Your modified adjusted gross income (MAGI) determines whether you are allowed to claim certain benefits on your taxes. These include whether you can deduct contributions to an individual retirement account (IRA). It also impacts what you can put in a Roth IRA each tax year.
Certain education-related tax benefits and income tax credits are based on MAGI. Under the Affordable Care Act, your household MAGI also impacts whether you can get income-based Medicaid or subsidized health insurance through the Marketplace.
In 2021, the American Rescue Plan allowed more households to access subsidized health insurance through the Marketplace. In tax years 2021 and 2022, you may be eligible for new tax credits that lower the cost of your Marketplace health insurance, even if your MAGI was too high to qualify in previous years. You will still need to file taxes at the end of the year to prove that your income was not too high for the tax credit.
The first thing to know is that your total income, modified adjusted gross income, and adjusted gross income (AGI) are not the same things. Though they use most of the same base numbers, each is calculated in a slightly different way.
For tax-planning purposes, you will need to learn the differences and when to use each one.
How Do I Find My Adjusted Gross Income?
Your AGI and your MAGI are likely to be fairly close in value to one another. Your AGI is the total amount of income you make in a year, minus certain expenses that you are allowed to deduct.
Adjusted gross income is your taxable income for the year, so it is what your income tax bill is based on.
There are two steps to finding your AGI. First, it includes all your income sources, such as:
- Investment income
- Business income
- Retirement income
- Rental income
- Farm income
The total amount of income is then "adjusted." Subtract the expenses you are allowed to deduct on your taxes. These may be:
- Educator expenses if you are a teacher
- Anything you put in a Health Savings Account (HSA)
- 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 and to determine whether you can claim many credits and exemptions on your taxes, such as:
- Deductions for what you give to charity
- Deductions for adoption expenses
- Dependent tax credits
- The earned income tax credit (EITC)
The American Rescue Plan also expanded eligibility for the earned income tax credit. It can now be claimed by:
- More childless households
- Taxpayers as young as 19, except for full-time students between the ages of 19 and 24
- Former foster children and homeless youths as young as 18
- Taxpayers over age 65
You don't need to add to your AGI any pre-tax contributions made to employer-sponsored plans such as a 401(k).
The lower your AGI, the lower your tax bill will be. That means it's often in your best interest to lower your AGI as much as possible. How much you can do this will depend on your different earnings and sources of income. One way to lower your AGI is to subtract as many tax-deductible expenses as possible from the total.
If you are not sure how to do this on your own, a tax professional can help you. You can also use tax preparation software, which will help you find legal ways to lower your AGI.
How Do I Find My MAGI?
You won't find your modified adjusted gross income on your tax return, but it is easy to figure out on your own.
Start with your adjusted gross income from your Form 1040. Then get a calculator, and add back:
- Any IRA deductions that you took
- Any deductions you took for student loan interest or tuition
- Passive income or loss
- Excluded foreign income
- Rental losses if you are a landlord
- Interest from EE savings bonds used to pay college expenses
- Half of your self-employment tax (IRS Form 1040, Schedule 1)
- Employer-paid adoption expenses (IRS Form 8839)
- Any losses from a publicly traded partnership
The total number with these amounts added back in is your MAGI. For many people, it will be higher than your AGI. In some cases, they may be the same number.
Your total income is sometimes called your "gross income." This is the total amount you make in a tax year. It includes your:
- Business income
- Capital gains
How Does the IRS Use Your MAGI?
Your MAGI is what determines whether you can make tax-deductible contributions to an IRA. If the total is over a certain amount, you can't deduct anything you added to an IRA for that tax year.
For example, as of tax year 2021, if you are a single or head-of-household filer on your tax return and are covered by a retirement plan at work, you can't take an IRA deduction if you had a MAGI of $76,000 or higher.
These limits change based on your tax filing status. For example, married couples who file taxes jointly can have a MAGI up to $125,000.
The IRS also uses your MAGI to determine whether you're allowed to take a tax deduction for tuition and fees.
These limits don't just change based on your filing status. They are also changed each tax year.
You'll need to consult a tax adviser or tally the numbers yourself to see where you stand with your MAGI. That will let you know what deductions you can make come tax time.