How to Calculate Your Modified Adjusted Gross Income
The IRS uses MAGI to determine IRA eligibility and more
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 your household MAGI.
The first thing to recognize is that your total income, modified adjusted gross income, and adjusted gross income (AGI) are not the same thing. For tax planning purposes, you must understand the differences.
Finding Your Adjusted Gross Income
Your adjusted gross income and your modified adjusted gross income 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 deductible expenses.
Adjusted gross income encompasses 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.
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.
You don't need to add to your AGI any pre-tax contributions made to employer-sponsored plans such as 401(k)s.
How to Calculate Your MAGI
You won't find your modified adjusted gross income on your tax return. Fortunately, it's easy to calculate.
Start with your adjusted gross income from your 1040. 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
Know your modified adjusted gross income so you can determine whether you can make tax-deductible contributions to individual retirement accounts. For example, as of 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 aren't eligible to take an IRA deduction if you had a MAGI of $76,000 or higher. The limit is $125,000 for married couples filing jointly. The IRS also uses the MAGI to determine if you're eligible to take a tax deduction for tuition and fees.
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.