step
- 1Compare income with the threshold. Income at or below the threshold draws the full maximum benefit, because there is nothing yet to phase out.
- 2Measure the income above the threshold. Subtract the threshold from household income. That excess, not total income, is what the phase-out rate applies to.
- 3Reduce the benefit by the phase-out. Benefit = maximum − rate × excess. Stop at zero, since a benefit does not turn into a bill once it runs out.
- 4Find the break-even income and the implicit tax. The benefit hits zero at threshold + maximum ÷ phase-out rate. The phase-out is itself a tax on earning, so add it to any income or payroll tax to see what the household keeps from the next dollar.
Worked example: Means-Tested Benefit
An illustrative program pays up to $600 a month and takes back 25 cents for every dollar of monthly income above $1,200. A household earning $2,400 has 2,400 − 1,200 = $1,200 of income above the threshold, so the benefit falls by 0.25 × $1,200 = $300 and the household receives 600 − 300 = $300. Total monthly resources are 2,400 + 300 = $2,700. The benefit runs out at 1,200 + (600 ÷ 0.25) = $3,600 a month. If income and payroll taxes take another 10 cents on the dollar, the household keeps 65 cents of the next dollar it earns, an effective marginal tax rate of 35%.
Means-Tested Benefit questions
What is the break-even income for a means-tested benefit?
It is the income at which the benefit reaches zero: the threshold plus the maximum benefit divided by the phase-out rate. Above that income the household gets nothing from the program.
Why does a phase-out work like a tax?
Each extra dollar earned takes part of the benefit away, so take-home resources rise by less than a dollar. A 25-cent phase-out is a 25% marginal tax before any tax authority collects anything.
Does a gentler phase-out rate always help?
A lower rate leaves more benefit at every income and weakens the disincentive to earn, but it also stretches eligibility further up the income scale and costs more. Halving the phase-out rate doubles the range of income over which the benefit is still paid.
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free, no spam.
No spam. Unsubscribe anytime. Read our privacy policy.
Keep track of what you have studied
A free EconLearn account adds progress tracking, your quiz history, and achievements. Studying here is free either way, and there is nothing to pay for as a student.
Create a free accountAlready have one? Sign in
Last updated