AGI vs MAGI
Every U.S. tax filer calculates an AGI when preparing their federal income tax return with the IRS. This number represents how much money overall they’ve earned (or earned as a couple if filing jointly) for the tax year after subtracting several above-the-line deductions. These deductions are typically from income sources that are considered to be non-taxable such as a portion of their Social Social benefits.
Many government programs and tax credits use AGI to determine if an applicant is eligible. However, because so many subtractions are allowed in the AGI calculator, this figure may be biased and not truly representative of how much money they took in for the year.
For example, if a taxpayer worked both in the U.S. and in a foreign country for several months throughout the year, then the foreign income would be excluded from their AGI. However, these earnings are still prevalent and should be considered for income-based government programs. Therefore, the government uses a “modified” version of AGI to effectively add back in certain deductions.
For many taxpayers, their AGI and MAGI will be very close if not identical. However, this will depend on each household’s unique financial situation.
When Is MAGI Used?
MAGI is used instead of AGI for many government programs. A few examples include:
● Contributing to Roth IRAs
● Making deductible contributions to a traditional IRA
● Higher premiums for Medicare Part B and prescription drug coverage
● Premium Tax Credit
● Education Credits
● Child Tax Credit
● Etc.
How Do You Calculate MAGI?
A tax filer can calculate their modified adjusted gross income by doing the following
1) Sum Up All Income Sources
The first step is to add together all applicable income sources for the tax year. Examples include:
● Salary, wages, and tips from a job
● Investment income (i.e. capital gains, dividends, interest)
● Alimony
● Rental property income
● Retirement income
● Business / side hustle income
Generally, taxpayers will receive end-of-the-year tax documents related to these income sources (such as a W-2). Those people earning money from a business or side hustle will usually need to keep track of it themselves.
2) Calculate Adjusted Gross Income
AGI can be calculated by taking the gross income and subtracting all tax-deductible expenses from their total income. Examples include:
● IRA contributions
● Student loan interest
● Qualified tuition expenses
● Non-taxable Social Security payments
● Self-employment tax
● Excluded income from savings bonds
● Rental losses
● Foreign housing deductions or exclusions
● Foreign earned income exclusion
3) Add Back Certain Deductions
To go from AGI to MAGI, the taxpayer must add back in any of the following on top of their AGI:
● Tax-exempt interest income
● Foreign earned income
● Student loan interest deduction
● Excluded savings bond interest
● Education-related expenses
● Nontaxable Social Security benefits like supplemental security income (SSI) payments
● Losses against passive income (such as deducting upkeep for rental properties)
It should be noted that not all IRS-related programs and tax credits follow the same procedure for calculating MAGI. For example, contributions to traditional and Roth IRAs take into consideration:
● Student loan interest deduction
● Foreign earned income and housing exclusions
● Foreign housing deduction
● Excluded savings bond interest
● Excluded employer adoption benefits
Meanwhile, the MAGI used for the Child Tax Credit takes the filer’s AGI and adds back in:
● Foreign earned income and housing exclusions
● Foreign housing deduction
● Excluded income from Puerto Rico
● Excluded income for bona fide residents of American Samoa
Therefore, don’t use the same MAGI for each program. A new MAGI should be calculated based on the program’s specific rules.
MAGI Calculation Example
According to the IRS, joint filers can contribute the full amount to a Roth IRA ($6,500 for participants under age 50) as long as their 2023 MAGI is under $218,000.
Suppose a couple that files jointly calculates their AGI and finds it to be $210,000. At first, they may believe that they are eligible to make full contributions to each of their Roth IRAs. However, after adding back in $12,000 from student loan interest and losses from passive income, they discover that their MAGI is really $222,000.
For MAGIs between $218,000 and $228,000, the IRS has a phase-out period where participants are allowed to contribute a reduced amount that gradually decreases from $6,500 to $0. With a MAGI of $222,000, the couple is only allowed to contribute no more than $3,900 to each Roth IRA for the year.
Where Do I Find My MAGI?
A person’s MAGI is not something that’s necessarily readily available to them. Even though tax preparers and software will calculate the value, it does not appear on an official federal tax return. For this reason, the individual may have to calculate it on their own or request it from the service preparing their taxes.
The Bottom Line
Modified adjusted gross income is a figure that's based on a person's AGI but adds back certain deductions. This is done to provide a more comprehensive picture of what their true financial situation may look like.
MAGI is used for a wide variety of programs from making IRA contributions to qualifying for certain tax credits. Applicants should work together with their tax preparers to ensure that they’ve calculated their MAGI correctly when applying for these incentives.