Nobody enjoys paying taxes, and it can feel like the IRS taxes you on every penny you earn. But fortunately, it doesn't. When you file your taxes, you can make adjustments by taking certain deductions and credits that lower your gross income. This lowers the amount on which you must pay taxes. This lowered income is called your adjusted gross income (AGI).
However, sometimes the IRS requires you to add some of those deductions back to your AGI. After doing that, you're left with a number called the modified adjusted gross income (MAGI).
Usually, your AGI and MAGI amounts are very close, or even exactly the same, because most of the deductions that get added back aren't common ones. But it's important to calculate your MAGI in case it does affect your taxes. For example, if you have an IRA (individual retirement account), it may make a difference in your deductions. The IRS uses your MAGI to determine if you are eligible for certain credits or deductions -- primarily IRA deductions and Roth IRA contributions.
Keep reading to learn how your MAGI differs from your AGI, and how to calculate it on your taxes.
AGI vs. Modified AGI
Before we delve into how to calculate your modified adjusted gross income (MAGI), let's discuss the difference between MAGI and regular adjusted gross income (AGI).
Your AGI, as opposed to your total gross income, can affect any tax deductions and credits for which you may be eligible -- and thus reduce your amount of taxable income. Here's how you calculate your AGI.
- Use Form 1040 to take advantage of all possible deductions and adjustments
- Report all your taxable income, including job earnings, income from alimony, or any bank account interest
- Subtract any deductions or adjustments for which you are eligible (things like alimony payments, education expenses and student loans)
This is your adjusted gross income. Your MAGI, on the other hand, is almost like going in reverse. Calculating your MAGI takes some of those deductions away. The IRS starts to phase out certain deductions and credits as your income increases, which is why we have the MAGI. When you add these back into the total, the IRS gets a more accurate account of what you truly earned over the past year.
However, there are only certain circumstances when your AGI and MAGI will wildly differ -- in most cases, these numbers will be close. Find out when they will differ on the next page.
Calculating Your Modified AGI
By determining your modified adjusted gross income (MAGI), the IRS determines whether you can take advantage of certain tax perks. Typically, your MAGI helps the IRS decide how much of your IRA contributions you can deduct from your taxes, as well as any property rental losses or education expenses. The higher your MAGI, the fewer credits or deductions you can take on your tax return.
Here's an example for tax year 2014. Suppose you are a single filer and you have a retirement plan at work. You cannot take a deduction for your IRA if your MAGI is $69,000 or higher. If your MAGI is $80,000 or more, you can't take a deduction for education or tuition expenses, either. If you're filing jointly, the MAGI limit is $160,000 or more.
Here's how to calculate your modified AGI when doing your taxes.
- On IRS Form 1040, use lines 7 through 21 to report all of your income. This includes everything -- wages, salary, alimony, interest, capital gains. The total goes on line 22.
- Lines 23 through 35 let you list your deductions, which is how you calculate your adjusted gross income (AGI). You total these on line 36 and then subtract line 36 from line 22. Now you have your AGI.
- Next, you must remove certain deductions to determine your MAGI. After subtracting those deductions from your AGI, you have your modified AGI.
Deductions you must add back to calculate your MAGI include:
- Passive income (income from an enterprise in which you're not actively involved, like rental property or a limited partnership)
- IRA contributions
- Foreign-earned income
- Rental losses
- Student loan interest
- Employer-paid adoption benefits
- Savings bond interest
- Foreign housing exclusion
The IRS also provides a basic calculation worksheet on the IRS.gov website if you're a DIY kind of person.
For more about taxes and deductions, check out the links on the next page.
- Bird, Beverly. "Adjusted Gross Income Vs. Modified AGI." Houston Chronicle. 2014. (Oct. 15, 2014) http://smallbusiness.chron.com/adjusted-gross-income-vs-modified-agi-21324.html
- Csiszar, John. "How to Determine My Modified Adjusted Gross Income." Zacks. 2014. (Oct. 15, 2014) http://finance.zacks.com/determine-modified-adjusted-gross-income-2956.html
- IRS. "Passive Activity Loss ATG - Exhibit 2.2: Modified Adjusted Gross Income Computation." IRS.gov. 2004. (Oct. 15, 2014) http://finance.zacks.com/determine-modified-adjusted-gross-income-2956.html
- Novel Investor. "How To Find Your Modified Adjusted Gross Income." Jan. 2, 2014. (Oct. 15, 2014) http://novelinvestor.com/taxes/modified-adjusted-gross-income/
- TurboTax. "What is Adjusted Gross Income (AGI)?" Intuit. 2013. (Oct. 15, 2014) https://turbotax.intuit.com/tax-tools/tax-tips/Taxes-101/What-is-Adjusted-Gross-Income--AGI--/INF19180.html
- TurboTax. "What Is the Difference Between AGI and MAGI on Your Taxes?" Intuit. 2013. (Oct. 15, 2014) https://turbotax.intuit.com/tax-tools/tax-tips/IRS-Tax-Return/What-Is-the-Difference-Between-AGI-and-MAGI-on-Your-Taxes-/INF22699.html