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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 MAGI, 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 currently outlined by the Affordable Care Act (ACA), as it stands at the present time. 

Calculating MAGI

Gross income (GI) is calculated first when calculating MAGI. Gross income 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 for their family size.


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