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

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

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Your modified adjusted gross income, often referred to as your MAGI, is included in calculations to limit, reduce, or phase out certain tax breaks you might qualify for. It's your adjusted gross income or AGI with certain deductions added back in. There's no single overall definition of a MAGI because your adjusted gross income can be modified in different ways for different purposes.

It's your adjusted gross income plus certain exclusions for purposes of calculating the Adoption Tax Credit, adoption assistance programs, the American Opportunity Tax Credit, contributions to Coverdell Education Savings Accounts, and the Lifetime Learning Credit:

  • Any foreign earned income exclusion you claimed
  • Any housing exclusion you claimed
  • Any housing deduction you might have claimed

You must also add back in any income you excluded from taxation that you received from American Samoa, Guam, the Northern Mariana Islands, or Puerto Rico.

The Adoption Tax Credit and Assistance Programs

The amount of adoption-related expenses that can be refunded through the Adoption Tax Credit is limited or phased out if your MAGI is above certain thresholds. The MAGI phaseout for the Adoption Tax Credit begins at $214,520 in the 2020 tax year—the tax return you'd file in 2021—and ends at $254,520.

Your MAGI can also limit the amount of adoption-related expenses you're eligible to claim for tax-free reimbursement from an employer assistance program. The same MAGI threshold limits that are used for the adoption credit are also used for employer-provided adoption assistance programs.

The value of these tax breaks begins reducing at the first threshold and taxpayers with MAGIs over the upper limit aren't eligible for these benefits at all.

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

The American Opportunity Tax Credit

Your MAGI for purposes of claiming the American Opportunity Credit appears on line 3 of Form 8863, the tax form you must file to calculate and claim the credit. Again, the amount of the credit is limited until it's ultimately phased out entirely if your MAGI exceeds certain thresholds.

The 2020 MAGI 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. 

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, the amount you can contribute tax-free is reduced or phased-out if your MAGI is over certain thresholds.

The threshold amounts for Coverdell Education Savings Accounts in the 2020 tax year are $95,000 to $110,000, increasing to $190,000 to $220,000 if you're married and filing a joint return.

The Lifetime Learning Credit

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 amount of the reduction can be calculated on IRS Form 8863. 

Student Loan Interest Tax Deduction

Your MAGI is your AGI with the following modifications for purposes of claiming the student loan interest tax deduction:

  • 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. The threshold amounts vary by year and by filing status. The limits for the student loan interest deduction for tax year 2020 are $85,000 for single filers and $170,000 for joint filers. Those who use the married filing separately status aren't eligible to deduct student loan interest at all.

Deducting IRA Contributions

The calculation of your MAGI is also different and more complicated for purposes of determining your allowable tax deduction for contributions you've made to your IRA. It's your adjusted gross income before you take the IRA deduction for this tax break, 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 if you're covered by a retirement plan through an employer. It can be calculated using Worksheet 1-1, "Figuring Your Modified AGI," which can be found in IRS Publication 590-A.

The MAGI threshold amounts for this deduction vary by year and by filing status, so you're best off calculating it using the worksheet. 

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). Your MAGI is your AGI with the following modifications for purposes of eligibility:

  • 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. The threshold amounts vary by year and by filing status.

Roth IRA reductions begin at MAGIs of $124,000 for the 2020 tax year for single filers, and they're eliminated entirely for those with MAGIs of $139,000 or more. They're $196,000 and $206,000 for married taxpayers who file joint returns.

NOTE: 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.

Article Sources

  1. IRS. "Topic No. 607 Adoption Credit and Adoption Assistance Programs." Accessed Nov. 17, 2020.

  2. Tax Policy Center. "What Is the Adoption Tax Credit?" Accessed Nov. 17, 2020.

  3. IRS. "2020 Instructions for Form 8863." Page 6. Accessed Nov. 17, 2020.

  4. IRS. "2020 Instructions for Form 8863." Page 3. Accessed Nov. 17, 2020.

  5. Carillon Family of Funds. "For Individual Retirement Accounts & Coverdell Education Savings Accounts." Page 20. Accessed Nov. 17, 2020.

  6. IRS. "Tax Year 2020 1040 and 1040-SR Instructions." Page 91. Accessed Nov. 17, 2020.

  7. Carillon Family of Funds. "For Individual Retirement Accounts & Coverdell Education Savings Accounts." Pages 13-14 Accessed Nov. 17, 2020.