What is Modified Adjusted Gross Income?

What is Modified Adjusted Gross Income?

Modified Adjusted Gross Income (MAGI for short) is one of the most important tax terms that you’ve probably never heard of—but if you’re planning on claiming certain tax deductions this year, you might want to elevate your tax term knowledge before you do so.

If you’ve filed your taxes before, you’ve likely calculated your adjusted gross income (AGI) on your own, or perhaps with the help of a tax professional. While they’re close in acronyms and calculations, your adjusted gross income and your modified adjusted gross income actually impact your tax bill quite differently.

If you’ve heard the term before and wondered, “what is a modified adjusted gross income?”, we’re here to help. In this article, you’ll learn what MAGI is, how to calculate it, and how it can impact your tax return.

Looking for answers regarding your modified adjusted gross income fast? You can use the links below to skip ahead. Or, to get a more comprehensive overview of how MAGI affects your financial health and taxes in general, read this post all the way through.

Modified Adjusted Gross Income Definition

Modified adjusted gross income is essentially your adjusted gross income, plus certain deductions (such as education expenses) added back to the equation. When these deductions are factored back into your AGI, your total MAGI can qualify or disqualify you from claiming certain deductions (like IRA contributions) on your tax return.

We’ll discuss how to calculate your modified adjusted gross income and which deductions you need to add in more detail later, but the basic equation is:

Adjusted Gross Income + Deductions = MAGI

Tax Tip: If after you’ve calculated your AGI and MAGI, and you’ve got a number that’s just about identical, don’t panic. It’s normal for your AGI and MAGI to be similar or even the exact same number—more on that in a moment.

Is Modified Adjusted Gross Income the Same as Adjusted Gross Income?

No, modified adjusted gross income is not the same as adjusted gross income—but you probably already had that figured out by now. But just to be sure we’re all on the same page here, let’s review the key differences between AGI and MAGI and how each impacts your taxes differently.

What is AGI and how do I calculate it?

Your adjusted gross income accounts for your total income (gross income), minus the deductions you’re claiming on your tax return. These tax deductions work to lower your taxable income, so your AGI should be lower than your gross income (that’s why it’s considered“adjusted”).

Tax Tip: If you’re planning on claiming tax deductions on your annual tax return, you should have the appropriate supporting documents to prove that you qualify for the deduction(s) that you’re claiming. Compliance is key when it comes to the IRS, so it’s important to do what you can to protect yourself in the event that the IRS decides to conduct a tax audit.

Now back to AGI: the deductions that are used to calculate your AGI are considered “above-the-line” deductions since they are factored in before you claim the standard deduction or itemize your deductions.

The above-the-line deductions on Form 1040 Schedule 1 for 2018 included:

  • Educator expenses
  • Student loan interest
  • Capital gain losses
  • Self-employed health insurance
  • IRA contributions
  • Alimony paid
  • Unemployment compensation
  • Farm income, or loss of farm income
  • Deduction for self-employment taxes paid (SE tax)
  • Moving expenses for military and members of the armed forces

Calculating your gross income (GI)

In order to figure out your AGI, you need to determine your gross income first. Your gross wages appear in Box 1 on the W-2 form you received from your employer. If you have more than one employer or other sources of income, you’ll need to add these numbers together to get your gross income.

When calculating your gross income, don’t forget to include the following sources of income:

  • Income from self-employment
  • Capital gains
  • Income earned from a rental property
  • Business income and taxable dividends
  • Taxable alimony payments received from a former spouse
  • Any other income that’s not tax-exempt

Have you figured out your gross income yet? Great, now you’re ready to “adjust” your gross income to get your AGI.

Calculating your adjusted gross income (AGI)

To calculate your adjusted gross income, you’ll need to use IRS Form 1040—the standard individual income tax form and Form 1040 Schedule 1.

You’ll use Form 1040 to help you collate all sources of income on lines 1-6, then you’ll use the information you filled out on Form 1040 Schedule 1 to subtract the total adjustments to your income represented on line 36. In other words, subtract the number on Schedule 1, line 36 from the number on Form 1040, line 7 (if you claimed any of the above-the-line deductions mentioned before).

If you took any of these deductions, your adjusted gross income should be a lower number than your gross income. Now that you have your AGI, let’s discuss why this number is important before we get to your modified adjusted gross income.

How does AGI affect your taxes?

Your adjusted gross income is the number the IRS uses to determine your income tax rate before MAGI comes into the picture, anyway.

The federal income tax rates for 2019 are as follows:

Rate For Unmarried Individuals, Taxable Income Over For Married Individuals Filing Joint Returns, Taxable Income Over For Heads of Households, Taxable Income Over
10% $0 $0 $0
12% $9,700 $19,400 $13,850
22% $39,475 $78,950 $52,850
24% $84,200 $168,400 $84,200
32% $160,725 $321,450 $160,700
35% $204,100 $408,200 $204,100
37% $510,300 $612,350 $510,300

Now that we know why AGI is important and how it impacts your tax return, let’s dive deeper into the question that brought you here in the first place: “what is modified adjusted gross income?” and “why is modified adjusted income important?”

Why is modified adjusted gross income important?

Everyone loves tax credits and tax deductions—I mean, you’d be a fool not to take advantage of a lowered tax bill, right? But if there are too many opportunities to cut your tax bill, who’s going to help fund our roads, schools, and other government-supported entities? Think about it: if everyone in the U.S. was allowed to claim as many tax deductions as they wanted, there wouldn’t really be a point of levying federal income tax at all.

While this might sound like a dream for you and your wallet, the IRS already has a system in place to make sure no one goes overboard with their tax savings. As you might have guessed, this is why your MAGI is important.

The IRS essentially uses MAGI to ensure that taxpayers are taxed at the appropriate rate according to their income. And for those claiming deductions, this could mean repealing or disqualifying them from claiming certain tax deductions (namely IRA contributions).

In other words, if your modified adjusted gross income is too high, you might not be able to qualify for the tax deductions that you claimed in the first place. What does this mean for your tax bill? Losing eligibility for those tax deductions could result in a higher tax bill from Uncle Sam.

So which credits do I run the risk of losing?

If your MAGI ends up being too high, the IRS may not allow you to claim the following deductions:

  • IRA contributions: One of the benefits of contributing to a retirement plan like an IRA (Individual Retirement Account) is that your contributions may be considered tax-deductible. However, if your MAGI appears too high, the IRS might lower the amount that you can deduct, or revoke the option altogether.
  • Healthcare premiums: Another tax incentive offered by the federal government is the ability for taxpayers to deduct a certain amount of healthcare premiums paid using the advanced premium tax credit. In order to qualify, the taxpayer’s MAGI must fall within the range outlined by the IRS.

Is my modified adjusted gross income eligible for IRA contributions?

The 2019 deduction requirements for IRA contributions are:

If your filing status is… And your MAGI is… You can claim this…
single or HOH $64,000 or less a full deduction up to the amount of your contribution limit.
single or HOH Between $64,000 and $74,000 A partial deduction
single or HOH $74,000 or more Zero deduction
married filing jointly or qualifying widow(er) $103,000 or less a full deduction up to the amount of your contribution limit.
married filing jointly or qualifying widow(er) Between $103,000 and $123,000 A partial deduction
married filing jointly or qualifying widow(er) $123,000 or more Zero deduction
married filing separately $10,000 or less A partial deduction
married filing separately $10,000 or more Zero deduction

You might have noticed that in order to claim the full deduction for your IRA contributions, your contribution may not exceed the “contribution limit.” A contribution limit is simply the maximum that the IRS says individual taxpayers can contribute to their IRA account.

For 2019, the IRA contribution limits are as follows:

  • If you’re under 50 years of age, you can contribute up to $6,000 to a traditional IRA or a Roth IRA.
  • If you’re over 50 years of age, you can contribute up to $7,000 to a traditional IRA or Roth IRA during a given tax year. The IRS boosts the limit after age 50 to encourage those nearing retirement to rev up their retirement savings.

How can I avoid a high MAGI?

If you want to qualify for MAGI deductions, but your income doesn’t make the cut, here are a few options that may lower your taxable income:

  • Take advantage of a workplace retirement plan such as a 401k or a thrift savings plan—these contributions can work to reduce your taxable income.
  • Make pre-tax contributions to an HSA (health savings account).
  • Don’t let self-employment deductions slip by the wayside—check out our guide to independent contractor taxes to learn more.

Key differences between MAGI and AGI

So now that you know what MAGI and AGI are and how they impact your annual federal tax return, let’s summarize the key differences between the two.

Adjusted gross income is the number you get after above-the-line tax deductions are factored into your gross income; and modified adjusted gross income is when certain tax deductions are factored back into the equation. This means that the IRS decided that your income was considered too high to claim the IRA or healthcare premiums deductions.

Calculating Your Modified Adjusted Gross Income

Remember how to get your AGI using Form 1040 Schedule 1? Great! Now that you have your AGI at the ready, estimating your MAGI is simple. To calculate your MAGI follow these steps:

  1. Find your AGI
  2. Add back these deductions as well as additional income that you might not have included already:
    1. Excluded foreign income
    2. Losses from a rental property
    3. Deductions claimed for IRA contributions
    4. Passive income gains or losses
    5. 50% of self-employment taxes paid
    6. Deductions from student loan interest or tuition fees
    7. Losses incurred from a publicly-traded partnership

There you have it—you’ve calculated your MAGI! Based on the outcome of your equation, you may or may not be eligible for certain tax savings such as deductions for IRA contributions.

Modified Adjusted Gross Income: FAQs

So far we’ve answered the following questions:

  • What is a modified adjusted gross income?
  • How does MAGI impact my taxes?
  • And what’s the difference between modified adjusted gross income and adjusted gross income?

Now that you’ve got some foundational knowledge on the subject, let’s discuss a few additional frequently asked questions about MAGI and how this number relates to the average taxpayer.

Where is the modified adjusted gross income on my tax forms?

Modified adjusted gross income is not a figure that’s listed on your tax return like your adjusted gross income is (line 37 on IRS Form 1040). But using the explanation above, you can easily figure out your MAGI based on your AGI and qualifying tax deductions.

Still not sure how to crunch the numbers? Our team is here to help—speak to tax professional about tax planning and strategy today.

Does MAGI include the standard deduction?

Both MAGI and AGI are calculated before a taxpayer claims the standard deduction or any itemized deductions. These deductions will be factored in later—in fact, a taxpayer’s AGI can indicate how much they can claim for certain deductions and credits, such as the child tax credit.

Do I need to calculate MAGI for my state taxes, too?

The deductions and tax credits that impact MAGI are federal tax incentives, which means that you do not need to worry about your MAGI when filing your state taxes. However, each state has different tax code regulations of their own, so you may be required to meet certain qualifications for state tax deductions. To see specifics on your state’s tax code, view our state tax data hub.

Where can I find my MAGI for the previous tax year(s)?

As we mentioned beforehand, your annual tax return won’t show your MAGI, so you’ll have to calculate it on your own using the calculation explained above.

Tax Tip: If you want to keep track of which years you did and did not qualify for the IRA and healthcare premiums deductions, it’s a good idea to keep track of your MAGI each year so you can reference this information when you’re planning for upcoming tax seasons.

If I don’t qualify for an IRA deduction, should I stop my retirement plan?

Reaping the tax benefits from IRA contributions is just a small part of the picture. Starting to save for retirement ahead of time can put you in a better place financially when you’re ready to say sayonara to your day job in favor of more time relaxing or doing things you love. If you’re not sure if you’re ready to retire with your current financial plan in place, find a financial advisor to help you navigate the route to retirement.

How else is MAGI used?

In addition to tax savings, MAGI is used to determine whether an individual qualifies for coverage under a government-subsidized health insurance plan through Marketplace.

Are there other ways I can save money on my taxes?

Absolutely! If your MAGI doesn’t make the cut for IRA tax savings, don’t worry, there are plenty of other options for you to save money on your tax return this year. Remember, we’re only at above-the-line deductions so far, so you still have the option to take the federal standard deduction or you could choose to itemize your deductions.

Whether you choose to claim the standard deduction or itemize your deductions depends on your financial situation as well as which deductions you’re eligible to claim.

Takeaways: What is modified adjusted gross income?

Modified adjusted gross income (MAGI) is a number the IRS uses to evaluate whether or not certain taxpayers qualify for tax deductions such as IRA contributions. You can calculate your MAGI by adding back in excluded foreign income, as well as tax deductions from student loan interest, self-employment taxes paid, etc. For many taxpayers, their AGI and MAGI are pretty similar, if not, the same since the items added back into the equation aren’t considered common for the average taxpayer.

Why is MAGI important? As we discussed, MAGI determines whether or not you can make tax-deductible contributions to an IRA. If you’re looking for a retirement savings plan that gets you the most “bang for your buck,” it’s worth knowing whether your MAGI will qualify or disqualify you from saving on your taxes.

Keep in mind, your MAGI isn’t the end-all-be-all when it comes to tax savings—there are plenty of other ways to save on your next tax return with the right strategy and tax preparation in place.

To make the most out of the tax savings available to you, speak with one of our in-house tax professionals to get tax help today!