Modified Adjusted Gross Income (MAGI)

What is Modified Adjusted Gross Income (MAGI)?

The Modified Adjusted Gross Income (MAGI) is a measure used by the Internal Revenue Service (IRS) to determine if a taxpayer is eligible for certain deductions or contributions to a Roth IRA. The IRA also uses MAGI to determine if a taxpayer is eligible for certain educational tax benefits and income tax credits.

For example, the IRS determines the eligibility for premium tax credits for income that does not exceed 400% of the federal poverty line. The modified adjusted gross income is also used to determine eligibility for subsidized health insurance plans and income-based Medicaid. Generally, MAGI is not included in the tax return form, and taxpayers must compute the numbers on their own.

Understanding Modified Adjusted Gross Income

When calculating MAGI, it is important to recognize that the modified adjusted gross income (MAGI) and the adjusted gross income (AGI) are two different concepts. AGI is determined by getting the total income for the year, less certain deductible expenses. AGI takes into account various incomes such as wages, retirement income, rental income, farm income, investment income, and business income.

The total income for the year is then adjusted by deducting tax-deductible expenses, such as health insurance expenses, student loan interest, health savings account, retirement plan contributions, penalties on premature withdrawal of savings, IRA deductions, and educator expenses. The IRS uses AGI as the starting point when calculating the total tax and to determine if a taxpayer is eligible for credits and deductions.

MAGI is then calculated by taking the adjusted gross income and adding back the following deductions:

• Passive income or losses
• Rental losses
• Interest from EE savings bonds
• Excluded foreign income
• Half of self-employment tax
• Deductions for IRA contributions
• Deductions for student loan interest

How to Calculate Modified Adjusted Gross Income

The modified adjusted gross income is calculated differently depending on the purpose for which it is being computed and the tax benefit under evaluation. The IRS provides instructions on how to calculate MAGI for whichever purpose it is needed.

Here are some examples of how MAGI is calculated:

Education credits

An education credit helps students with the cost of higher education by reducing the total amount of taxes owed on the tax return. If the tax credit reduces the tax owed to less than zero, the taxpayer may be eligible for a tax refund. For education credits, MAGI is calculated by taking the adjusted gross income plus foreign income and housing exclusions.

Premium tax credit

Premium tax credit refers to a U.S. tax credit that is provided by the IRS to help eligible households with low to moderate incomes purchase health insurance through a healthcare exchange. In this case, MAGI is calculated by taking AGI plus foreign-earned income, tax-exempt interest, and the tax-free portion of social security benefits.

Traditional IRA contribution deduction

MAGI is calculated by taking the adjusted gross income plus foreign-earned income and housing exclusion, student loan interest, foreign housing deduction, excluded savings bond interest, tuition and fees deduction, excluded employer adoption benefits, and domestic production activities deductions.

How MAGI is Used

MAGI is used as the primary basis when determining income limits for determining a taxpayer’s eligibility for tax credits and deductions. The following are ways in which MAGI is used:

1. Contributions to a Roth IRA

MAGI directly affects the amount that a taxpayer can contribute to a Roth IRA. The IRA considers the taxpayer’s MAGI to determine the point at which their income is considered too high to contribute to a Roth IRA. When filing as a single person, the MAGI must be below $137,000 and $139,000 for 2019 and 2020, respectively. For a married couple and filing jointly, the MAGI must be below $203,000 and $206,000 for 2019 and 2020, respectively.

2. Buying health insurance

MAGI is a common factor when buying health insurance coverage through a state health insurance exchange. Most insurance providers use MAGI as a baseline when determining eligibility for insurance coverage. The exchange also uses MAGI to determine if and how much a customer will save on health insurance plans.

3. Itemizing deductions on taxes

Itemized deductions are expenditures that can be subtracted from the adjusted gross income to reduce the overall tax bill. This allows taxpayers to qualify to pay a lower tax bill than if they chose to take standard deductions. If a taxpayer chooses to itemize deductions when filing taxes, they may be required to calculate their MAGI.

Depending on the MAGI, the IRS will determine the point at which certain deductions will be reduced or fully eliminated. Itemized deductions are recorded on Form 1040 and Schedule A. Examples of allowable itemized deductions include mortgage interest and unreimbursed medical expenses.

Related Readings

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

• 401(k) Plan
• Additional Child Tax Credit (ACTC)
• Earned Income
• Form 1040EZ
• See all accounting resources