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AGI vs. MAGI: What's the Difference?

AGI vs. MAGI: An Overview

When you calculate your personal income tax, it's important to understand the relationship between the terms adjusted gross income (AGI) and modified adjusted gross income (MAGI) because they can affect the amount of taxes that you owe. The Internal Revenue Service (IRS) allows individual taxpayers to use tax deductions and applicable credits to reduce their tax liability based on their AGI and MAGI. But these tools may result in small differences that can greatly affect an individual's tax return. AGI can reduce your taxable income by taking deductions from your gross income. But some of those deductions may be taken away through your MAGI as your income increases.

Key Takeaways

  • Adjusted gross income and modified adjusted gross income are calculations based on your gross income.
  • Both help the IRS determine whether taxpayers may take advantage of certain credits and deductions.
  • AGI can reduce the amount of your taxable income by subtracting certain deductions from your gross income.
  • MAGI is your AGI after factoring in tax deductions and tax-exempt interest.
  • You can't find your MAGI on your tax return, although your AGI appears on line 11 of Form 1040.

Adjusted Gross Income (AGI)

Adjusted gross income is a tax term that is used by the IRS. The agency defines it as a modification of your gross income, which is the total amount of money you earn in a tax year. AGI is generally more useful than gross income for individual tax purposes and it becomes the starting point for determining your tax liability. Put simply, it is an important but intermediate step in determining how much of your gross income is taxable.

It factors in allowable deductions from your gross income to reach the figure for which your income taxes will be calculated. Some of these adjustments and expenses include student loan payments, business expenses, moving expenses, alimony payments, and self-employment taxes. As such, think of your AGI as giving yourself these (and other eligible) IRS tax deductions.

You can find your AGI on line 11 of Form 1040.

Calculating AGI

To reach your AGI, add all the income you earned during the year and subtract any allowable adjustments, such as:

  • Educator expenses
  • Self-employed retirement
  • Individual retirement account (IRA) contributions
  • Student loan interest
  • Alimony payments under a divorce agreement that was entered into on or before Dec. 31, 2018.

To arrive at your AGI, you also may deduct 50% of any self-employment taxes you paid and self-employed health insurance premiums for you and your family members.

AGI's Effects on Your Taxes

As noted earlier, your gross income is all the money you made from various sources during the tax year. Your AGI, on the other hand, is a modified version of this figure. It becomes the starting point in determining whether you'll have a tax bill or get a refund.

This means that AGI has a big impact on whether you qualify for certain deductions or tax credits. As such, it directly influences your eligibility to claim many of the ones that are available on your tax return. For instance, both the earned-income credit (EIC) and the child and dependent care credit depend on AGI calculations. Similarly, certain tax deductions are based on your AGI. These include mortgage insurance premiums (MIPs) and medical expense deduction thresholds,

Remember, though, that your AGI must meet a certain threshold in order to be eligible for these deductions and credits. For instance, you don't qualify for the adoption credit if your AGI exceeded $256,660 for the 2021 tax year.

Gross income is the sum of all that you earn in a year, including wages, dividends, alimony, capital gains, interest income, royalties, rental income, and retirement distributions.

Modified Adjusted Gross Income (MAGI)

Modified adjusted gross income (MAGI) is your adjusted gross income after taking certain tax deductions and tax-exempt interest into account. It modifies your AGI by adding back items like foreign earned income, student loan interest, and the excluded portion of adoption expenses. For most taxpayers, MAGI is simply AGI with the student loan interest deduction added back in. As such, you may consider it as taking away those deductions.

Your MAGI is important because it allows you to determine whether you can contribute to a Roth IRA and whether you can deduct contributions made to a traditional IRA if you have an employer-sponsored 401(k). Your MAGI also determines your eligibility for the premium tax credit. This credit helps lower any costs incurred through a health insurance plan purchased through the marketplace, Medicaid, as well as the Children's Health Insurance Program (CHIP).

Unlike your AGI, your MAGI doesn't appear on your annual tax return.

Calculating MAGI

To calculate your MAGI, add certain adjustments back to the AGI total to determine whether you are able to take full advantage of tax perks. Some of the most common adjustments used to arrive back at your MAGI include:

  • Tuition-related costs or deductions
  • Losses from rental properties
  • Half of the self-employment tax you paid during the tax year
  • Student loan interest

The IRS begins to phase out deductions for items such as IRA contributions and expenses related to education at certain income levels.

MAGI's Effects on Your Taxes

As noted above, the IRS uses the MAGI figure to determine how much of an individual's IRA contribution is deductible. The higher the MAGI, the fewer deductions you can take on IRA contributions. and how much of a deduction you can take for student loan interest. If your MAGI is too high, IRA deductions may even reach zero. If this happens, you can still contribute to an IRA plan, but cannot deduct any of the contributions on your taxes.

Your MAGI also dictates whether you're eligible for premium tax credits outlined by the Affordable Care Act (ACA) as it stands today. It also outlines whether you can claim certain deductions, such as student loan interest. Individual taxpayers with a MAGI under $85,000 ($170,000 for married couples filing jointly) in the 2021 tax year can claim the deduction. Those whose MAGI exceeded that amount don't qualify.

It's normal for a person's MAGI to be similar to or the same as their AGI.

Example of AGI vs. MAGI

Here's a hypothetical example to show the difference between adjusted and modified adjusted gross income and how to calculate both of them. We know that AGI appears on line 11 on Form 1040 or your annual tax return. Let's say the sum of all your W-2s is $30,000 (this is your gross income) and you have additional earned income (from interest and dividends) totaling $1,500. Your total income is $31,500, This figure is reported on line 9 of Form 1040.

Now let's say you have the following:

  • Student Loan Interest: $1,200
  • IRA Contributions: $3,500
  • Moving Expenses: $500

The total of your adjustments is $5,200. When you subtract these from your total income, you get your AGI or $26,300. Note that you would also factor in other expenses like alimony, educator expenses, and tuition fees, among others. Deducting these figures from your gross income can bring you into a lower tax bracket, thus lowering your liability. And a lower AGI means you'll be able to claim more credits and deductions.

Now. we need to figure out your MAGI. Let's say you had a total of $200 in tax-exempt interest for the year from municipal bonds. This is added back into your AGI ($26,300 + $200), giving you a MAGI of $26,500. You would also add in any income that was excluded from foreign sources as well as any non-taxable Social Security benefits. It's important to note, again, that this figure doesn't appear on your annual tax return. Depending on where your MAGI falls, you may be able to claim a greater portion of allowable deductions like the student loan interest. That figure is lower if your MAGI is higher and vice versa.

What Does Modified Adjusted Gross Income Include?

Your modified adjusted gross income is your adjusted gross income after accounting for certain tax deductions and tax-exempt interest, such as untaxed foreign income.

Is Modified Adjusted Gross Income on My Tax Return?

No, you can't find your MAGI on your tax return. But you can locate your AGI. This figure is found on line 11 of Form 1040.

How Do I Lower My MAGI?

The easiest way to lower your MAGI (but probably not the most desirable) is to earn less. If you're not willing to take a pay cut, there are other options available to you. Consider making or increasing contributions to retirement accounts that are funded using pre-tax dollars, such as a traditional IRA, 401(k), SIMPLE IRA, or SEP IRA. Just make sure you don't go over the annual limits. You can also lower your MAGi by opening a health savings account or flexible savings account—both of which help you save up for your health care costs.

Is Social Security Included in MAGI?

Social Security is included in your MAGI. This includes retirement income, Social Security Disability Insurance, and any survivor's benefits. All of these benefits count even if they aren't taxable.

Article Sources
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  1. Internal Revenue Service. "Definition of Adjusted Gross Income."

  2. Intuit TurboTax. "What Is the Difference Between AGI and MAGI on Your Taxes?"

  3. Internal Revenue Service. "Form 1040: U.S. Individual Income Tax Return," Page 1.

  4. Internal Revenue Service. "Form 1040 Instructions," Pages 90-93.

  5. Internal Revenue Service. "Topic No. 607 Adoption Credit and Adoption Assistance Programs."

  6. Internal Revenue Service. "Modified Adjusted Gross Income."

  7. Healthcare.gov. "Modified Adjusted Gross Income (MAGI)."

  8. Internal Revenue Service. "Income ranges for determining IRA eligibility change for 2021."

  9. Internal Revenue Service. "Education Credits: Questions and Answers."

  10. Internal Revenue Service. "2021 IRA Deduction Limits - Effect of Modified AGI on Deduction If You Are Covered by a Retirement Plan at Work."

  11. Healthcare.gov. "What to include as income."

  12. Internal Revenue Service. "Rev. Proc. 2021-45," Page 18

  13. Centers for Medicare & Medicaid Services. "Income Eligibility Using MAGI Rules," Page 24.

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