Definition:
Modified adjusted gross income (MAGI) is your adjusted gross income with the addition of certain tax deductions.
What is modified adjusted gross income?
Your family’s modified adjusted gross income is what determines whether you qualify for certain tax savings and deductions. Your MAGI is determined by pre-calculating your adjusted gross income (AGI), which is your income after you have changed it to account for some tax deductions. Then, to find your MAGIs, you have to add some of those deductions back. That’s not a figure you’ll find on your tax return because you have to calculate your MAGI yourself. Depending on your MAGI, you may be eligible for some benefits, including Medicaid insurance, medical plan subsidies under the Healthcare Marketplace, and the ability to contribute to individual retirement accounts such as the Roth IRA.
Difference between MAGI and AGI
Adjusted gross income (AGI) and modified adjusted gross income (MAGI) are two digits that can have an impact on your finances. They may be similar in value to each other, but they are not the same thing.
The AGI is the number that appears on your tax return. This number affects your eligibility for certain tax credits and tax exemptions. For example, the AGI determines whether you are entitled (and for what amount you are entitled) to a child tax credit, earned income tax credit, dependent care tax credit, adoption tax credit, and more.
There are also some tax deductions that you are only entitled to if your income falls below a certain level. These deductions include certain itemized deductions, mortgage insurance contributions, charitable contributions, medical expenses, and qualified vehicle taxes.
Depending on your financial situation, your MAGI can be very similar or identical to your AGI – it depends on the case. Your MAGI is required to determine whether you are eligible for certain other deductions. Specifically, your MAGI determines whether you can deduct any contributions you have made to an Individual Retirement Account (IRA) and whether you can contribute to a Roth IRA.
What does MAGI need for?
MAGI and Roth IRA
If you were considering opening a Roth IRA, then you should pay special attention to your revised adjusted gross income (MAGI). A Roth IRA is an individual retirement account into which you deposit funds after tax, but then do not pay taxes when you withdraw funds. Only individuals whose MAGI falls under a certain threshold are eligible to contribute to the Roth IRA. At a certain level of MAGI, the amount you can contribute to your Roth IRA is reduced. There is also a level of income at which your eligibility is completely lost.
In 2023, if your income is less than $138,000 (or $218,000 for married couples), you can contribute the full $6,500. If your income is between $138,000 and $153,000 (or between $218,000 and $228,000 for married couples), you can deposit a reduced amount. Finally, if your MAGI exceeds $153,000 for single people and $228,000 for married couples, then you can’t contribute to the Roth IRA.
MAGI & Traditional IRAs
Your MAGI also plays a vital role if you’re contributing to a traditional IRA. A traditional IRA is one where you can deduct the dollars you contribute to your IRA, but then you pay taxes on the money you withdraw when you retire.
The amount you can contribute to a traditional IRA is the same as a Roth IRA – $6,500 or $7,500 for those aged 50 and over in 2023. But with a traditional IRA, you can contribute as much no matter how high your income is. In the case of a traditional IRA, your MAGI determines whether you can deduct your contributions for tax purposes. Those who are within a certain income range can only receive a partial deduction, while those who exceed a certain income will not be able to receive any deduction at all.
How to count MAGI?
1. Determine your gross income
When it comes to determining your adjusted gross income (MAGI), the first step is to determine your total income for the year. Your gross income is the sum of all the income you earned during the year. It can be wages, tips, business income, rental income, retirement income, child support and investment income (usually in the form of capital gains, dividends and interest).
2. Define your adjusted gross income (AGI)
Once you’ve calculated your total income for the year, it’s time to determine your adjusted gross income (AGI). Your adjusted gross income is your income after you deducted certain non-taxable expenses. Your AGI represents your taxable income before you have accounted for a standard deduction, itemized deductions and any tax relief or exemption you might be entitled to. All this reduces your taxable income.
Deductions you can deduct from your gross income to determine your AGI include:
- Contributions to the Health Savings Account (HSA)
- Health insurance costs (if you are self-employed)
- Contributions to Individual Retirement Account (IRA)
- Student loan interest
- Training and fees
- Teacher costs
Ultimately, the lower your AGI, the less income taxes you will end up paying. Therefore, it is in your interest to take advantage of as many tax deductions as possible to reduce your taxable income.
3. Calculate your modified adjusted gross income (MAGI)
Once you get your AGI, you can calculate your MAGIs. It won’t appear on your tax form like your AGI, but it shouldn’t be difficult to sort it out. Your MAGI may be very similar to your AGI (in some cases it may even be identical).
To determine your MAGI, you’ll need to add some things back to your AGI. They may refer to:
- Deductions you took for IRA contributions
- Deductions you took for student loan interest as well as tuition
- Self-employment taxes
- Passive income or loss
- Lease losses
- Losses from publicly traded partnerships
- Excluded foreign income