When you sit down to do your taxes each year, you must figure out how much income you earned, called gross or total income. Then you have to calculate your adjusted gross income and possibly a modified adjusted gross income as well. The amount of AGI and MAGI you have will impact your eligibility for certain tax credits and deductions.
Doing your taxes begins with adding up all of your income. Income includes wages, commissions, tips, interest and investment earnings, self-employment income – everything goes into the pot. The Internal Revenue Service allows you to subtract certain items from your total income to find your AGI. That’s good because it reduces your taxable income even before you claim deductions and tax credits. However, you might have to add back some of the items excluded from AGI to calculate MAGI. MAGI is used to determine your eligibility for certain tax breaks.
You must calculate your AGI before figuring MAGI. You exclude, meaning subtract, applicable amounts from your total income. Excludable items include IRA and self-employment retirement contributions, 50 percent of self-employment tax, self-employment health care premiums, alimony and health savings account contributions. According to Turbo Tax, some other amounts you may exclude include student loan interest and certain expenses incurred as an educator, moving expenses and deductible tuition and fees.
To figure MAGI, add back some of the amounts you excluded when calculating your AGI. Some of the items you must add to your AGI to figure MAGI are student loan interest, deductions for self-employment tax, IRA contributions and deductions for tuition and fees. You might also have to include U.S. savings bond interest, rental losses and qualified tuition that was excluded from income. In some situations, none of the items you subtracted from your total income to figure AGI have to be added back and your MAGI will be the same as AGI.
Significance of MAGI
Your modified adjusted gross income may be higher than your AGI. This can disqualify you for some tax credits. For example, to qualify for the child tax credit, you must have a MAGI of less than $80,000 if single or $160,000 if married and filing a joint return, as of the time of publication. If your MAGI exceeds limits set annually by the IRS, you can lose part or all of the deduction for making traditional IRA contributions. The amount you can contribute to a Roth IRA may be reduced or eliminated if your MAGI is too high.