How to Calculate Your Modified Adjusted Gross Income

Knowing your Modified Adjusted Gross Income (MAGI) can help you determine your eligibility for various tax benefits. The IRS uses MAGI to assess whether you qualify for certain credits, deductions and retirement account contributions.

By understanding MAGI and accurately calculating yours, you can make smarter financial decisions for yourself and your family.

The information below can help you understand MAGI and how to calculate yours. For more information, visit the IRS's comprehensive page about MAGI.

 

What Is MAGI?

MAGI is used by the IRS to determine your eligibility for tax benefits and credits. While your Adjusted Gross Income (AGI) forms the basis for MAGI, there are specific modifications added back into AGI to calculate your MAGI. These adjustments can include non-taxable Social Security benefits, tax-exempt interest and foreign-earned income. 

What is the Difference Between AGI and MAGI?

AGI and MAGI are closely related but have distinct differences that impact your tax filings and benefits. 

AGI is your total gross income minus specific deductions, also known as adjustments. These deductions can include Health Savings Account (HSA) contributions, student loan interest, contributions to retirement accounts and business expenses. AGI is found on Line 11 of your IRS Form 1040 and is the starting point for calculating your MAGI.

MAGI starts with your AGI and then adds back certain items that were deducted to get the AGI. Common additions include passive income or loss, student loan deductions and rental losses. The resulting MAGI is used to determine your eligibility for tax benefits, such as Roth IRA contributions, education tax credits and the child tax credit. 

 

Why Knowing Your MAGI Matters

Your MAGI is an important figure, not just for understanding your taxable income, but also for determining your eligibility for tax credits and deductions. Many tax benefits have income thresholds based on your MAGI rather than your gross income. If your MAGI exceeds these thresholds, you may see these credits or deductions reduce or phase out entirely.

In addition to tax benefits, MAGI determines your eligibility for healthcare waivers and incentives under the Affordable Care Act (ACA) when purchasing insurance through state health insurance marketplaces. Moreover, MAGI is a key qualifier for state Medicaid programs. 

Roth IRA Income & Contribution Limits

Your MAGI influences your eligibility to contribute to a Roth IRA. When looking at Roth IRAs vs. Traditional IRAs, Roth IRAs use after-tax dollars and grow tax-free, in contrast to traditional IRAs, which are tax-deferred.

You can learn more about Roth IRA limits here.

If your income exceeds the limit for direct Roth IRA contributions, you can still take advantage of a Roth IRA through a backdoor Roth. This involves making a nondeductible contribution to a traditional IRA and then converting that amount to a Roth IRA. This allows high-income earners to bypass the MAGI limits and still benefit from the tax advantages of a Roth IRA.

Traditional IRA Deductions

For traditional IRAs, your MAGI affects whether you can deduct your contributions on your tax return. The IRS sets income limits that determine the deductibility of your traditional IRA contributions based on your filing status and participation in an employer-sponsored retirement plan

Premium Tax Credit Eligibility

Your MAGI also determines your eligibility for the premium tax credit, which helps lower the cost of health insurance purchased through the health insurance marketplace. The premium tax credit is available to individuals and families with incomes between 100% and 400% of the federal poverty level.

When applying for health insurance, your MAGI is used to estimate the amount of your premium tax credit. A lower MAGI can increase the amount of the credit you receive, making health insurance more affordable. Conversely, a higher MAGI can reduce or eliminate your premium tax credit eligibility.

 

How MAGI is Calculated

Calculating your MAGI is typically a three-step process.

To determine your MAGI, you will need:

• Your gross income for the year, or how much you make before any taxes are taken from your paycheck.
• Your AGI.
• The amounts of certain deductions.

Deductions you may need to add back in could include:

• Non-taxable Social Security benefits
• Tax-exempt interest income
• Foreign-earned income and housing exclusions
• Deductions for student loan interest, tuition, and fees

You should work with a financial professional to confirm that your deductions are correct and that you've correctly factored in everything needed for your MAGI.

Are 401(k) Contributions Deducted in MAGI?

No, 401(k) contributions are not deducted when calculating your Modified Adjusted Gross Income (MAGI). While 401(k) contributions reduce your Adjusted Gross Income (AGI) since they are made with pre-tax dollars, they are not added back when determining your MAGI. This means your 401(k) contributions lower your AGI and, consequently, your MAGI.

 

Speak to a Financial Professional Today

Calculating your MAGI can help you understand what financial options are available for your situation. However, you should always turn to a professional before making any decisions. If you need help with managing your finances or have questions about how your MAGI affects your tax situation, speak with your tax advisor today or wealth advisor today.