Your modified adjusted gross income (MAGI) affects tax benefits, including IRA contributions and tax credits. Calculating MAGI requires adjusting AGI by adding back specific deductions.
By Brad Nakase, Attorney
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When you subtract specific expenses from your AGI and add them back in, the result is your modified adjusted gross income (MAGI). It’s important to know your MAGI because it affects your ability to get certain tax breaks, like letting you deduct contributions to a traditional IRA or taking the premium tax credit. Additionally, it decides if you are eligible to put money into a Roth IRA.
While most tax credits and benefits use a modified adjusted gross income (MAGI) calculation, some may require a different method.
Your adjusted gross income (AGI) and modified adjusted gross income (MAGI) are usually quite close to each other. Nevertheless, the minor changes that transform your AGI into your MAGI may significantly impact your total tax return.
Keep in mind that AGI and MAGI do not always reflect your entire taxable income. After deducting the Standard Deduction or all itemized deductions from your AGI, you will obtain your federal taxable income. Further, many states will utilize your AGI as a starting point for calculating your state taxable income if you reside in a state that has an income tax.
After deducting specific amounts, the remaining amount is your adjusted gross income. The first page of your Form 1040 lists the income deductions that you are eligible to claim.
Here are some commonly used adjustments:
Additional factors taken into account when determining AGI are:
A number of tax credits, including the following, are contingent upon the value of your adjusted gross income (AGI).
Once your adjusted gross income (AGI) rises over a particular threshold, you will no longer be eligible for many deductions. Your AGI will determine which deductions apply, such as:
To start calculating your MAGI, you need to know your gross income. This includes everything you earn, such as a salary, profits from the sale of a home or stocks, interest, retirement, and even unemployment benefits.
Total income less specific adjustments called above-the-line deductions is your adjusted gross income (AGI). When calculating AGI, it is usual practice to deduct the following from gross income:
Lastly, after deducting specific expenses, add them back to your AGI. Even though it may appear like you are just adding things back in, there could be a difference between the two figures; therefore, it is important to complete the exercise—regardless of whether your AGI and MAGI are equal.
Fortunately, if you use high-quality tax software, calculating your MAGI and seeing how it affects your tax benefits should be a breeze. Consult a tax expert if you are unsure of how to calculate your adjusted gross income (AGI) by subtracting certain amounts from your gross income.
A lot of tax breaks and credits are based on MAGI. Credits such as the American Opportunity Credit, the Lifetime Learning Credit, the Premium Tax Credit, the Child Tax Credit, and the EV Tax Credit often utilize MAGI income limits.
It’s the same criterion that determines if a person can put money into a Roth IRA or a traditional IRA and to what extent. If a person’s MAGI is too high, they may only be able to deduct a portion of their taxes or make a partial contribution, if any at all. In a nutshell, these income limitations apply to both traditional and Roth IRAs.
If you or your spouse do not have access to a workplace retirement plan, you are eligible to claim the full amount contributed to an IRA as a tax deduction each year. However, whether or not you are eligible for this deduction and the amount you can take depends on your MAGI if you have an employer-sponsored retirement plan.
In 2024, you contribute $7,000 to a traditional IRA, have a workplace retirement plan, and intend to file your taxes as a single person. If your modified adjusted gross income (MAGI) is $77,000 or lower, you can deduct the entire $7,000 from your taxable income in 2024 (when you file your taxes in 2025).
With a Roth IRA, you can put money in after taxes, and when you retire, you won’t have to pay taxes on it at all. Your maximum allowable contribution (MAGI) determines whether you are eligible to make a Roth IRA contribution. At specific income levels, contributions are either reduced or not permitted at all.
The calculation of MAGI varies across programs and deductions. For the purpose of calculating your maximum allowable income (MAGI), here are a few examples of possible deductions and credits.
Example 1: Can you deduct standard IRA contributions?
To get your adjusted gross income, add the following: deductions for student loans, foreign earned income and housing, foreign housing, interest on savings bonds that are not taxable, and employer adoption benefits that are not taxable.
You are able to deduct the full amount if the amount you get is lower than the traditional IRA deduction limit. Such deduction limitations are subject to change and are dependent on your filing status and the existence of a workplace retirement plan. In the absence of a workplace retirement program for either you or your spouse, you are eligible to claim the full deduction regardless of your MAGI.
Example 2: Are you qualified for particular education credits?
To get your adjusted gross income, add the following: housing exclusions and foreign earned income; the foreign housing deduction; and the income of an excluded bona fide resident of American Samoa or Puerto Rico.
If your MAGI reaches a certain level, you will no longer be eligible for the American Opportunity Credit or the Lifetime Learning Credit. Full credit eligibility is typically available to those with modified adjusted gross income (MAGI) of $80,000 or less ($160,000 for married couples filing jointly).
One can get reduced credit if they file as a single person and their MAGI falls between $80,000 and $90,000. You will no longer be qualified to receive the credit beyond $90,000.
You are ineligible for the tax cut once you reach the phase-out threshold, which is between $160,000 and $180,000 for married people filing jointly. None of these tax credits will apply to you if you file as a married couple claiming the separate tax identification number.
When figuring out which tax breaks are available to you, your MAGI is the starting point. One of the most prominent is figuring out if your IRA contributions are tax deductible.
For instance, as of 2024, a maximum adjusted gross income (MAGI) of $87,000 or more would prevent a single filer from deducting contributions to an individual retirement account (IRA) from their taxable income. In addition, if your modified adjusted gross income (MAGI) was $90,000 or more in 2024 (or $185,000 if you were married and filed jointly), you would not be able to deduct the interest you paid on your student loans.
The IRS uses your modified adjusted gross income on specific worksheets to determine the amounts that appear on your tax returns, but it does not appear on the actual tax return forms that you file with the IRS. Take line 11 of Form 1040 for 2024 as an example; that’s where you’ll see your adjusted gross income.
You need to take your AGI and “add-back” specific deductions to get your MAGI. Since this is the formula for MAGI, your MAGI will never be less than your AGI.
To find out if you’re eligible for tax credits and deductions, the IRS looks at your AGI and MAGI. Extending your tax deductions is possible if your adjusted gross income (or modified adjusted gross income) falls below specific levels. The question then becomes how to lower your AGI to take advantage of tax deductions such as those for IRA contributions and student loan interest.
Earning less money should, in theory, bring your AGI down. However, you can’t really expect your bank account to benefit from a decrease in income in exchange for the amount you can save through specific tax deductions, so that’s not a practical solution.
To further reduce your AGI, you can do things like:
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