Modified Adjusted Gross Income (MAGI) & Its Effect on Tax Credits

Your MAGI is an alternate measure of income that Limits some tax breaks

Your modified adjusted gross income, often referred to as your MAGI and pronounced "Maggie," is pretty much exactly what it sounds like—a modification of your adjusted gross income.

There's no single overall definition of MAGI. Your adjusted gross income can be modified in different ways for different purposes. It's included in calculations to limit, reduce, or phase out certain tax breaks.

The Adoption Tax Credit and Assistance Programs

For purposes of the adoption tax credit, your MAGI is your adjusted gross income plus any foreign earned income exclusion, housing exclusion, or housing deduction you might have claimed to calculate your AGI. You must also add back in any income you excluded from American Samoa, Guam, the Northern Mariana Islands, or Puerto Rico.

Your MAGI can limit the amount of adoption-related expenses you're eligible to claim for the tax credit or for tax-free reimbursement from an employer assistance program. It appears on line 7 of Form 8839, which you must complete and submit to claim qualified adoption expenses. Your MAGI also shows up on line 23 of Form 8839. Here it's used to limit the amount of employer-provided benefits for adoption assistance reimbursement that can be excluded from federal income tax. 

The amount of adoption-related expenses eligible to be refunded through the adoption tax credit is limited or phased out if your MAGI is above certain thresholds. The same MAGI threshold limits that are used for the adoption credit are used for employer-provided adoption assistance programs.

The MAGI phaseout for the Adoption Tax Credit and Assistance Programs begins at $207,140 in 2018, and ends at $247,140. The value of these tax breaks begins reducing at the first threshold and those with MAGIs over the upper limit are not eligible for these benefits at all. The thresholds increase to $211,160 and $251,160 in 2019. 

The American Opportunity Tax Credit

Your MAGI for purposes of claiming the American Opportunity Credit is the same as it would be for the adoption tax breaks. It shows up on line 3 of Form 8863, the tax form you must file to calculate and claim the credit. If your MAGI is over certain thresholds, the amount of the American Opportunity Tax Credit is limited until it's ultimately phased out entirely. 

The phase-outs are $80,000 or less to claim the full credit for single taxpayers and $160,000 or less for those who are married and file joint returns. You can't claim these tax breaks at all if your MAGI is over $90,000, or $180,000 for joint filers. 

The MAGI thresholds for the American Opportunity Credit remain the same in 2018 and 2019.

Coverdell Education Savings Accounts

Your MAGI also limits the amount you can contribute to a Coverdell Education Savings Account on behalf of another individual. Calculations for these accounts are made using Worksheet 7-1, MAGI for a Coverdell ESA, found in IRS Publication 970. Again, if your MAGI is over a certain threshold, the amount you can contribute tax-free is reduced or phased-out. 

Your MAGI is calculated the same for this tax break as for the others.

The threshold amounts for Coverdell Education Savings Accounts in the 2018 and 2019 tax years are $190,000 if you're married and filing jointly, or $95,000 for all other filing statuses.

Individual Retirement Account (IRA) Tax Deduction

The calculation of your MAGI is a little different for the tax deduction for contributions made to your IRA. It's your adjusted gross income before you take the IRA deduction, and after including any taxable Social Security benefits and applying the passive activity loss limitations to passive income. The following modifications also apply:

  • Add back any exclusion for savings bond interest
  • Add back adoption assistance excluded from income
  • Add back deduction for domestic production activities 
  • Add back any deduction for interest paid on student loans
  • Add back any deduction for tuition and fees
  • Add back any foreign earned income exclusion, housing exclusion and housing deduction

Your MAGI limits the amount you can deduct for contributions made to a traditional IRA when you're covered by a retirement plan through an employer. It can be calculated using Worksheet 1-1, Figuring Your Modified AGI, which is found in IRS Publication 590. If your MAGI is over a certain threshold, the amount of contributions you can deduct is reduced or phased out. The threshold amounts for this deduction vary by year and by filing status so you're best off calculating it using the worksheet. 

The Lifetime Learning Credit

The Lifetime Learning Credit also calculates your MAGI as your AGI plus any foreign earned income exclusion, housing exclusion, or housing deduction you claimed, excluding income from American Samoa, Guam, the Northern Mariana Islands, or Puerto Rico. 

You can calculate your MAGI for the Lifetime Learning Credit using Worksheet 3-1 in IRS Publication 970. Again, if your MAGI is over a certain threshold, the amount of the credit you can claim is reduced or phased out—how much depends on your MAGI and your filing status. The threshold amounts vary each year, but the reduction amount can be calculated on IRS Form 8863, lines 9 through 19. 

Roth Individual Retirement Account (IRA) Eligibility

Depending on your MAGI, you might or might not be eligible to establish a Roth Individual Retirement Account (IRA). In this case, your MAGI is your AGI with the following modifications:

  • Less income from a Roth conversion
  • Plus any deduction for Traditional IRA contribution
  • Plus any exclusion for savings bond interest
  • Plus any adoption assistance excluded from income
  • Plus any deduction for domestic production activities
  • Plus any deduction for interest paid on student loans
  • Plus any deduction for tuition and fees
  • Plus any foreign earned income exclusion, housing exclusion and housing deduction.

Your MAGI is used to determine whether you can—and how much you can—contribute to a Roth IRA. If your MAGI is over a certain threshold, the amount you can contribute to a Roth IRA is reduced or phased out. The threshold amounts vary by year and by filing status.

For single filers, Roth IRA reductions begin at MAGIs of $120,000 for the 2018 tax year and are eliminated entirely for those with MAGIs of $135,000 or more. These numbers increase to $122,000 and $137,000 in 2019. They're $189,000 and $199,000 in 2018 for married taxpayers filing joint returns, and to $193,000 and $203,000 in 2019 for these filers.

Student Loan Interest Tax Deduction

For purposes of the student loan interest tax deduction, your MAGI is your AGI with the following modifications: 

  • Less your deduction for student loan interest
  • Less any deduction you took for tuition and fees
  • Less any deduction for domestic production activities
  • Plus any foreign earned income exclusion, housing exclusion and housing deduction
  • Plus any exclusion of income from American Samoa, Guam, the Northern Mariana Islands, or Puerto Rico.

Your MAGI for this deduction can be calculated using Worksheet 4-1 found in IRS Publication 970. It limits the amount of student loan interest you can deduct. If your MAGI is over a certain threshold, your deduction is reduced or phased-out. The threshold amounts vary by year and by filing status.

The limits for the student loan interest deduction in tax year 2018 are $80,000 for single filers and $165,000 for joint filers, increasing to $85,000 and $170,000 in 2019. Those who use the married filing separately status are not eligible to deduct student loan interest.

Tax laws change periodically and the above information might not reflect the most recent changes. Please consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.