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What is Modified Adjusted Gross Income (MAGI)?

definition

Your modified adjusted gross income (MAGI) is your adjusted gross income with certain tax deductions added back in.

🤔 Understanding modified adjusted gross income

Your household’s modified adjusted gross income is what determines whether you’re eligible for certain tax savings and deductions. Your MAGI is found by first calculating your adjusted gross income (AGI), which is your income after you’ve changed it to account for some tax deductions. Then, to find your MAGI, you have to add some of those deductions back. It’s not a number you’ll find on your tax return — You have you calculate your MAGI yourself. Depending on your MAGI, you might be eligible for some serious benefits, including Medicaid coverage, subsidies for health plans under the Healthcare Marketplace, and the ability to contribute to individual retirement accounts, such as a Roth IRA.

example

Steve contributes to an individual retirement account (IRA). Steve’s contributions might be tax-deductible if his modified adjusted gross income (MAGI) falls under a specific number. To find his MAGI, Steve takes his adjusted gross income and adds back in certain tax deductions. This calculation gives him his MAGI, which tells him whether or not he’ll be able to deduct those IRA contributions.

Takeaway

Modified adjusted gross income is like an airline size limit for your carry-on luggage…

You’ll need to put your income (your bag) on the scale (through a series of calculations). If it’s too big, you may have to check your bag and pay more in fees (taxes).

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What is the difference between MAGI and AGI?
Why is MAGI important?
How do you calculate MAGI?

What is the difference between MAGI and AGI?

Your adjusted gross income (AGI) and your modified adjusted gross income (MAGI) are two figures that can have an impact on your finances. Though they may be similar in value to one another, they aren’t the same thing.

Your AGI is a number that appears on your tax return. This number impacts your eligibility for certain tax credits and exemptions. For example, your AGI determines whether you’re eligible for (and how much you’re eligible for) the child tax credit, earned income tax credit, dependent care tax credit, adoption tax credit, and more.

There are also some tax deductions that you’re only eligible for if your income falls under a certain level. These deductions include those for certain itemized deductions, mortgage insurance premiums, charitable contributions, medical expenses, and qualified motor vehicle taxes.

Depending on your financial situation, your MAGI might be very similar or identical to your AGI — it varies on a case-by-case basis. Your MAGI is essential for figuring out if you’re eligible for certain other deductions. In particular, your MAGI determines whether you can deduct any contributions you made to an individual retirement account (IRA) and whether you can contribute to a Roth IRA.

Why is MAGI important?

MAGI & Roth IRAs

If you’ve thought about opening a Roth IRA, then you should pay special attention to your modified adjusted gross income (MAGI). A Roth IRA is an individual retirement account you contribute to with after-tax money, but then don’t pay taxes when you withdraw. Only individuals whose MAGI falls under a certain threshold are eligible to contribute to a Roth IRA. At a certain MAGI level, the amount you can contribute to your Roth IRA decreases. There’s also an income level where your eligibility goes away altogether.

As of 2020, those with an income of $124,000 or less (or $196,000 or less for married couples) can contribute the full amount to their Roth IRA. In 2020, that maximum amount is $6,000 for most individuals and $7,000 for those at age fifty or older.

If your income falls between $124,000 and $139,000 (or $196,000 and $206,000 for married couples), the amount you can contribute each year decreases. Finally, if your MAGI falls above $139,000 for single individuals and $206,000 for married couples, then you can’t contribute to a Roth IRA at all.

If you are unable to contribute to a Roth IRA because of your income, you may be able to do what’s called a “backdoor Roth IRA,” where you contribute to a traditional IRA and then immediately roll over the funds into a Roth IRA. Consult a tax professional.

MAGI & traditional IRAs

Your MAGI also plays a vital role if you contribute 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 during retirement.

The amount you can contribute to a traditional IRA is the same as the Roth IRA — $6,000, or $7,000 for those age 50 or older. But with a traditional IRA, you can contribute just as much no matter how high your income.

In the case of a traditional IRA, your MAGI determines whether you can deduct your contributions for tax purposes. Those within a specific income range might be able to take only a partial deduction, while those over a certain income won’t be able to take any deduction at all.

As of 2020, a single person or head of household can take the full deduction for a MAGI of up to $65,000. Between $65,000 and $75,000, they’ll be able to receive only a partial deduction. Once their income exceeds $75,000, they won’t be able to deduct any of their traditional IRA contributions.

For married couples, the full deduction is available to those with a MAGI of $104,000 or less. With a MAGI of $104,000 to $124,000, they will be able to take only a partial deduction. And once their MAGI exceeds $124,000, they no longer qualify for a deduction.

MAGI & healthcare

The Affordable Care Act (ACA) — you might know it as Obamacare — became law in March 2010. Congress passed the bill to reduce the cost of healthcare and to provide health insurance coverage for those who didn’t receive coverage elsewhere.

Included in the ACA were certain premium tax credits and cost-sharing subsidies that could help families to purchase health insurance at a more affordable price. It is your MAGI that determines whether you are eligible for these benefits.

Those with income up to 400% of the Federal Poverty Level (FPL) are eligible to receive a tax credit. The FPL as of 2020 is $12,490 for a single person, $16,910 for a family of two, $21,330 for a family of three, and $25,750 for a family of four (and it continues to increase from there). The lower your income, the more of a credit you can receive. To determine if you are eligible for one of these tax credits, take the FPL for your family size and multiply it by four. If your MAGI falls under that number, you should be eligible for some level of a tax credit.

In this case, figuring out how to calculate your MAGI is essential. At 400% of the FPL, you are eligible for a tax credit under the ACA. But as soon as your MAGI exceeds that 400% by even one dollar, you can’t claim those credits.

It’s important to note that you also may not be eligible for ACA tax credits if your MAGI is too low. If your MAGI falls under 138% FPL (or under 100% FPL in states that did not expand Medicaid), then you won’t get any ACA tax credits — You’ll have to apply for Medicaid instead.

How do you calculate MAGI?

Step 1: Find your gross income

When it comes to determining your modified adjusted gross income (MAGI), the first step is finding your total income for the year. Your gross income is the sum of all income you’ve earned throughout the year.

Your gross income includes your wages, tips, business income, rental income, retirement income, alimony, and investment income (usually in the form of capital gains, dividends, and interest).

Usually, you’ll receive a form to show you how much you’ve earned from a particular source. If you have a job, for example, your employer will provide you with a W-2 form. If you’re a freelance or contract worker, your clients will send you a 1099 form.

Step 2: Determine your adjusted gross income (AGI)

Once you’ve figured out 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’ve taken into account certain tax-deductible expenses. Your AGI represents your taxable income before you’ve accounted for the standard deduction, itemized deductions, and any tax credits or exemptions for which you might be eligible. These all lower your taxable income.

The deductions you can subtract from your gross income to find your AGI include:

  • Health savings account (HSA) contributions
  • Health insurance expenses (if you’re self-employed)
  • Individual retirement account (IRA) contributions
  • Student loan interest
  • Tuition and fees
  • Educator expenses
  • Certain business expenses, including half of your self-employment taxes (aka Medicare and Social Security taxesself-employed individuals pay twice as much because they don’t have an employer paying a portion of theirs)

Ultimately, the lower your AGI, the less you’ll end up paying in income taxes. Because of that, it’s in your best interest to take advantage of as many tax deductions as possible to lower your taxable income.

You can calculate your AGI yourself using this information. Your AGI also appears on Form 1040, which is an IRS form that you use to file your taxes every year.

Step 3: Calculate your modified adjusted gross income (MAGI)

Once you’ve got your AGI, you can calculate your MAGI. It won’t appear on your tax form like your AGI does, but it shouldn’t be challenging to figure out. Your MAGI might be very similar to your AGI (in some cases, it could even be identical).

To determine your MAGI, you’ll need to add some things back to your AGI. You can go ahead and add:

  • Deductions you took for IRA contributions
  • Deductions you took for student loan interest as well as tuition
  • Self-employment taxes
  • Passive income or losses
  • Rental losses
  • Publicly-traded partnership losses
  • Excluded foreign income Interest from EE savings bonds for higher education expenses

The result is your MAGI.

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