Loading the player...

What is 'Modified Adjusted Gross Income - MAGI'

The IRS uses modified adjusted gross income to determine whether a private individual qualifies for certain tax deductions. Most notably, the IRS uses it 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 MAGI by taking his adjusted gross income 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 MAGI, the fewer deductions the taxpayer can take on IRA contributions. If the MAGI is too high, IRA deductions can even reach zero. If this happens, one can still contribute to an IRA plan, but the taxpayer cannot deduct any of the contributions on the following year's taxes.

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 affect an individual's tax return. Specifically, these differences will dictate whether an individual is eligible for certain benefits as outlined by the Affordable Care Act, as it stands today. 

Calculating MAGI

A taxpayer must first calculate gross income when calculating MAGI. Gross income is an individual's total income earned through wages, interest, dividends, rental and royalty income, capital gains, business income and any other means. After calculating GI, an individual then adjusts that income by subtracting qualified deductions from the GI, 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 a taxpayer can claim for the dependent care credit and the child tax credit.

A taxpayer can then calculate MAGI after finalizing AGI. 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 for one's MAGI to differ greatly from AGI. The IRS explains that deductions added back to calculate MAGI include things like 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 for their family size.

RELATED TERMS
  1. Adjusted Gross Income - AGI

    Adjusted gross income (AGI) is a measure of income calculated ...
  2. Tax Deduction

    A tax deduction lowers a person’s tax liability by lowering his ...
  3. Standard Deduction

    The IRS standard deduction is a portion of income that is not ...
  4. Above The Line Deduction

    An above the line deduction is an item that is subtracted from ...
  5. Tax Deductible Interest

    The tax deductible interest is a borrowing expense that a taxpayer ...
  6. Medical Expenses

    Medical expenses are any costs incurred in the prevention or ...
Related Articles
  1. Taxes

    Making Sense of the 2017 Tax Changes

    Here is a brief overview of some of the changes introduced by the Tax Cuts and Jobs Act of 2017, and how they may affect your taxes.
  2. Taxes

    Top Tax Refunds For Recent Grads

    Don't miss out on these tax credits if you have recently graduated.
  3. Taxes

    7 Tax Terms Explained

    As the tax season begins, there are certain words you need to know. Read on to see what they are.
  4. Taxes

    9 Ways the New Tax Law Affects Millennials

    The new tax bill, the Tax Cuts and Jobs Act, includes some important changes for Millennials.
  5. Retirement

    The basics of Roth IRA contribution rules

    What you need to know about Roth IRA contributions – from eligibility to dollar limits, to deadlines, to tax breaks.
  6. 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.
  7. Taxes

    Calculating the Mortgage Interest Tax Deduction

    The amount of money you save by paying your mortgage off quickly will far exceed any benefit from the mortgage interest tax deduction.
  8. Tech

    Tax Tips for Deducting Investment Management Fees

    Investment expenses can be deducted from your taxes when three main criteria are met. Here's how they work to help you maximize your tax deduction.
  9. Taxes

    The Most Overlooked Tax Deductions

    The receipts you cram into your wallet could be replaced with cash come tax season.
  10. Retirement

    Traditional IRA Deductibility Limits

    Find out whether you can take a tax deduction on the contributions you make.
Trading Center