Modified Adjusted Gross Income (MAGI) is a significant number. First, it determines whether you can contribute to a Roth IRA and deduct IRA contributions. The factor is also eligible for certain tax benefits for education and income tax credits. . In addition, it determines your Medicaid eligibility based on income and health insurance plans subsidized in the health insurance market.
However important this number is, you won’t find it on your tax return. You will need to collect a few numbers to find your MAGI.
MAGI can be defined as the adjusted gross income of your household with any tax-exempt interest income and certain deductions added back. The Internal Revenue Service (IRS) uses MAGI to determine if you qualify for certain tax benefits. In particular, MAGI determines:
- If you can contribute to a Roth IRA
- If you can deduct traditional IRA contributions if you and/or your spouse have a retirement plan at work
- Your eligibility for the premium tax credit, health insurance
For example, you can contribute to a traditional IRA, no matter how much you earn. However, you cannot deduct these contributions when you file your tax return if MAGI exceeds the IRS limits and if you and/or your spouse have a workplace retirement plan.
Dining keys
- Your MAGI determines if – and how much – you can contribute to a Roth IRA and deduct your traditional IRA contributions.2
- To calculate the modified adjusted gross income (MAGI), take the adjusted gross income (AGI) and add back some deductions.
- It is normal for AGI and MAGI to be similar.
How does adjusted gross income work?
Determining MAGI is a three-step process:
- Calculate your gross annual income
- Calculate adjusted gross income (AGI)
- Add back some deductions to find your MAGI
Calculate your gross income
Your gross income includes everything you earn during the year from:
- Child support
- Business income
- Capital gains
- dividends
- Interest
- Agricultural income
- Rental income and royalties
- Retirement income
- tips
- Salaries12
There are two scenarios in which alimony payments are not considered gross income. The first is whether your divorce agreement was executed after 2018. The second is whether your divorce agreement was executed before 2019, but was subsequently amended to expressly state that such payments are not deductible for the payer.
Your gross income is shown on line 9 of Form 1040.
Calculate your AGI (or find it in your tax return)
Your adjusted gross income (AGI) is important because it is the total taxable income calculated before deductions, exemptions, and detailed or standardized credits are taken into account. It dictates how you can use various tax credits and exemptions. For example, AGI affects the amount of money you can claim for the child tax credit.
Your adjusted gross income is equal to your gross income, less certain tax-deductible expenses, including:
- Certain business expenses for performing artists, reservists, and government officials for a fee
- Expenses with the educator
- Half of the taxes on their own
- Health insurance premiums (if you are self-employed)
- Health Savings Account Contributions (HSA)
- Moving expenses for members of the armed forces who move due to activity
- Sanctions for early withdrawal of savings
- Retirement plan contributions (including IRAs and independent pension plan contributions)
- Interest in student loans
- Tuition fees and charges12
Add back some deductions
To find your MAGI, take AGI and add it back:
- Any deductions you made for IRA contributions and taxable social security payments
- Foreign income excluded
- Interest on EE savings bonds used to pay for higher education expenditure
- Loss of partnership
- Passive income or losses
- Rental losses
- Exclusion of adoption expenses
Many of these deductions are not commonly used, so MAGI and AGI may be similar or even identical.
Special considerations for MAGI
Roth IRAs
To contribute to a Roth IRA, your MAGI must be below the IRS limits. If you are on the income threshold, the actual amount you can contribute is also determined by MAGI. If your MAGI exceeds the allowable limits, your contributions will be phased out.
Here are the Roth IRA revenue limits for 2019:
Here is a summary of the Roth IRA income limits for 2020:
Please note that if you contribute more than you are allowed to, you must eliminate excess contributions. Otherwise, you will face a tax penalty. Excess contributions are taxed at a rate of 6% per annum as long as the excess amount remains in the IRA.
Traditional IRAs
Your MAGI and if you and your wife have retirement plans at work determine if you can deduct traditional IRA contributions. If neither spouse is covered by a workplace plan, you can get the full deduction up to the contribution limit. However, if either spouse has a work plan, your deduction may be limited.
Tax laws are complicated and change regularly. If you need help finding your MAGI, or if you have questions about IRA contributions and income limits, please contact a trusted tax professional.
