The IRS uses your modified adjusted gross income (MAGI) to determine whether you qualify for important tax benefits like deducting contributions from your individual retirement account (IRA) and making contributions to your Roth IRA. Many taxpayers consult a financial advisor to maximize their tax strategy for their retirement goals. Let’s take a look at your modified adjusted gross income and break down how it may impact your tax bill.
Tax Definition of Modified Adjusted Gross Income
Simply put, your MAGI is the sum of your adjusted gross income (AGI), your tax-exempt interest income, and specific deductions added back. The IRS uses MAGI to establish whether you qualify for certain tax benefits since it can offer a more comprehensive financial picture.
For many taxpayers, their MAGI is the same as their AGI. But, if you have non-taxable Social Security benefits, tax-exempt interest and untaxed foreign income, you will need to add them back to your AGI when calculating your MAGI.
Calculating Your Adjusted Gross Income
Before you can calculate your MAGI, you’ll need to know how to calculate your adjusted gross income. Your AGI shows how much taxable income you have after subtracting above-the-line deductions from your gross 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.
When calculating your AGI, you will deduct qualifying adjustments that include:
- Alimony payments (if your divorce was finalized before 2019)
- Educator expenses
- Health savings account (HSA) contributions
- IRA deductions
- Student loan interest
You can find other tax deductions in your Form 1040.
Calculating Your Modified Adjusted Gross Income
To get your MAGI, you’ll need to add back interest and expenses that you would have deducted from your AGI. Because many of them are uncommon, don’t be surprised if your MAGI and AGI are the same.
These deductions include:
- Student loan interest
- Half of the self-employment tax you paid
- Passive income losses
- Taxable Social Security payments
- Deductible higher education expenses
Some exclusions for certain adoption expenses, foreign earned income and U.S. savings bonds income also get added back to complete your MAGI calculation.
How the IRS Uses MAGI and AGI to Calculate Benefits
Both your MAGI and your AGI play a role in determining which deductions and credits you qualify for. And the IRS may look at your MAGI if your AGI doesn’t provide an accurate representation of your financial situation.
Your AGI is used to determine specific tax credits and exemptions. Credits for the 2021 tax year include child and dependent care, the elderly or permanently disabled, adoption, and the earned income tax credit (EITC). Common exemptions for 2021 include total itemized deductions, mortgage insurance premiums, charitable contributions and qualifying medical deductions.
By comparison, your MAGI will affect how much student loan interest you can deduct. So if you filed as a single taxpayer for the 2021 tax year, and your MAGI was greater than $85,000 (over $170,000 for joint filers), you can not claim a student loan interest deduction. Single taxpayers with MAGI between $70,000 and $85,000 ($140,000-$170,000 for joint filers) can deduct a portion of the interest they paid.
Similarly, if you were covered by a workplace retirement plan for the 2021 tax year and filed as a single taxpayer, you could not claim a traditional IRA deduction if your MAGI was $76,000 (over $125,000 for joint filers). This threshold limit goes up to $78,000 for single taxpayers in the 2022 tax year ($129,000 for joint filers).
On the flip side, your MAGI is also used to calculate the maximum amount that you can contribute to your Roth IRA. For the 2021 tax year, single tax filers can contribute the full $6,000 ($7,000 if you’re age 50 or older) as long as your MAGI is less than $129,000 ($204,000 for joint filers). Taxpayers with MAGIs between $129,000 and $145,000 ($204,000-$214,000) can make partial contributions to a Roth IRA.
You should also note that your MAGI is used to calculate your eligibility for premium tax credits and other savings that can be applied to your marketplace health insurance, Medicaid, and the Children’s Health Insurance Program (CHIP).
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.
Tips for Filing Your Taxes
- Figuring out which tax deductions and credits you are eligible for can be complicated. A financial advisor could help you maximize a tax strategy for your financial goals. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Once you’ve figured out your deductions and credits, you might want to see what your tax return looks like. SmartAsset’s tax return calculator can help you estimate whether you will get a refund or owe money to the government.
- Many people stress about filing taxes, but these tax filing services can make the process easier. Check out our list of best tax filing software, and our list of best free online tax software.
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