What is Modified Adjusted Gross Income (MAGI) and how to calculate it?

Making the most of Modified Adjusted Gross Income should be a key part of your financial planning and taxes, as it can play an important role when determining your eligibility for various tax credits, deductions, and retirement account contributions.

In this article, we'll explore what MAGI is, and how it differs from Adjusted Gross Income (AGI). We’ll discuss both Roth and Traditional IRAs, and how knowledge of all of these options contributes to your financial well-being.

What is Modified Adjusted Gross Income?

Modified Adjusted Gross Income is a measure of your income that the IRS uses to determine your eligibility for certain tax benefits. It starts with your Adjusted Gross Income (AGI), which is your total income minus specific adjustments like student loan interest, alimony payments, and certain retirement account contributions.
The main difference between AGI and MAGI is that the latter adds back some of the deductions taken to calculate AGI. These add-backs can include:

• IRA contributions
• student loan interest
• foreign-earned income exclusion
• passive loss or passive income
• rental losses
• interest from EE savings bonds used to pay higher-education expenses

More detail on this is given below.

✔️ Pro tip: Modified Adjusted Gross Income is not a line item on your tax return. It's calculated using your AGI and the specific add-backs relevant to the tax benefit you're seeking.

How is MAGI calculated?

The standard formula for calculating MAGI is:
MAGI = AGI + add-backs

The specific add-backs used to calculate it can vary depending on the tax benefit you're seeking. Some common adjustments include:

• Tax-exempt interest income: Interest from certain investments, such as municipal bonds, is not federally taxed. But this tax-exempt interest is added back when calculating MAGI for certain tax benefits.
• Excluded foreign-earned income and housing expenses: If you live and work abroad, you can exclude some foreign-earned income and housing expenses from your AGI. However, these exclusions are added back when determining your MAGI.
• The IRA deduction and student loan interest deduction: While these deductions lower your AGI, they are added back when calculating MAGI for specific tax benefits, such as Roth IRA contribution eligibility and the lifetime learning credit.
• Non-taxable Social Security benefits: Some of your Social Security benefits may be non-taxable and excluded from your AGI. These non-taxable benefits are however included in your calculation for certain tax purposes.
• Passive income and losses: Passive income, like rental income, and passive losses are treated differently when calculating AGI and MAGI. Limited passive losses for AGI are added back for MAGI.

Examples of income types that can affect your MAGI include:

• wages and salaries
• dividends and capital gains
• alimony received (for divorces finalized before 2019)
• rental income
• business income
• taxable Social Security benefits

Examples of calculating Modified Adjusted Gross Income

To better understand how it is calculated, let's look at a few examples that demonstrate the impact of various factors:.

Example 1: Adriana’s Roth IRA Contributions

• AGI: $120,000
• Foreign earned income exclusion (FEIE): $30,000
• Student loan interest deduction: $2,500
• Roth IRA contribution: $6,000

Adriana’s AGI is $120,000. To calculate her MAGI for Roth IRA contribution purposes, we add back the FEIE ($30,000) and her student loan interest deduction ($2,500). The Roth IRA contribution itself doesn’t impact the calculation.

Adriana: $120,000 + $30,000 + $2,500 = $152,500

As a single filer, Adriana’s Modified Adjusted Gross Income exceeds the 2023 phase-out range of $138,000 to $153,000, limiting her Roth IRA contributions.

Example 2: Rami’s Traditional IRA Deductibility

• AGI: $70,000
• Traditional IRA contribution: $6,000
• 401(k) contribution: $10,000
• Rental income: $5,000

Assuming Rami is covered by a 401(k). His AGI is $70,000, and he has made a $6,000 Traditional IRA contribution and a $10,000 401(k) contribution. He also has a property from which he generates rental income.
To determine Rami’s MAGI for Traditional IRA deductibility, we add back the Traditional IRA contribution ($6,000) and the rental income ($5,000). The 401(k) contribution doesn’t impact the calculation.

Rami: $70,000 + $6,000 + $5,000 = $81,000

Also single, Rami’s Modified Adjusted Gross Income falls within the 2023 phase-out range for Traditional IRA deductibility, $73,000 to $83,000, limiting his deduction.

Example 3: Genevieve’s Medicare Premium Surcharge

• AGI: $85,000
• Tax-exempt interest: $10,000
• Rental loss: ($3,000)

Genevieve's AGI is $85,000, with $10,000 in tax-exempt interest income and a $3,000 rental loss. To calculate her MAGI for Medicare purposes, we add back the tax-exempt interest ($10,000) and the rental loss ($3,000).

Genevieve: $85,000 + $10,000 + $3,000 = $98,000

Filing as single, her Modified Adjusted Gross Income exceeds the 2023 threshold of $97,000, subjecting her to a higher Medicare premium surcharge.

Note: Some key examples of add-backs would be: Adriana’s FEIE, Rami’s IRA contribution, Genevieve’s tax-exempt interest. Examples of exclusions are Adriana’s Roth IRA, Rami’s 401(k), Genevieve’s rental loss.

These examples demonstrate how retirement contributions, investment income, and deductions affect your MAGI. Understanding this helps in planning retirement contributions, tax credits, and deductions while also being aware of other potential pitfalls like Medicare premium surcharges.

Why does MAGI matter?

It is used to determine your eligibility for several tax credits, deductions, and retirement account contributions.
Here are a few key areas where MAGI comes into play:
1. Tax credits

• Premium Tax Credit (PTC): This credit helps individuals and families with low to moderate incomes afford health insurance purchased through the Health Insurance Marketplace. Your MAGI must be between 100% and 400% of the Federal Poverty Level to qualify.
• Earned Income Tax Credit (EITC): This credit benefits working people with low to moderate incomes. The income limits for EITC eligibility are based on your MAGI and family size.

2. Deductions

• Student Loan Interest Deduction: You can deduct up to $2,500 of student loan interest paid per year, but the deduction phases out at certain thresholds.
• IRA Contribution Deduction: The deductibility of your Traditional IRA contributions depends on your MAGI and whether you or your spouse are covered by an employer-sponsored retirement plan.

3. Retirement account contributions

• Roth IRA: Your ability to contribute to a Roth IRA is phased out at certain levels, which vary based on your tax filing status.
• Traditional IRA: While you can always contribute to a Traditional IRA, the deductibility of those contributions may be limited based on your MAGI if you or your spouse are covered by an employer-sponsored retirement plan.

✔️ Pro tip: Keep an eye on your Modified Adjusted Gross Income throughout the year to ensure you're staying within the limits for the tax benefits you're interested in. If you're close to a threshold, consider strategies to reduce it, such as making additional retirement account contributions or taking advantage of flexible spending accounts (FSAs). If you want the latest tax news, we post updates on everything that could impact our readers.

Conclusion

Understanding your Modified Adjusted Gross Income can really benefit your tax planning and help you put those hard-earned dollars to work. When used properly, Roth IRA, Traditional IRA, and MAGI can boost your tax credits, deductions, and retirement account contributions, giving you stability and security in your later years.

If you have questions about your MAGI or how it affects your taxes, speak to Taxes For Expats, we prioritize a fast response but also value clear communication when dealing with our clients.