To start, MAGI is an acronym for modified adjusted gross income. This number can help determine if you can contribute to a Roth IRA, deduct IRA contributions, and determine eligibility for income tax credits and education tax benefits. It even is used to determine eligibility for income-based Medicaid and subsidized health insurance under the Affordable Care Act.
Surprisingly, while MAGI is such an important number for most households, you won’t be able to find it on your tax return. You will need to do a little calculation on your own to determine your MAGI.
How Does MAGI Work?
There is a three-step process to determine your MAGI. First, you need to determine which of your income types should be included. Second, you will then calculate your adjusted gross income (AGI). Finally, you will add back deductions specified by the IRS.
For many people, your MAGI and AGI will be very close, sometimes even identical. If you’re ready to determine MAGI to determine your eligibility for IRS credits, deductions, and retirement plans, start by looking at the income types below.
Income Types That Affect MAGI
The first step in determining your MAGI is to look at your different types of income to determine whether they count as a part of your MAGI. While we have listed the most common types of income, it is not a complete list. If you do not see one of your income types listed, check the IRS website to determine what is considered income for your modified adjusted gross income.
Federal Taxable Wages
This is one of the most common income types. If your employer provides you with a pay stub that has “federal taxable wages” listed, use that number. If you do not see “federal taxable wages” on your check stub, use the number under “gross income” then subtract any amount that was deducted for health insurance, retirement plans, and childcare.
Tips can be the primary source of income for many, and are required to be counted as income.
Self Employment Income
You will want to include any self-employment income that you made from your business, minus any business expenses. This will be your “net self-employment income”.
Unemployment compensation should also be included in your calculations.
You will want to include both the taxable and non-taxable social security income you receive. Use the full amount, do not include deductions.
Social Security Disability Income
You will also want to include any social security disability income (SSDI). However, you do not need to include any Supplemental Security Income (SSI).
Retirement Or Pension
When calculating your MAGI, include any withdrawals from your IRA and 401K. You will not include qualified distributions from a designated Roth account. For more detailed instructions of what to include, review this IRS publication.
If you receive alimony, it will depend on when your divorce was finalized to determine if the income should be included. Perhaps your separation or divorce was finalized before January 1, 2019, you should include it as income. If your divorce or separation was finalized after January 1, 2019 you should not include it as income.
Any child support that you receive is not included as income.
You will need to include capital gains during your calculations.
You will also need to include any investment income including expected interest, expected dividends earned, and tax-exempt interest.
Rental And Royalty Income
Like self-employed income, you will want to use your net rental and royalty income. You do this by taking your rental and royalty income, then deducting qualified expenses.
Calculating Your AGI
Now that you know what income should be included in MAGI, you will want to start calculating your adjusted gross income (AGI).
Your AGI is calculated by the total amount of your income within the year, minus certain expenses that are considered deductible. First, total all your income including wages, tips, business income, rental income, dividends, everything included above. This is your gross income (GI).
After you have figured your gross income, you will adjust it by removing qualified deductions.
Health Savings Account (HSA)
HSA accounts are a tax-free account for individuals, typically with high-deductible health plans. You can use it to pay any medical expenses pre-tax. You will remove any money paid into your HSA from your gross income.
You can remove up to $4,000 for your higher education tuition and fees from your gross income, but only if your modified gross income does not exceed $65,000. For married couples, the limit is $130,000, unless you file separately then you cannot claim this deduction.
Retirement Plan Contributions
Retirement plan contributions can be deducted from your gross income. With traditional IRAs, the money that is deposited then reduces your AGI dollar-for-dollar for that tax year. However, with a Roth IRA you will not reduce your AGI for the year, instead since they are funded with after-tax dollars, you will not have to pay income tax when the money is withdrawn.
Self-Employed Health Insurance
When you are self-employed and pay for your own health insurance premiums, you can deduct 100% of what you spent on premiums. This also covers your dependents and spouse. However, if you have insurance coverage available to you through an employer or your spouse’s employer, you cannot take this deduction.
Teachers and educators can adjust their income up to $250 if single, or $500 if married filing a joint return and both educators. You must be a teacher, principal, aide, instructor, or counselor for students aged kindergarten through grade 12 and work 900 hours yearly in a school that provides elementary or secondary education. You can then adjust your income for classroom expenses.
If you are self-employed you must pay 100% of your Social Security and Medicare taxes. The IRS will give half of that back to you as an adjustment to your gross income.
How To Calculate MAGI
Once you have determined your adjusted gross income, you can now calculate your MAGI by adding back in deductions as determined by the IRS. You will want to add back in the following:
Passive Income Or Losses
Earnings or losses that you took from a limited partnership, rental property, or other enterprises which you are not actively involved in should be added back in.
You will also need to add back in any non-taxable social security payments.
If you deducted IRA contributions to determine your adjusted gross income, calculate them back in as a factor for your MAGI.
Student Loan Interest Or Tuition
If you are currently paying student loan interest or tuition, you could deduct it from your adjusted gross income, but it should be added back in for your MAGI calculation.
Half of your self-employment tax should be added back in if you freelance, work as an independent contractor, or started your own business.
If you took a loss on your rental property, it is removed from your adjusted gross income and receives favorable tax treatment. But you will need to add the loss back in to determine your modified adjusted gross income.
Excluded Foreign Income
If you live or work abroad, you likely meet certain requirements to exclude you from foreign earned income from your adjusted gross income. However, your modified adjusted gross income should add all foreign income back into the equation.
Interest From EE Savings Bonds
Qualified taxpayers can exclude in their AGI the interest paid upon redemption of select savings bonds when they are used to pay for higher education expenses at eligible institutions. These savings bonds must start with Series EE. That interest should be added back in when calculating MAGI.
Losses From Publicly Traded Partnership (PTP)
In a partnership, PTPs do not pay tax, making them able to pay more of their income to investors. Since they are treated as a return of capital, rather than income, they are deducted from adjusted gross income, but need to be added back in to determine MAGI.
Employer-Paid Adoption Expenses
Adoption assistance programs, Section 137, provides a deduction for amounts paid or expenses incurred by an employer for a qualified adoption. The expenses should be added back to determine your modified adjusted gross income.
MAGI vs AGI
When calculating your personal income tax, both your adjusted gross income (AGI) and modified adjusted gross income (MAGI) should be taken into consideration.
Your adjusted gross income reduces that amount of your taxable income, while your modified adjusted gross income takes away these deductions, increasing your income.
How Does Your MAGI Affect Taxes?
Your MAGI is most commonly used by the IRS to determine how much of your IRA contribution is deductible. It can also be used to determine your eligibility for premium tax credits. If your MAGI is higher, the fewer deductions you qualify for on IRA contributions. If it is too high, you could receive zero IRA deductions.
How To Reduce Your Modified Adjustable Gross Income
If you are close, or above the income needed to qualify to contribute to a Roth IRA, you might need to consider ways to lower your MAGI. You can do this by making pre-tax contributions to a 401(k), 457, 403(b), or Thrift Savings Plan or contribute to an HSA (health savings account) or flexible-spending account.
Calculate And Compare With An Advisor
Working with a trusted financial advisor can help you understand your personal AGI and MAGI. They can help you develop a strategy to adjust your MAGI if needed and help you reach your financial goals.