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What Is Modified Adjusted Gross Income?

You’re probably familiar with the term adjusted gross income (AGI). It reflects how much taxable income you have after subtracting your above-the-line deductions (also known as adjustments to income) from your gross income. You also have a modified adjusted gross income. Let’s take a look at what your modified adjusted gross income is and how it may impact your tax bill.

Calculating Adjusted Gross Income

Before you can calculate your modified adjusted gross income, you’ll need to know how to calculate your adjusted gross income. Your AGI is your gross income minus various adjustments to income.

Your gross income is your pre-tax income. It includes all of your earnings, tips and wages, plus taxable interest, dividends, unemployment benefits and taxable retirement distributions. There are various adjustments to income that you can claim without itemizing, including the deduction for alimony payments and the tax break for educator expenses.

Modified Adjusted Gross Income vs. Adjusted Gross Income

What Is Modified Adjusted Gross Income?

Your modified adjusted gross income (MAGI) also has an effect on the size of your tax bill. Both your MAGI and your AGI play a role in determining which deductions and credits you qualify for. But the IRS may look at your MAGI if your AGI doesn’t provide an accurate representation of your financial situation.

Taxpayers’ AGI and MAGI are usually quite similar. And sometimes they’re the same. Still, you’ll need to pay close attention to what you have to include in your MAGI. If your MAGI is too high, you won’t qualify for tax breaks like the deduction for IRA contributions.

Calculating Your Modified Adjusted Gross Income

What Is Modified Adjusted Gross Income?

To get your MAGI, you’ll need to add tax-exempt interest and certain deductible expenses to your AGI. Specifically, you’ll need to add in your student loan interest, half of the self-employment tax you paid, your passive losses, taxable Social Security payments and any deductible higher education expenses. Some exclusions – like the one for certain adoption expenses – also get added back to your AGI to get to your MAGI.

The Takeaway

Whether you know it or not, your modified adjusted gross income is important because it affects your tax liability. It’s what the federal government uses to decide whether you qualify for certain tax breaks. And in some cases, it may provide a better reflection of your financial status than your adjusted gross income. If you’re not sure whether your MAGI affects the number of tax deductions and credits you can claim, you may want to consider meeting with a tax professional.

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Photo credit: ©iStock.com/andresr, ©iStock.com/RichVintage, ©iStock.com/KucherAV

Lauren Perez, CEPF® Lauren Perez writes on a variety of personal finance topics for SmartAsset, with a special expertise in savings, banking and credit cards. She is a Certified Educator in Personal Finance® (CEPF®) and a member of the Society for Advancing Business Editing and Writing. Lauren has a degree in English from the University of Rochester where she focused on Language, Media and Communications. She is originally from Los Angeles. While prone to the occasional shopping spree, Lauren has been aware of the importance of money management and savings since she was young. Lauren loves being able to make credit card and retirement account recommendations to friends and family based on the hours of research she completes at SmartAsset.
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