Anyone who has had to file income taxes should be aware of the difference between gross income and adjusted gross income (AGI). But what about modified adjusted gross income (MAGI)? Let’s talk about these concepts, how they relate to each other, and why they matter.
Gross income is quite simply how much money you make, not yet taking into account any deductions. Specifically, gross income includes all income derived from:
Alimony
Capital gains
Certain retirement accounts
Dividends
Farming
Interest
Rent
Royalties
Salary and wages
Unemployment compensation
To then calculate AGI, you take your gross income, and subtract for all the following deductions:
Alimony paid
Certain business expenses of reservists, performing artists, and government officials
Certain moving expenses
Contributions to an IRA
Educator expenses
Health insurance premiums if self-employed
Health savings account
One half of self-employment tax
Penalties on early withdrawals of savings
Student loan interest
Notice what is not mentioned here. AGI does not take into account your personal exemption on your tax form, where you choose between standard and itemized deductions. That comes later; AGI is calculated only from the deductions listed above.
So what then is MAGI?
You calculate MAGI by adding the following items back into your AGI:
Domestic products activities deduction
Employer-paid adoption expenses you earlier excluded
Interest income from series EE bonds earlier excluded because you paid qualified higher education expenses
IRA contribution deduction
One half of self-employment tax
Passive activity losses
Rental real estate losses
Student loan interest or qualified tuition and related expenses deduction
Taxable social security or tier 1 railroad retirement benefits
For many taxpayers, AGI and MAGI will be the same, or at least very close. They differ only if you have one or more items from the above list to add to your AGI, and some of them are quite rare and obscure. How many people have to worry about employer-paid adoption expenses after all?
But they can differ, and when they do it’s important, because they are used for distinct purposes.
Most notably, AGI is used to determine whether you qualify for certain tax deductions and benefits (beyond those already listed above) and of what size, and then is used to calculate your taxable income.
MAGI’s main uses are in connection with Roth IRAs. Your MAGI determines how much, if anything, you may contribute to a Roth IRA, or may convert into a Roth IRA from a different retirement plan.
Sources:
“Instructions for Form 1040-ALL.” IRS
“Instructions for Form 8606.” IRS
“Adjusted Gross Income and Modified Adjusted Gross Income.” Money Blue Book
Jim Wang, “Adjusted Gross Income and Modified Adjusted Gross Income.” Bargaineering
