Modified adjusted gross income is an important number. First of all, it determines whether you can contribute to a Roth IRA and if you can deduct IRA contributions. It also factors into your eligibility for certain education tax benefits and income tax credits. Furthermore, it establishes your eligibility for income-based Medicaid and subsidized health insurance plans on the Health Insurance Marketplace.
Still, as important as this number is, you won’t find it on your tax return. You'll have to crunch some numbers to find your modified adjusted gross income.
- Your MAGI determines if—and how much—you can contribute to a Roth IRA, and if you can deduct your traditional IRA contributions.
- To calculate your modified adjusted gross income (MAGI), take your adjusted gross income (AGI) and add back certain deductions.
- It's normal for your AGI and MAGI to be similar.
What Is Modified Adjusted Gross Income?
Modified adjusted gross income (MAGI) is your household's adjusted gross income with any tax-exempt interest income and certain deductions added back.
The Internal Revenue Service (IRS) uses MAGI to establish if you qualify for certain tax benefits. Most notably, MAGI determines:
For example, you can contribute to a traditional IRA no matter how much money you earn. But you can't deduct those contributions when you file your tax return if your MAGI exceeds limits set by the IRS.
Modified Adjusted Gross Income (MAGI)
How to Calculate Your Modified Adjusted Gross Income
Determining your MAGI is a three-step process:
- Figure your gross income for the year.
- Calculate your adjusted gross income (AGI).
- Add back certain deductions to find your MAGI.
Figure your gross income for the year
Your gross income includes everything you earned from:
- Business income
- Capital gains
- Farm income
- Rental and royalty income
- Retirement income
Calculate your AGI (or find it on your tax return)
Your adjusted gross income (AGI) is important because it's the total taxable income calculated before itemized or standard deductions, exemptions, and 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 dependent care credit and 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 fee-basis government officials
- Educator expenses
- Half of any self-employment taxes
- Health insurance premiums (if you’re self-employed)
- Health Savings Account (HSA) contributions
- Moving expenses for members of the Armed Forces
- Penalties on early withdrawal of savings
- Retirement plan contributions (including IRAs and self-employed retirement plan contributions)
- Student loan interest
- Tuition and fees
Add back certain deductions to find your MAGI
To find your MAGI, take your AGI and add back:
- Any deductions you took for IRA contributions and taxable Social Security payments
- Any deductions you took for student loan interest or tuition
- Excluded foreign income
- Half of your self-employment taxes
- Interest from EE savings bonds used to pay for higher education expenses
- Losses from a publicly-traded partnership
- Passive income or loss
- Qualified tuition expenses
- Rental losses
- The exclusion for adoption expenses
Many of these deductions not commonly used, so your MAGI and AGI could be similar or even identical.
MAGI and Qualifying for a Roth
To contribute to a Roth IRA, your MAGI must be below the limits specified by the IRS. If you’re within the income threshold, the actual amount you can contribute is also determined by your MAGI. If your MAGI exceeds the allowed limits, your contributions are phased out.
Here's are the Roth IRA income limits for 2019:
|Roth IRA Income Limits|
|If your filing status is…||And your modified AGI is…||You can contribute…|
|Married filing jointly or qualifying widow(er)||Less than $193,000||Up to the limit|
|More than $193,000 but less than $203,000||A reduced amount|
|$203,000 or more||Zero|
|Single, head of household, or married filing separately and you didn't live with your spouse at any time during the year||Less than $122,000||Up to the limit|
|More than $122,000 but less than $137,000||A reduced amount|
|More than $137,000||Zero|
|Married filing separately and you lived with your spouse at any time during the year||Less than $10,000||A reduced amount|
|$10,000 or more||Zero|
Of course, if you contribute more than you're allowed, you have to remove the excess contributions. Otherwise, you’ll face a tax penalty. Excess contributions are taxed at a rate of 6% per year for as long as the excess amount remains in your IRA.
MAGI and Deducting Traditional IRA Contributions
Your MAGI and whether you and your spouse have retirement plans at work determine if you can deduct traditional IRA contributions.
If neither spouse is covered by a plan at work, you can take the full deduction, up to the amount of your contribution limit. But if either spouse has a plan at work, your deduction could be limited.
Here's a rundown of traditional IRA income limits for 2019:
|Traditional IRA Income Limits|
|If your filing status is…||And your modified AGI is…||Then you can take…|
|Single, head of household, qualifying widow(er), married filing jointly or separately and neither spouse is covered by a plan at work||Any amount||A full deduction up to the amount of your contribution limit|
|Married filing jointly or qualifying widow(er) and you're covered by a plan at work||$103,000 or less||A full deduction up to the amount of your contribution limit|
|More than $103,000 but less than $123,000||A partial deduction|
|$123,000 or more||No deduction|
|Married filing jointly and your spouse is covered by a plan at work||$193,000 or less||A full deduction up to the amount of your contribution limit|
|More than $193,000 but less than $203,000||A partial deduction|
|$203,000 or more||No deduction|
|Single or head of household and you're covered by a plan at work||$64,000 or less||A full deduction up to the amount of your contribution limit|
|More than $64,000 but less than $74,000||A partial deduction|
|$74,000 or more||No deduction|
|Married filing separately and either spouse is covered by a plan at work||Less than $10,000||A partial deduction|
|$10,000 or more||No deduction|
The Bottom Line
MAGI is important for investors because it's a factor in your eligibility to contribute to a Roth IRA. At the same time, it affects the amount of traditional IRA contributions you can deduct from your taxes. And if you buy a health insurance policy on the Marketplace, it determines if you qualify for the premium tax credit.
Tax laws are complicated and do change periodically. If you need help figuring out your MAGI, or if you have any questions about IRA contribution and income limits, contact a trusted tax professional. (For related reading, see "Do 401(k) Contributions Reduce AGI and/or MAGI?")