MAGI, or modified adjusted gross income, is your adjusted gross income, plus certain deductions added back in. Adjusted gross income, or AGI, is your total income, minus any deductions you’re eligible to claim.
Knowing how to calculate MAGI can help you determine which tax deductions or credits you may be eligible for when it’s time to file your return. Here’s a breakdown of what MAGI is, and why it matters.
Key Points
• MAGI (Modified Adjusted Gross Income) is adjusted gross income (AGI) plus certain deductions added back in.
• Knowing MAGI can be crucial for tax planning, minimizing tax liabilities, and determining eligibility for tax credits, such as the Child Tax Credit.
• Gross income may include wages, business and retirement income, tips, dividends, capital gains, rents, and interest.
• Common deductions used to determine AGI include student loan interest, contributions to certain retirement plans, educator expenses, and health savings account (HSA) contributions.
• Deductions that need to be added back to AGI to determine MAGI may include traditional IRA contributions, student loan interest, passive loss or passive income, excluded foreign income, and rental losses, among others.
What Is MAGI?
MAGI is a tax term that refers to modified adjusted gross income. Gross income is your income before taxes or other deductions are applied. Understanding your MAGI can be helpful for tax planning, whether you’re making money trading stocks, or simply working a single job and earning a paycheck.
Definition of MAGI
In simple terms, MAGI is your adjusted gross income with some deductions added back in to see if you qualify for specific deductions or income-based programs.
Some groups may define MAGI slightly differently depending on how it’s used. For instance, in context of student loan interest deductions, the Internal Revenue Service (IRS) notes the following:
For most taxpayers, MAGI is the adjusted gross income (AGI) as calculated on their federal income tax return before subtracting any deduction for student loan interest.
The Social Security Administration (SSA), meanwhile, uses this definition:
Modified Adjusted Gross Income (MAGI) is the sum of the beneficiary’s adjusted gross income (AGI) (found on line 11 of the Internal Revenue Service (IRS) tax filing form 1040), plus tax-exempt interest income (line 2a of IRS Form 1040).
You may wonder why you’re subtracting certain deductions and then adding them back in, but the totals of your MAGI and AGI may differ. We’ll compare MAGI and AGI a little further on to help you understand the difference.
Recommended: What Is Income Tax?
Why MAGI Is Important
MAGI becomes important when determining which, if any, tax breaks you may be eligible to claim. It’s helpful to know your MAGI if you plan to:
• Make traditional IRA contributions that you plan to deduct on your taxes.
• Claim a premium tax credit for health insurance expenses.
• Claim child tax credits or education credits, which reduce your tax liability dollar for dollar.
It can also be helpful if you plan to contribute to a Roth IRA, which requires you to be income-eligible. An IRA is a tax-advantaged account that you can use to save for retirement. Traditional IRAs allow for deductible contributions while Roth IRAs offer tax-free qualified withdrawals.
Apart from tax planning, your MAGI is used for Medicare planning to determine what you’ll pay for monthly premiums once you turn 65.
MAGI vs. Adjusted Gross Income (AGI)
MAGI and AGI are two different calculations, though the final numbers may be very close. Here’s how the IRS defines AGI:
Adjusted gross income, also known as (AGI), is defined as total income minus deductions, or “adjustments” to income that you are eligible to take.
Gross income, for AGI purposes, includes wages, dividends, capital gains, business and retirement income, tips, rents, and interest. Adjustments to income are deductions that reduce your gross income.
Some common deductions that reduce gross income to determine AGI include:
• Health insurance premiums (if self-employed)
• One half of self-employment taxes paid
• Student loan interest
• Educator expenses
• Traditional IRA contributions and other qualified retirement plans
Your MAGI is your AGI, with some deductions added back in. Certain deductions are subject to limits, meaning that if your MAGI is too high, your deduction may be reduced or phased out entirely.
Who Needs to Calculate MAGI
Anyone who’s interested in claiming every tax credit or deduction they’re eligible for, up to the full amount allowed by the IRS, may benefit from knowing how to calculate MAGI.
Estimating your tax liability before the year ends gives you time to make some last-minute financial moves that might reduce what you owe or increase your refund. For instance, say you’ve been thinking of opening a Roth IRA. You’ll first need to know your MAGI to know if you’re eligible to contribute to a Roth, based on your income.
It’s also helpful to know your MAGI when applying for federal benefit programs. Your MAGI can affect your eligibility for:
• Supplemental Nutrition Assistance Program (SNAP) benefits
• Medicaid
• Children’s Health Insurance Program (CHIP) benefits
Calculate your Roth IRA eligibility.
Using your MAGI, discover how much you can put into a Roth IRA in 2024 using SoFi’s IRA contribution calculator.
How to Calculate MAGI
Tax planning software programs can calculate your MAGI automatically, or you consult with a tax professional. You’ll need a few pieces of information to find your MAGI.
Step 1: Calculate Your Adjusted Gross Income (AGI)
You’ll first need to find your AGI. To do that you first add up your total gross income. Again, this is all of your income from all sources, before taxes and deductions. Everyone’s list may be different, but might include:
• Full or part-time employment wages
• Self-employment income
• Investments, including rental income
• Interest and dividends
• Capital gains
You’ll use your gross income number to find your AGI in the next step.
Step 2: Add or Subtract Applicable Adjustments
Now you’ll subtract applicable adjustments to gross income to find your AGI. Again, this will differ from individual to individual, but some of the most common adjustments for AGI include:
• Traditional IRA contributions, including SEP IRA contributions if you’re self-employed
• Student loan interest
• Half of self-employment taxes paid
• Tuition and fees
• Contributions to a Health Savings Account (HSA)
The final number, after adjustments, is your AGI.
Step 3: Determine Your MAGI
Using your AGI you’ll now add back applicable adjustments to get your MAGI. Some of the things you’ll add back include:
• Traditional IRA contributions, and SEP IRA contributions if you’re self-employed
• Student loan interest
• Half of self-employment taxes paid
• Tuition and fees
• Passive loss or passive income
• Rental losses
• Non-taxable Social Security payments
• Foreign earned income exclusion
The resulting number is your MAGI, and this is what will help you discern which deductions or credits you might be eligible to take when filing your tax return.
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Common Adjustments to AGI for MAGI Calculation
Some adjustments to AGI for MAGI calculations are more common than others. Here are some of the most-often used adjustments.
Tax-Exempt Interest Income
Tax-exempt interest income is not subject to tax at the federal level — as the name implies. This income may, however, still be subject to income tax at the state and local levels.
An example of tax-exempt interest income is income earned from municipal bonds. A municipal bond is a debt instrument that city and local governments use to raise money to fund public works.
When you buy a municipal bond or muni, the bond issuer agrees to pay you interest for a set term in exchange for the use of your money. If the bond is tax-exempt you won’t owe income tax on the interest earned.
But again, interest income from these bonds may still generate state or local tax liabilities.
Qualified Tuition Expenses
Qualified tuition expenses include tuition and required fees for enrollment or attendance at eligible postsecondary schools. The term “qualified tuition expenses” is most often used when discussing education tax credits, such as the American Opportunity Tax Credit (AOTC).
Qualified tuition expenses do not include:
• Room and board
• Transportation costs
• Insurance and medical expenses
• Student fees that are not required as a condition of enrollment or attendance
You can’t claim this credit for the same expenses that were paid for with tax-free scholarships or grants. Neither can you claim a deduction for the same education expenses that you claim a tax credit for.
IRA Contributions
Traditional IRAs allow you to deduct some or all of your contributions. The amount you can deduct is determined by three things:
• Your MAGI
• Your tax filing status
• Whether you (and your spouse, if married) are covered by a retirement plan at your job
Note: If you or your spouse (if you’re married) are not covered by a retirement plan at work, your IRA contributions are fully deductible.
If either you or your spouse are covered by a workplace retirement plan, your IRA deduction may be limited. To determine how much of your IRA contributions you can deduct in a given year, if any, you’ll need to calculate your MAGI by adding certain deductions back to your AGI — such as the IRA contributions you deducted.
Deducting SEP or SIMPLE IRA Contributions
Keep in mind that contributions to self-employed retirement plans, such as SEP or SIMPLE IRAs, are generally subject to the same tax treatment as traditional IRAs. But because these accounts are used by small business owners and those who are self-employed, the rules governing deductions can be different from traditional IRAs, so it’s wise to check.
Roth IRAs do not allow for deductible contributions.
Student Loan Interest Deduction
When are student loans tax deductible? Generally speaking, the loan principal is not deductible, though the interest you pay might be.
The student loan interest deduction allows you to subtract amounts paid for student loan interest from your taxable income. As of 2024, you can deduct the lesser of $2,500 or the amount of interest you paid during the year.
Your MAGI must be below a certain amount to claim this deduction. For 2024, your ability to claim the deduction begins to phase out at these levels:
• Single filers with a MAGI of $80,000 or more
• Married couples filing jointly with a MAGI of $165,000
Single filers with a MAGI exceeding $95,000 and married couples with a MAGI greater than $195,000 won’t be able to deduct student loan interest.
MAGI and Tax Credits
Tax credits reduce your tax liability dollar for dollar. Some tax credits are refundable, meaning you can get a credit for them even if you don’t owe any tax.
MAGI is used to determine eligibility for a number of tax credits, including:
• Child Tax Credit
• Earned Income Tax Credit (EITC)
• Premium tax credit for health insurance
• Dependent Care Credit
Claiming credits can reduce your tax liability at the end of the year.
MAGI and Deductions
Tax deductions reduce your taxable income, which can push you into a lower tax bracket. As mentioned above, MAGI is used for several key deductions, including:
• IRA contributions
• Student loan interest
• Educator expenses
• Deductions for adoption expenses
You can claim both tax credits and deductions on your return to try and minimize your tax liability, or boost your refund. However, you can’t claim tax credits and deductions for the same expenses.
The Takeaway
MAGI is the same as AGI plus some adjustments added back into the mix. Navigating tax terms can seem daunting but it’s helpful to understand what MAGI is and how it can impact your financial situation. Learning about how taxes work can help you develop a plan for potentially minimizing your tax liabilities, so that you might have more money to invest.
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FAQ
What is the difference between MAGI and AGI?
Your MAGI is your adjusted gross income, with certain adjustments added back in. Your AGI is your gross income, after certain deductions are taken out.
Is MAGI used for all tax calculations?
MAGI is used for certain tax calculations that determine eligibility for tax breaks. For example, if you’re wondering whether you can claim the Earned Income Tax Credit, or get a deduction for traditional IRA contributions, your MAGI makes a difference.
Can MAGI be higher or lower than AGI?
Your MAGI will always be equal to your AGI, or higher. MAGI is your AGI, with certain deductions or adjustments added back in.
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