Modified Adjusted Gross Income - MAGI

Loading the player...

What is a 'Modified Adjusted Gross Income - MAGI'

Modified adjusted gross income (MAGI) is used to determine whether a private individual qualifies for certain tax deductions. Most notably, it is used to determine how much of an individual's IRA contribution is deductible and whether an individual is eligible for premium tax credits. A taxpayer determines modified adjusted gross income by taking his adjusted gross income (AGI) and adding back certain items, such as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions, and deductions for higher-education costs.

BREAKING DOWN 'Modified Adjusted Gross Income - MAGI'

The higher the modified adjusted gross income, the more the deductible amount of the IRA contribution is reduced, potentially to zero. If this happens, one can still contribute to an IRA plan, but the entire amount contributed will not be tax deductible.

It's normal for an individual's MAGI to be similar or the same to his AGI. However, there may be small differences that greatly effect an individual's overall tax return. Specifically, these differences will dictate whether a individual is eligible to receive certain benefits as outlined by the Affordable Care Act (ACA).

Calculating MAGI

Gross income (GI) is calculated first when calculating MAGI. GI is an individual's total income earned through wages, interests, dividends, rental and royalty income, capital gains, business income and any other type. After GI is calculated, an individual then adjusts that income by subtracting qualified deductions from the GI number, deriving AGI. Allowable deductions are listed on the front page of tax form 1040.

These deductions are made up of standard adjustments such as retirement plan contributions, student loan interest, tuition, self-employed health insurance payments and others. An individual's AGI is important because it's calculated before itemized or standard deductions, exemptions and credits are taken into account. It dictates how an individual can apply various tax credits and exemptions. For example, AGI affects the amount of money that can be claimed for the dependent care credit and the child tax credit.

MAGI is then calculated after finalizing the AGI number. To calculate MAGI, the taxpayer adds back certain deductions to AGI, many of which are rare and not realized by individuals. Therefore, it's fairly uncommon to have a MAGI that differs greatly from an AGI. The Internal Revenue Service (IRS) explains that deductions added back to calculate MAGI include things such as student loan interest, tuition, rental loss and IRA contributions.

The MAGI then dictates the use of premium tax credits and retirement plans. For example, eligibility for premium tax credits occurs when an individual's MAGI is less than 400% of the federal poverty line.

RELATED TERMS
  1. Adjusted Gross Income - AGI

    A measure of income calculated from your gross income and used ...
  2. Schedule A

    Schedule A is a U.S. income tax form that is used by taxpayers ...
  3. Standard Deduction

    A base amount of income that is not subject to tax and that can ...
  4. Taxable Income

    The amount of income that is used to calculate an individual's ...
  5. Itemized Deduction

    A deduction from a taxpayer's taxable adjusted gross income that ...
  6. Phase Out

    1. The gradual reduction of a tax credit as a taxpayer approaches ...
Related Articles
  1. Investing

    What's MAGI?

    Modified adjusted gross income, or MAGI, is one aspect of a person’s income that is calculated while preparing a tax return.
  2. Taxes

    What is Adjusted Gross Income?

    Adjusted gross income (AGI) is a term from the Internal Revenue Code. AGI is used to determine a person’s income taxes due.
  3. Taxes

    How To Calculate AGI For Tax Purposes

    The first step in completing your taxes is calculating your adjusted gross income. Here’s how.
  4. Financial Advisors

    How to Deduct Medical Insurance Premiums

    An overview of tax breaks for those who pay medical insurance premiums.
  5. Taxes

    Why You Should Itemize Your Tax Deductions

    This strategy of moving your tax deductable payments and donations to the following year could mean hundreds more on your return.
  6. Taxes

    Top Tax Deductions Not to Overlook

    If you want to pay as little as possible in taxes, it's important to learn about all the different credits and deductions available. Here's a primer.
  7. Taxes

    Will Itemized Deductions Get You A Bigger Refund?

    April and taxes are due soon. If you need to file your return, you might have to decide if itemizing your deductions this year will net you a better deal.
  8. Taxes

    Top Tax Issues For High-Net-Worth Individuals

    Wealth brings benefits, but from a tax perspective it creates special challenges. Here are some tax issues to pay attention to.
  9. Taxes

    Don't Miss These Tax Deductions

    Knowing the tax deductions you're entitled to can make or break your bank account. Do you know about all these insurance-related deductions?
  10. Taxes

    Explaining Taxable Income

    Taxable income is the net of gross income and allowable deductions.
RELATED FAQS
  1. What is the difference between MAGI (modified adjusted gross income) and adjusted ...

    Understand the difference between adjusted gross income and modified adjusted gross income and the effect each has on personal ... Read Answer >>
  2. What are some good free online calculators for AGI (adjusted gross income)?

    Learn specific information about adjusted gross income and modified adjusted gross income and where free online calculators ... Read Answer >>
  3. What are the differences among gross income, adjusted gross income and modified adjusted ...

    Discover how calculating total taxable income is easier when gross income, adjusted gross income and modified adjusted gross ... Read Answer >>
  4. To what extent is my IRA tax deductible?

    I was in an employer sponsored retirement plan for part of the year, but I was unemployed for the rest of year. ... Read Answer >>
  5. What is the difference between AGI (adjusted gross income) and gross income?

    Find out the differences between your annual gross income and your adjusted gross income, or AGI, both of which are calculated ... Read Answer >>
  6. Where on my 1040 form do I report AGI (adjusted gross income)?

    Learn more about IRS Form 1040 and your adjusted gross income, or AGI, which is the figure the IRS uses to figure your total ... Read Answer >>
Hot Definitions
  1. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  2. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  3. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  4. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  5. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  6. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
Trading Center