What Is Modified Adjusted Gross Income (MAGI)?
Modified adjusted gross income (MAGI) is individual's adjusted gross income (AGI) after taking into account certain allowable deductions and tax penalties. MAGI is an important number to understand since it is used in several different tax concepts.
Key Takeaways
- Modified adjusted gross income (MAGI) is an important figure for understanding your taxable income.
- MAGI adjusts the adjusted gross income (AGI) for certain tax deductions and credits.
- You’ll have to crunch some numbers to find your MAGI, but tax preparation software makes this easy.
- MAGI can change your eligibility for specific programs like qualified retirement account contributions and other programs.
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Understanding Modified Adjusted Gross Income (MAGI)
Modified adjusted gross income can be defined as your household’s AGI after any tax-exempt interest income and after factoring in certain tax deductions. Knowing your MAGI can help reduce an individual's taxable income (to account for your retirement account contributions), factor in the eligibility for benefits like the student loan interest deduction and the Child Tax Credit, and establish eligibility for income-based Medicaid coverage or health insurance subsidies.
The Internal Revenue Service (IRS) uses MAGI to establish whether you qualify for certain tax benefits. MAGI notably determines:
- Whether your income does not exceed the level that qualifies you to contribute to a Roth individual retirement account (IRA)
- Whether you can deduct your traditional IRA contributions if you and/or your spouse have retirement plans, such as a 401(k) at work
- Whether you’re eligible for the premium tax credit, which lowers your health insurance costs if you buy a plan through a state or federal Health Insurance Marketplace
You can contribute to a traditional IRA no matter how much you earn. In addition, you can typically deduct the IRA contribution amount, reducing your taxable income for that tax year. However, you can’t deduct contributions when you file your tax return if your MAGI exceeds limits set by the IRS and you and/or your spouse have a retirement plan at work.
MAGI and Its Uses
Your MAGI is an important figure, not only for understanding your taxable income but also for qualifying for certain tax credits or deductions. Several such credits and deductions have thresholds that look at your MAGI, not your unadjusted gross income. MAGIs above those thresholds will see those credits or deductions phase out or disappear.
MAGI is also used to determine eligibility for healthcare waivers and incentives under the Affordable Care Act (ACA) for states' health insurance marketplaces. It is also used as a threshold for qualifying for state Medicaid programs.
Roth IRAs
MAGI is also used to determine your eligibility to contribute to a Roth IRA. Roth accounts use after-tax dollars and grow tax-exempt (unlike traditional retirement accounts that are instead tax-deferred).
To contribute to a Roth IRA,your MAGI must be below the limitsspecified by the IRS. If you’re within the income threshold, the actual amount you can contribute is also determined by your MAGI. Your contributions are phased out if your MAGI exceeds the allowed limits.
Here’s a rundown of Roth IRA income limits for 2023:
| 2023 Roth IRA Income Limits | ||
|---|---|---|
| If your filing status is… | And your modified AGI is… | Then you can contribute… |
| Married filing jointly or qualifying widow(er) | Less than $218,000 | Up to the limit |
| More than $218,000 but less than $228,000 | A reduced amount | |
| $228,000 or more | Zero | |
| Single, head of household, or married filing separately and you didn’t live with your spouse at any time during the year | Less than $138,000 | Up to the limit |
| More than $138,000 but less than $153,000 | A reduced amount | |
| $153,000 or more | Zero | |
| Married filing separately and you lived with your spouse at any time during the year | Less than $10,000 | A reduced amount |
| $10,000 or more | Zero | |
Traditional IRAs
You have to remove the excess contributions if you contribute more than you’re allowed. Otherwise, you’ll face a tax penalty. Excess contributions are taxed at a rate of 6% per year for as long as the extra amount remains in your IRA.
Your MAGI and whether you and your spouse have retirement plans at work determine whether you can deduct traditional IRA contributions. If neither spouse is covered by a plan at work, then you can take the full deduction up to the amount of your contribution limit. However, if either spouse has a plan at work, then your deduction may be limited.
Here’s a rundown of traditional IRA income limits for 2023:
| 2023 Traditional IRA Income Limits | ||
|---|---|---|
| If your filing status is… | And your modified AGI is… | Then you can take… |
| Single or head of household covered by plan at work | $73,000 or less | A full deduction up to the amount of your contribution limit |
| $73,000 but less than $83,000 | A partial deduction | |
| $83,000 or more | No deduction | |
| Married filing jointly or qualifying widow(er) covered by plan at work | $116,000 or less | A full deduction up to the amount of your contribution limit |
| $116,000 but less than $136,000 | A partial deduction | |
| $136,000 or more | No deduction | |
| Married filing separately covered by plan at work; married filing separately with spouse who is covered by plan at work | $10,000 or less | A partial deduction |
| $10,000 or more | No deduction | |
| Single, head of household, qualifying widow(er); married filing jointly or separately NOT covered by a plan at work but your spouse is | Any amount | A full deduction up to the amount of your contribution limit |
| Married filing jointly or separately NOT covered but with a spouse who is covered by a plan at work | $218,000 or less | A full deduction up to the amount of your contribution limit |
| $218,000 but less than $228,000 | A partial deduction | |
| $228,000 or more | No deduction | |
Tax laws are complicated and change periodically. If you need help figuring out your MAGI, or if you have any questions about IRA contribution and income limits, contact a trusted tax professional.
Many deductions are not commonly used, so your MAGI and AGI could be similar or identical.
Calculating Your MAGI
There are several different ways to calculate MAGI based on how MAGI is to be used. In the broadest sense, determining your MAGI is a three-step process. Additional ways to calculate MAGI for more specific reasons is in the subsequent section. In most cases, MAGI is calculated in three steps:
- Figure out your gross income for the year.
- Calculate your AGI.
- Add back certain deductions to calculate your MAGI.
Figure Out Your Gross Income
Your gross income includes everything you earned during the year from:
- Alimony, which is court-ordered payments to a spouse due to divorce or separation
- Business income
- Capital gains or any realized gains after selling an asset for a profit
- Dividends, which are typically cash payments to a company’s shareholders
- Interest
- Farm income
- Rental and royalty income
- Retirement income
- Tips
- Wages
There are two scenarios in which alimony payments are not considered gross income. The first is if your divorce agreement was executed after 2018. The second is if your divorce agreement was executed before 2019 but later modified to expressly state that such payments are not deductible for the payer.
Your gross income appears on line 9 ofForm 1040.
Calculate Your AGI
Your AGI is important because it’s the total taxable income calculated before itemized or standard deductions, exemptions, and credits are taken into account. It dictates how you can use various tax credits and exemptions.
Your AGI is equal to your gross income, minus certain tax-deductible expenses, including:
- Certain business expenses for performing artists, reservists, and fee-basis government officials
- Educator expenses
- Half of any self-employment taxes
- Health insurance premiums (if you’re self-employed)
- Health Savings Account (HSA) contributions
- Moving expenses for members of the armed forces moving due to active duty
- Penalties on early withdrawal of savings
- Retirement plan contributions(including IRAs and self-employed retirement plan contributions)
- Student loan interest
You can do the math to figure out your AGI. Or you can find it on line 11 ofForm 1040.
Add Back Certain Deductions
To find your MAGI, take your AGI and add back:
- Any deductions you took for IRA contributions and taxable Social Security payments
- Deductions you took for student loan interest
- Tuition and fees deduction
- Half of self-employment tax
- Excluded foreign income
- Interest from EE savings bonds used to pay for higher education expenses
- Losses from a partnership
- Passive income or loss
- Rental losses
- The exclusion for adoption expenses
Various MAGI Calculations
As mentioned earlier, MAGI is used to determine eligibility for certain tax benefits, subsidies, and assistance programs in a number of different ways. The specific calculations can vary depending on the context, as MAGI is used in different scenarios.
Below is a brief list of programs, taxes, or benefits that may each all for a MAGI calculation. However, the MAGI calculation will vary across each item. As you are asked to calculate MAGI for any tax credit or government program, be mindful you are aware of which MAGI calculation is required as not all formulas are the same. Several examples include but are not limited to:
- IRA Deductions: Start with your AGI, then subtract any specific deductions related to traditional IRA contributions.
- Student Loan Interest Deduction: Start with your AGI, then add back any student loan interest deduction you claimed.
- Self-Employment Tax: Start with your AGI, then add back any specific deductions for self-employment taxes.
- Excluded Foreign Income: Start with your AGI, then add back any excluded foreign income.
- Other Tax-Exempt Income: Start with your AGI, then add back specific tax-exempt income such as income from municipal bonds.
- Social Security benefits: Start with your AGI, then add back a portion of your Social Security benefits (though often not all).
Strategies to Minimize MAGI
From a tax planning and strategy perspective, it's best to minimize your MAGI. Here are several tips on how to reduce your MAGI in the eyes of tax agencies:
- Maximize Deductions: Take advantage of available deductions, and that doesn't always mean the standard deduction. Keep in mind other ideas such as mortgage interest, property taxes, charitable contributions, and medical expenses.
- Save for Retirement: Contributing to tax-advantaged retirement accounts like Traditional IRAs, 401(k)s, or Health Savings Accounts (HSAs) can reduce MAGI. Your primary goal may not be to reduce your taxes when saving the for the future, but these select retirement or savings vehicles have added tax benefits.
- Use Other Tax-Advantaged Vehicles: Investing in tax-advantaged vehicles such as municipal bonds, Roth IRAs, or 529 college savings plans can also reduce your MAGI. If you're looking to generate income but also want to minimize taxes, be mindful how you hold the investments.
- Harvest Capital Losses: Harvesting losses is a strategy to offset capital gains. If you weren't able to use the tax-advantaged accounts in the last bullet, you can still find ways to reduce taxable income derived from investment accounts.
- Closely Monitor Rental Investments: Managing rental properties may entail a lot of different costs; to optimize MAGI, maximize deductible expenses and properly reporting rental income (which requires close management of the property).
What Purpose Does MAGI Serve?
The IRS uses MAGI to determine whether you qualify for specific tax programs and benefits. For instance, it helps to determine the allowed amount of your Roth IRA contributions. Knowing your MAGI can also help you avoid tax penalties because over-contributing to these programs and others like them can trigger interest payments and fines. Your MAGI can also determine eligibility for certain government programs, such as the subsidized insurance plans available on the Health Insurance Marketplace.
What Is the Difference Between MAGI and AGI?
Your modified adjusted gross income (MAGI) is your adjusted gross income (AGI) plus additional items such as student loan interest, qualified education expenses, passive income or losses, IRA contributions, and foreign income, among others.
Can MAGI and AGI Be the Same?
Yes, MAGI and AGI can be the same. For many people, the list of deductions that need to be added back to AGI to calculate MAGI will not be relevant. For instance, those who did not earn any foreign income would have no reason to use that deduction and would have none of those earnings to add back to their AGI.
The Bottom Line
Modified adjusted gross income (MAGI) is important for your tax returns to determine what you owe the IRS. It takes your gross income and adjusts and modifies it for certain exemptions, qualifications, and allowances. Your MAGI will differ from your adjusted gross income (AGI) if you have foreign income, qualified education expenses, or passive losses, among other items.
