Knowing your income is important for a lot of purposes, like taxes and insurance. However, the tax code is highly complex, and there are multiple measures of your income. Everyone who’s done their own taxes is familiar with adjusted gross income.
But one lesser-known measure of income is just as important: your modified adjusted gross income. It impacts your ability to qualify for certain tax incentives or things like health care subsidies.
While it can seem complicated, your MAGI isn’t all that hard to calculate once you know what it is and why you’re trying to figure it out.
What Is Modified Adjusted Gross Income?
Modified adjusted gross income (MAGI) is a calculation of your income adjusted for a few different factors.
Your gross income is the total amount of money you earn in a year from everything you do. For example, if you have a job that pays $50,000 per year, win $500 in the lottery, get $25 in interest from your bank, and earn $200 in dividends from investments, your gross income is $50,725.
Your adjusted gross income (AGI) is your gross income minus certain expenses, such as student loan interest and educator expenses. So your AGI is lower than your gross income.
Your modified adjusted gross income is your AGI with some of those deductions added back. But there are different methods of calculating MAGI for different purposes.
For example, you can deduct individual retirement account (IRA) contributions from your gross income to find your AGI but have to add it (plus several other things) back to your AGI when calculating your MAGI for determining your Roth IRA eligibility.
When You Need to Know Your MAGI
You must use your modified adjusted gross income in a few different scenarios.
One of the most common times to use your MAGI is when you’re filing taxes. Your MAGI determines your eligibility for different types of tax deductions and credits, but you calculate the MAGI for each credit differently.
- Child Tax Credit. The child tax credit is for taxpayers with children under 18. For this purpose, your MAGI is your AGI plus foreign earned income, housing exclusions, foreign housing deductions, and excluded resident income for residents of Puerto Rico and American Samoa.
- Adoption Credit. Parents who adopt a child can get a tax credit for expenses directly related to the adoption, such as adoption fees and court costs. For this credit, your MAGI is equal to your AGI plus foreign-earned income, housing exclusions, and housing deductions.
- Premium Tax Credit. This tax credit helps individuals cover the premiums for health insurance purchased through the marketplace. For this credit, your MAGI is your AGI plus foreign-earned income, tax-free interest, and the tax-free portion of Social Security income.
Your MAGI plays a major role in determining your eligibility to contribute to a retirement plan. But you don’t calculate your eligibility for every retirement plan the same way.
- IRA Eligibility. Your MAGI must be below certain limits to contribute to a Roth IRA. Take your AGI and add income from Roth conversion and deductions for IRA contributions, excluded bond interest, adoption assistance, domestic production activities, student loan interest, tuition and fees, and foreign-earned income.
- IRA Contribution Deductions. Take your AGI and add excluded bond interest and adoption assistance and deductions for domestic production activities, student loan interest, tuition and fees, and foreign-earned income.
The amount of money you make determines your eligibility for the health insurance premium credit and whether you can receive a subsidy for purchasing health insurance through the marketplace. It also influences whether you’re eligible for Medicaid.
For both, your MAGI is your AGI plus excluded foreign income, nontaxable Social Security income, and tax-exempt interest.
Many educational programs and tax incentives depend on your MAGI. But as with other eligibility requirements, you calculate your MAGI differently for each of these as well.
- Lifetime Learning Credit and American Opportunity Credit. These give you a credit for educational expenses like tuition and fees. The latter is a partially refundable credit, meaning you can get money back if the credit exceeds your tax bill for the year. Your MAGI for these is equal to your AGI plus foreign earned income, foreign housing deductions, and excluded income from Puerto Rico or American Samoa.
- Student Loan Interest Deductions. If you have student loans, you can deduct some or all of the interest from your taxes. Take your AGI and add any amount you would deduct for student loan interest, tuition and fee deductions, domestic production deductions, foreign earned income, foreign housing deductions, and excluded income from Puerto Rico or American Samoa.
How to Calculate Modified Adjusted Gross Income
Calculating your MAGI can seem complicated because there are so many deviations depending on why you need it. But in reality, it’s quite simple.
- Determine Your Gross Income. Your gross income is the sum total of your income from all sources, such as wages, tips, investment dividends, and capital gains. It also includes sources like Social Security, business income, alimony, and pensions.
- Find Your Adjusted Gross Income. Your AGI is your gross income, adjusted for expenses like IRA contributions, student loan interest, school tuition and fees, health savings plan contributions, and educator expenses for teachers.
- Take your AGI and Add Back Some of the Adjustments. Once you know your AGI, you can calculate your MAGI by adding back some of the amounts you deducted based on the type of credit or eligibility you’re trying to figure.
The resulting number is your modified adjusted gross income.
For example, imagine Jane has an AGI of $43,500. She also spent a month abroad in the summer and earned $1,000 in foreign income. She has no housing exclusions or foreign housing deductions and has never been to Puerto Rico or American Samoa.
She wants to take the child tax credit, so to calculate her MAGI for that purpose, she must add the foreign earned income to her AGI, making her MAGI $44,500.
Jane also wants to contribute to a Roth IRA. If she deducted $500 in student loan interest that year, her MAGI for Roth IRA eligibility would be $45,000 ($43,500 AGI + $1,000 foreign income + $500 student loan interest deduction), assuming she had no other deductions from the Roth IRA MAGI formula.
See the IRS website or contact a qualified tax professional at a firm like H&R Block for full details about what counts as gross income, what you can remove to calculate your AGI, or help calculating your MAGI.
Modified Adjusted Gross Income FAQs
Understanding the difference between MAGI and AGI can be challenging, but it’s crucial if you’re trying to determine your eligibility for government aid or tax incentives.
How Is MAGI Different From AGI?
Your MAGI is different from your AGI because it includes some of the deductions AGI removes from your gross income.
Can My MAGI & AGI Be the Same?
Yes, it is possible for your MAGI and AGI to be the same. In fact, it’s relatively common.
Your MAGI and AGI will be the same if you don’t have any deductions to make from your gross income when determining your AGI. For many filers, the AGI and MAGI are the same because some of the deductions removed from MAGI are rare, such as foreign earned income tax exclusions.
Where Do I Enter MAGI on My Tax Return?
Your modified adjusted gross income isn’t listed on your income tax return. However, you calculate your MAGI using the information contained on your Form 1040.
Can I Lower My MAGI?
Yes, it is possible to lower your MAGI. The most obvious way is simply earning less money because having less income means a lower modified adjusted gross income. However, this isn’t the best option for most people.
You can reduce your MAGI in other ways. Some ways to reduce your MAGI include:
- Contribute to a health savings account or flexible spending account
- Contribute to a retirement plan
- Pay self-employed health insurance premiums
- Sell taxable investments for a capital loss
To make calculating your MAGI easier, you can use Omni’s MAGI calculator. For example, if you’re trying to calculate your Medicaid eligibility, you just enter your AGI, excluded foreign income, nontaxable Social Security income, and tax-exempt interest and leave the other fields blank.
If you run into trouble, talking to a tax professional at a company like H&R Block can help. They’ll need information on your income and the deductions you’re eligible for. Tax forms like a W-2 from your employer and 1098-E for student loan interest can be a big help.
If you qualify, you can save money by taking advantage of all the deductions and programs available.