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 below.
- 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