What is Modified Adjusted Gross Income (MAGI)?
Modified Adjusted Gross Income (MAGI) is an important number. It first determines whether you can contribute to a Roth IRA and whether you can deduct IRA contributions. It also determines whether you qualify for certain education tax benefits and income tax credits. Additionally, it establishes your eligibility for income-based Medicaid and subsidized health insurance plans in the health insurance marketplace.
However, as important as this number is, you won’t find it on your tax return. You will need to do some math to find your MAGI.
MAGI can be defined as your adjusted gross household income, plus tax-free interest and certain deductions. The Internal Revenue Service (IRS) uses the MAGI to determine if you are eligible for certain tax benefits. The MAGI determines in particular:
- If you can contribute to a Roth IRA
- Whether you can deduct your traditional IRA contributions if you and/or your spouse have a retirement plan at work
- Your eligibility for the premium tax credit, which lowers your health insurance premiums if you purchase a plan from the Health Insurance Marketplace
For example, you can contribute to a traditional IRA regardless of the amount of your income. However, you cannot deduct these contributions on your tax return if your MAGI exceeds the limits set by the IRS and if you and/or your spouse have a retirement plan at work.
Key points to remember
- Your MAGI determines whether — and how much — you can contribute to a Roth IRA and whether you can deduct your traditional IRA contributions.
- To calculate your modified adjusted gross income (MAGI), take your adjusted gross income (AGI) and add some deductions.
- It is normal for your AGI and MAGI to be similar.
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How Modified Adjusted Gross Income Works
Determining your MAGI is a three-step process:
- Calculate your gross income for the year
- Calculate your adjusted gross income (ABI)
- Add some deductions to find your MAGI
Calculate your gross income
Your gross income includes everything you earned during the year:
- alimony
- Business income
- Capital gains
- Dividends
- Interest
- Farm income
- Rental and royalty income
- retirement income
- Advice
- Wages
Note: There are two scenarios in which support payments are not considered gross income. The first case is if your divorce agreement was executed after 2018. The second is if your divorce agreement was signed before 2019 but later amended to expressly state that these payments are not deductible to the payer.
Your gross income is shown on line 7b of Form 1040.
Calculate your AGI (or find it on your tax return)
Your Adjusted Gross Income (ABI) is important because it is the total taxable income calculated before any itemized or standard deductions, exemptions, and credits are taken into account. It determines how you can use the various tax credits and exemptions. For example, adjusted gross income affects the amount you can claim for the Child Tax Credit.
Your adjusted gross income equals your gross income minus certain tax-deductible expenses, including:
- Certain professional expenses for performing artists, reservists, and paid government employees
- Tuition fees
- Half of the self-employment taxes
- Health insurance premiums (if you are self-employed)
- Contributions to the health savings account (CES)
- Moving expenses for members of the armed forces moving due to active duty
- Penalties for early withdrawal of savings
- Pension plan contributions (including IRAs and self-employed pension plan contributions)
- Interest on student loans
- Registration and tuition fees
You can do the math to determine your AGI, or you can find it online 8b of Form 1040.
Restoration of certain deductions
To find your MAGI, take your AGI and add again:
- Any deductions you made for IRA contributions and taxable Social Security payments
- Foreign income excluded
- Interest from EE savings bonds used to pay for higher education expenses
- The losses of a partnership
- Passive income or loss
- Loss of rent
- Exclusion for Adoption Expenses
Many of these deductions are not commonly used, so your MAGI and AGI may be similar or even the same.
Special Considerations for Magis
Roth IRAs
To contribute to a Roth IRA, your MAGI must be below the limits specified by the IRS. If you are below the income threshold, the actual amount you can contribute is also determined by your MAGI. If your MAGI exceeds the authorized limits, your contributions are phased out.
