The IRS uses your modified adjusted gross income (MAGI) to determine whether you qualify for important tax benefits like deducting contributions from your individual retirement account (IRA) and making contributions to your Roth IRA. Many taxpayers consult afinancial advisor to maximize their tax strategy for their retirement goals. Let’stake a look at your modified adjusted gross income and break down how it may impact your tax bill.
Tax Definition ofModified Adjusted Gross Income
Simply put, yourMAGI is the sum of youradjusted gross income (AGI),your tax-exempt interest income, and specific deductions added back. The IRS uses MAGIto establish whether you qualify for certain tax benefits since it can offer a more comprehensive financial picture.
For many taxpayers, their MAGI is the same as theirAGI.But, if you have non-taxable Social Security benefits,tax-exempt interest and untaxed foreign income, you will need to add them back to your AGI when calculating your MAGI.
Calculating Your Adjusted Gross Income
Before you can calculate your MAGI, you’ll need to know how to calculate your adjusted gross income. Your AGIshows how much taxable income you have after subtractingabove-the-line deductionsfrom your gross income. Your gross income is your pre-tax income. It includes all of your earnings, tips and wages, plus taxable interest, dividends, unemployment benefits and taxable retirement distributions.
When calculating your AGI, you will deduct qualifying adjustments thatinclude:
- Alimony payments (if your divorce was finalized before 2019)
- Educator expenses
- Health savings account (HSA) contributions
- IRA deductions
- Student loan interest
You can find other tax deductions in yourForm 1040.
Calculating Your Modified Adjusted Gross Income
To get your MAGI, you’ll need to add back interest and expenses that you would have deducted from your AGI. Because many of them are uncommon, don’t be surprised if your MAGI and AGI are the same.
These deductions include:
- Student loan interest
- Half of the self-employment tax you paid
- Passive income losses
- Taxable Social Security payments
- Deductible higher education expenses
Some exclusions for certain adoption expenses, foreign earned income and U.S. savings bonds income also get added back to complete your MAGI calculation.
How the IRS Uses MAGI and AGI to Calculate Benefits
Both your MAGI and your AGI play a role in determining which deductions and credits you qualify for. And the IRS may look at your MAGI if your AGI doesn’t provide an accurate representation of your financial situation.
Your AGI is used to determine specific tax credits and exemptions. Credits for the 2023 (and 2024) tax year include child and dependent care, the elderly or permanently disabled, adoption, and the earned income tax credit (EITC). Common exemptions for 2023 (and 2024) include total itemized deductions, mortgage insurance premiums, charitable contributions and qualifying medical deductions.
By comparison, your MAGI will affect how much student loan interest you can deduct. So if you file as a single taxpayer for the 2023 tax year, and your MAGI is greater than $90,000 (over $185,000 for joint filers), you cannot claim a student loan interest deduction. Single taxpayers with MAGI between $75,000 and $90,000 ($155,000-$185,000 for joint filers) can deduct a portion of the interest they paid.
Other Uses of Modified Adjusted Gross Income
Besides determining what general tax deductions you qualify for, your MAGI is also used to determine contributions to certain retirement accounts. It’s also used to determine how much credit you might receive for certain benefits. Let’s take a look at the things MAGI may impact that are commonly used:
- Traditional IRAcontributions:Similarly, if you were covered by a workplace retirement plan for the 2023 tax year and filed as asingle taxpayer, youcould not claim a traditional IRA deduction if your MAGI was $83,000 (over $136,000 for joint filers).
- Roth IRAcontributions:On the flip side, your MAGI is also used to calculate the maximum amount that you can contribute to your Roth IRA. For the 2023 tax year, single tax filers can contribute the full $6,500 ($7,500 if you’re age 50 or older) as long as your MAGI is less than $138,000 ($218,000 for joint filers). Taxpayers with MAGIs between $138,000 and $153,000 ($218,000-$228,000) can make partial contributions to a Roth IRA. The total contribution limit increases to $7,000 in 2024.
- Eligibility for premium tax credits:You should also note thatyour MAGI is used to calculate your eligibility for premium tax credits and other savings that can be applied to your marketplace health insurance, Medicaid, and the Children’s Health Insurance Program (CHIP).
Bottom Line
Whether you know it or not, your modified adjusted gross income is important because it affects your tax liability. It’s what the federal government uses to decide whether you qualify for certain tax breaks. And in some cases, it may provide a better reflection of your financial status than your adjusted gross income. If you’re not sure whether your MAGI affects the number of tax deductions and credits you can claim, you may want to consider meeting with a tax professional.
Tips for Filing Your Taxes
- Figuring out which taxdeductions and credits you are eligible for can be complicated. Afinancial advisorcould help you maximize a tax strategy for your financial goals.Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Once you’ve figured out your deductions and credits, you might want to see what your tax return looks like. SmartAsset’stax return calculatorcan help you estimate whether you will get a refund or owe money to the government.
- Many people stress about filing taxes, but these tax filing services can make the process easier.Check out our list ofbest tax filing software, and our list ofbest free online tax software.
Photo credit: ©iStock.com/andresr,©iStock.com/RichVintage,©iStock.com/KucherAV
