Key takeaways

  1. MAGI is the Adjusted Gross Income (AGI) of a household, including tax-exempt interest income and certain deductions
  2. MAGI includes tax-exempt interest income, certain tax deductions, and excluded savings bond interest
  3. MAGI can impact eligibility for various tax benefits, such as the Child Tax Credit (CTC) and premium tax credits for health insurance subsidies
  4. Optimizing MAGI involves contributing to tax-advantaged accounts like IRAs, 401(k)s, and HSAs

Determining your modified adjusted gross income (MAGI) is crucial for tax credits and deductions. 

This article will give you everything you need to know about MAGI, detail its impact on your taxes, and guide you through how to calculate it, ensuring you can use it to your advantage.

What is modified adjusted gross income (MAGI)?

MAGI is more than just mere tax jargon; it’s the key to unlocking various tax credits and exemptions. 

MAGI is essentially your household’s Adjusted Gross Income (AGI). It includes tax-exempt interest income and certain tax deductions. It’s like a financial snapshot used to determine how much tax you owe to the IRS and your eligibility for various tax credits and exemptions.

AGI is calculated by subtracting specific deductions from your gross income to help determine your taxable income. Gross income includes all your earnings; the deductions can range from student loan interest to IRA contributions. As a result, your MAGI could be the same as your AGI if you don’t have the deductions to add back to your AGI.

Components of modified adjusted gross income

MAGI is your AGI plus tax-exempt interest income, certain tax deductions, and excluded savings bond interest. Each plays a vital role in calculating your MAGI and, ultimately, your tax outcomes.

Let’s delve deeper into each of these three components.

Tax-exempt interest income

Tax-exempt interest income typically comes from government bonds. Since these bonds finance government operations, the interest they generate is not taxable. Even when not in the form of a bond, interest on state or local government obligations remains tax-exempt.

Various entities, from port authorities to utility services authorities, can issue tax-exempt bonds as long as they meet certain obligations. Understanding the distinction between tax-exempt interest income and net investment income tax is essential, as the latter applies to certain investment incomes and is subject to different regulations.

Certain tax deductions

Certain tax deductions also play a role in shaping your MAGI. When calculating MAGI, deductions like IRA contributions, student loan interest, and a portion of self-employment tax must be added back to your AGI.

For example, the student loan interest deduction can reduce your gross income by up to $2,500, affecting your MAGI calculation.

Excluded savings bond interest

Excluded savings bond interest rounds out the components of MAGI. This refers to interest from Series EE savings bonds not included in your taxable income. When calculating your MAGI, this excluded interest must be added back to your AGI. However, this exclusion only applies when the savings bonds are used for higher education expenses.

Step-by-step guide to calculating your MAGI

Having dissected the components of MAGI, it’s time to guide you through its calculation. This involves determining your gross income, finding your AGI, and adding back specific deductions.

1. Calculate gross income

Calculating your MAGI begins with determining your gross income. This encompasses all your earnings, including:

  • Salary
  • Retirement income
  • Business income
  • Dividends
  • Interest
  • Rental income

And several others.

Your gross income is reported on line 9 of IRS Form 1040, providing a starting point for your MAGI calculation.

2. Determine adjusted gross income (AGI)

With your gross income determined, you can now calculate your AGI. This involves subtracting certain tax-deductible expenses from your gross income. These allowable adjustments include:

  • IRA contributions
  • alimony payments
  • half of your self-employment taxes paid
  • certain business expenses for various professions (e.g., educators and performing artists)

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

3. Add back specific deductions

Once you have your AGI, you can finalize your MAGI calculation by adding back certain deductions. These include but are not limited to:

  • IRA contributions
  • Student loan interest
  • Non-taxable Social Security payments
  • Excluded savings bond interest
  • Penalties on early withdrawal of savings
  • Specific business expenses for performing artists

Adding back these deductions will give you your final MAGI calculation. By adding back these specific deductions to your AGI, you can accurately calculate your MAGI, which can impact your eligibility for certain tax benefits and credits.

MAGI’s impact on tax benefits and credits

MAGI significantly influences your eligibility for various tax credits, benefits, and government programs. Let’s explore how your MAGI can impact your eligibility for Roth IRA contributions, Child Tax Credit, and premium tax credits.

Roth IRA contributions

Your MAGI can directly influence the eligibility and limits for Roth IRA contributions. Here are the limits for  2024:

Single filers 
  • MAGI of less than $138,000 can contribute the full amount to a Roth IRA.
  • A reduced contribution is allowed for those with a MAGI between $138,000 and $153,000.
  • If your MAGI exceeds $153,000, you’re out of the Roth IRA game.
Married couples filing jointly 
  • Less than $218,000: full contribution allowed
  • More than $218,000, but less than $228,000: reduced contribution
  • $228,000 or more: No contribution allowed

If your income exceeds the income limits, you can consider a backdoor Roth IRA conversion as an alternative strategy.

Child tax credit

The Child Tax Credit (CTC) is a tax break parents can take for their qualifying children. Joint filers with a MAGI up to $400,000 and other filers with a MAGI up to $200,000 are eligible for the maximum CTC in 2024. If your MAGI exceeds these limits, your CTC amount is reduced gradually.

Premium tax credits and health insurance subsidies

Eligibility for premium tax credits and health insurance subsidies is also determined by your MAGI. Considering your family size, your household income must be between 100% and 400% of the federal poverty line to qualify for these benefits. 

The American Rescue Plan temporarily expanded premium tax credit eligibility for individuals with household incomes above 400% of the federal poverty line in 2021 and 2022. However, your premium tax credit is adjusted on a sliding scale, where those with lower household incomes receive a more substantial credit.

Navigating different MAGI calculations

It’s important to remember that not every MAGI calculation is identical. Different tax benefits require different MAGI calculations, which can affect your eligibility and ‘phase-outs.’

For example, to fully deduct traditional IRA contributions, especially when an employer-sponsored retirement plan is involved, it’s crucial to calculate MAGI by including add-backs to AGI, like student loan interest. 

For education-related credits, MAGI calculation includes add-backs like foreign-earned income and housing exclusions, as well as the foreign-earned income exclusion

The foreign tax credit helps taxpayers avoid double taxation (foreign income is taxed by both the US and the foreign country). This credit can only decrease US taxes on foreign source income, not on US source income.

Understanding the various MAGI calculations is key as they directly influence your tax benefits and credit eligibility.

Tips for maximizing your MAGI

While understanding MAGI is crucial, knowing how to optimize it is equally important. One way is to increase your contributions to tax-deductible retirement accounts like 401(k)s, health savings accounts (HSAs), and traditional IRAs. It’s also important to avoid tax penalties that may arise from over-contributing to retirement accounts.

If you’re self-employed, you can lower your MAGI by deducting health insurance premiums (paid by you) for yourself, your partners, and your dependents. However, always remember to strike a balance between deductions and credits to reduce MAGI and preserve your long-term investment objectives and financial security, including considering expenses like mortgage insurance premiums.

Seeking professional help

While navigating the tax maze might seem overwhelming, remember that you don’t have to do it alone. Tax professionals can assist you in understanding your tax returns and help you maximize credits and deductions. They’re knowledgeable about the various definitions of MAGI for specific tax benefits, which can be vital for determining your eligibility.

Tax preparation software can also simplify the process by guiding you through the steps and automatically adding back necessary deductions. The IRS website also offers helpful information and tools for understanding MAGI and how to calculate it.

Final word

Understanding and accurately calculating your MAGI is essential in the tax planning process. It influences your eligibility and limits for various tax benefits and credits, such as Roth IRA contributions, the Child Tax Credit, and premium tax credits. But remember, different tax benefits require different MAGI calculations. Hence, staying updated with the tax laws and seeking professional help if you need it is important. 

Frequently Asked Questions

How do I calculate my modified adjusted gross income?

To calculate your modified adjusted gross income (MAGI), add certain deductions to your adjusted gross income (AGI), such as IRA contributions, student loan interest, and half of self-employment tax. This will give you your MAGI.

What qualifies as modified adjusted gross income?

Modified Adjusted Gross Income (MAGI) includes your Adjusted Gross Income (AGI) plus certain deductions like exempt or excluded income and specific deductions, which the IRS uses to determine your eligibility for tax benefits.

How do I calculate my adjusted gross income?

To calculate your adjusted gross income, you need to add up all your taxable income and then subtract allowable deductions and expenses from the total. This will give you your AGI, which is the starting point for determining your tax bill.

How do I lower my modified adjusted gross income?

To lower your modified adjusted gross income, consider looking for deductions available on your tax return that are above the line showing your adjusted gross income. This will also reduce your ACA-specific MAGI.

How does MAGI affect my eligibility for Roth IRA contributions?

Your MAGI directly affects your eligibility for Roth IRA contributions, as it determines the limits and potential reduction in contributions based on IRS guidelines. Be sure to review your MAGI with the IRS limits to understand your eligibility for Roth IRA contributions.