How to Calculate Your Modified Adjusted Gross Income
The IRS uses your MAGI to determine whether you can contribute to an IRA
Your modified adjusted gross income (MAGI) determines your eligibility for important tax benefits, including whether you can deduct contributions to an individual retirement account (IRA) or contribute directly to a Roth IRA. Eligibility for education tax benefits and certain income tax credits are also based on MAGI. Under the Affordable Care Act, eligibility for income-based Medicaid and subsidized health insurance through the marketplaces is calculated using the modified adjusted gross income (MAGI) of your household.
Therefore, it is important to understand how to calculate your MAGI because it has an important role in various income tax planning strategies.
The first thing to recognize is that your modified adjusted gross income is not the same thing as your total income, or as your adjusted gross income (AGI). Most people are more familiar with their adjusted gross income than they are with their modified adjusted gross income (MAGI).
But although your adjusted gross income and your modified adjusted gross income are likely to be fairly close in value to one another, it's important to understand the difference between them. Here are the details, plus how to calculate your MAGI.
Finding Your Adjusted Gross Income
Your AGI is the total amount of income you make in a year, minus certain deductible expenses. The AGI is found on line 37 of IRS Form 1040, on line 21 of IRS Form 1040A, and on line 4 of IRS Form 1040EZ. The IRS is working on a new Form 1040 for the 2019 tax season. The location of your adjusted gross income may change, but the same concepts will apply in determining how to calculate your AGI.
Adjusted gross income includes all your income, including:
- investment income
- business income
- retirement income
- rental income
- farm income
The total amount of income then is "adjusted" by subtracting tax-deductible expenses. These may include:
- educator expenses
- health savings account (HSA) contributions
- health insurance expenses (if you're self-employed)
- IRA deductions
- student loan interest
The Internal Revenue Service uses your adjusted gross income as a starting point to calculate your total income tax. It also uses it to determine if you're eligible for a variety of credits and exemptions, including charitable deductions, deductions for adoption expenses, dependent tax credits, and the earned income credit.
Therefore, it's generally in your best interests to lower your AGI as much as possible, given your earnings. You should find as many tax-deductible expenses as possible to subtract from the total.
There are two items you don't need to add to your AGI:
- contributions to employer-sponsored plans, like 401(k)s
- taxable income generated by converting to a Roth IRA
How to Calculate Your MAGI
You won't find your modified adjusted gross income on your tax return. Fortunately, though, it's easy to calculate.
Start with your adjusted gross income, the figure on the last line of the front of your 1040 or 1040A tax form (line 37 for Form 1040, line 21 for Form 1040A, or line 4 for Form 1040EZ).
Then find yourself a calculator, and add back:
- any deductions you took for IRA contributions
- any deductions you took for student loan interest or tuition
- half of your self-employment tax
- passive income or loss
- excluded foreign income
- rental losses
- interest from EE savings bonds used to pay higher education expenses
- employer-paid adoption expenses
- losses from a publicly traded partnership
How the IRS Uses Your MAGI
The most important reason to know your modified adjusted gross income is to determine whether you can make tax-deductible contributions to individual retirement accounts. The IRS also uses the MAGI to determine if you're eligible to take a tax deduction for tuition and fees. For example, as of 2018 if you are a single or head-of-household filer on your tax return and are covered by a retirement plan at work, you aren't eligible to take an IRA deduction if you had a MAGI of $73,000 or higher. The limit is $121,000 for married couples filing jointly (see 2018 IRA Limits on Contributions and Income).
You also cannot take a deduction for tuition and fees if you had a MAGI of $80,000 or higher as a single or head-of-household filer, or $160,000 if married and filing jointly.
Since the limits in these situations differ depending on your filing status, you'll need to consult a tax adviser or tally the numbers yourself to see where you stand with your MAGI.