How AGI and MAGI Affect Your Taxes and How Much You Owe the IRS

How AGI and MAGI Affect Your Taxes and How Much You Owe the IRS

What Is AGI (Adjusted Gross Income)?

AGI is a taxpayer’s total yearly income minus deductions for which they are qualified to take on their federal tax return.

Income included in your adjusted gross income total must include wages, dividends, rental income, self-employment earnings, certificates of deposit (CDs), and interest earned from investments as well as high-yield checking and savings accounts.

What Is MAGI (Modified Adjusted Gross Income)?

MAGI is a taxpayer’s household adjusted gross income plus certain deductions and tax-exempt interest income.

The IRS relies on MAGI totals to determine if a taxpayer qualifies for certain tax benefits.

More specifically, MAGI establishes whether:

  • Income meets or is below the level that allows taxpayers to contribute to Roth individual retirement accounts (IRAs)
  • Taxpayers and/or their spouses can deduct IRA contributions from their income
  • Taxpayers can take the premium tax credit, a deduction that reduces health insurance expenses if you purchase through a federal or state marketplace

How Are AGI and MAGI Different?

Adjusted Gross Income

AGI is the amount of taxable income remaining after you subtract certain deductions from your total income. These deductions include IRA contributions, alimony payments (if ordered before 2019), self-employment retirement plans, and other similar adjustments.

In addition, your AGI is used to determine whether you are eligible to take the Child Tax Credit, the Child and Dependent Care Credit, and the Earned Income Tax Credit (EITC).

Modified Adjusted Gross Income

While MAGI is obtained from AGI, MAGI involves adding back certain deductions and interest income. Some of these deductions include eligible tuition expenses, student loan interest, IRA contributions, and 50 percent of applicable self-employment taxes.

A taxpayer’s modified adjusted gross income is used by the IRS to evaluate whether they are qualified to take specific tax deductions.

How Do You Calculate Your AGI?

To calculate AGI, start with your gross income: total all income from wages, salaries, commissions, tips, dividends, interest, rental income, gig work, and passive income earnings as an example.

Example: John earned a total gross income of $150,000 by working 40 hours a week as a business consultant and receiving income from two rental properties.

Subtract deductions to “adjust” your income. Common adjustments taken by taxpayers include IRA contributions, student loan interest, educator expenses (classroom supplies), half of self-employment taxes, and health savings account (HSA) contributions.

Example: John qualifies to subtract his student loan interest of $2,500 from his gross income. This leaves him with an AGI of $147,500.

How Does Your AGI Affect Taxes You Owe the IRS?

AGI is a starting point for calculating actual taxable income. You can then further reduce this income by adjusting your AGI with additional standard and itemized deductions.

Depending on where your AGI falls in IRS tax brackets, the ability to lower an AGI total may result in owing substantially less taxes to the IRS.

Certain tax credits and deductions are subject to limitations or phaseouts based on a taxpayer’s adjusted gross income. An increasing AGI may qualify you for one or more tax benefits or no tax benefits.

Examples of general phaseouts include deductions for student loan interest or the Child Tax Credit.

How Do You Calculate MAGI?

To calculate your MAGI, take your gross income (your total income before any deductions), figure your adjusted gross income, and add back deductions that you are allowed to take under MAGI guidelines.

In some cases, a taxpayer’s AGI and MAGI number may end up nearly the same or even equal. Your MAGI amount can be the same as your AGI but shouldn’t ever be less than it.

How Does Your MAGI Affect Taxes You Owe the IRS?

MAGI determines whether you are eligible to take the following deductions and tax credits:

  • Child Tax Credit
  • Retirement Savings Contributions Credit
  • Student loan interest deduction
  • Health insurance premium tax credits
  • IRA deduction
  • Roth IRA eligibility

Taxpayers who can take multiple MAGI deductions and tax credits will be able to lower their taxable income and pay less in taxes. The best way to lower MAGI is to reduce your AGI by increasing contributions to expenses that are eligible for above-the-line deductions.

Examples of above-the-line deductions include HSA contributions, property taxes, charitable donations, and mortgage interest.

Seniors enrolled in Medicare Part B or D could have their premiums affected by the amount of their MAGI. Having a higher MAGI could result in a senior paying higher Medicare premiums.

Do You Include Both AGI and MAGI on Your 1040 Return?

Your adjusted gross income amount is placed on Line 11 of a 1040 tax return. To calculate your modified adjusted gross income, you will need to complete Schedule A, Form 1040 (Itemized Deductions).

Schedule A should be attached to your 1040 when you send your tax return to the IRS.

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