Calculating personal income tax correctly involves understanding two important tax terms: adjusted gross income (AGI) and modified adjusted gross income (MAGI). The Internal Revenue Service (IRS) allows individual taxpayers to use tax deductions and applicable credits based on calculations of AGI and MAGI to reduce total tax liability. While some taxpayers have an AGI that is the same as their MAGI, other individuals see a difference in each calculation. AGI is used to determine a taxpayer's income bracket and refers to total income for the year minus certain adjustments. MAGI is used to determine what tax deductions or credits are applicable, and it equals total income for the year with certain adjustments added back in to that total.
Adjusted Gross Income
To reach AGI, taxpayers total all income earned during the year and subtract allowable adjustments, such as self-employed retirement or IRA contributions, alimony payments and student loan interest. Half of any self-employment taxes paid, self-employed health insurance premiums and qualified tuition are also used as adjustments to reach AGI.
An individual's AGI determines whether he qualifies for certain tax credits and tax deductions used to lower his total tax liability for the year. Both the earned income credit and the child/dependent care credit depend on AGI calculations. Similarly, tax deductions including mortgage insurance premiums, medical deduction allowances and total itemized deductions are based on a taxpayer's AGI.
Modified Adjusted Gross Income
To calculate MAGI, taxpayers add certain adjustments back to the AGI total to determine eligibility for tax credits or deductions. Tuition-related costs or deductions, losses from rental properties, half of self-employment tax paid and student loan interest are common adjustments added back to reach MAGI. The IRS begins to phase out deductions for items such as IRA contributions, expenses related to education and losses from rental properties when MAGI reaches certain levels.