Modified Adjusted Gross Income (MAGI) is a figure used in the United States tax system to determine your eligibility for certain tax benefits and credits. It’s based on your Adjusted Gross Income (AGI), which is your total income minus certain deductions, but with some additional adjustments.
Here’s a breakdown:
- Adjusted Gross Income (AGI): This is your total income from all sources (wages, interest, dividends, etc.) minus specific deductions allowed by the IRS, such as contributions to traditional IRAs, student loan interest, and certain business expenses.
- Modified Adjusted Gross Income (MAGI): This takes your AGI and adds back certain deductions and income exclusions that weren’t counted when calculating your AGI. Examples of these include:
- Student loan interest deduction (if you claimed it above the line)
- Traditional IRA contributions
- Certain employer contributions to health savings accounts (HSAs)
- Foreign earned income exclusion
- Non-taxable Social Security benefits
Not everyone will have these additional adjustments added back to their AGI to get their MAGI. It depends on the specific deductions and income exclusions you claimed on your tax return.
Here are some reasons why MAGI is important:
- Eligibility for benefits: MAGI is used to determine your eligibility for various tax benefits and credits, such as:
- Premium tax credits for health insurance under the Affordable Care Act
- Deduction for student loan interest (if your income is above a certain threshold)
- Earned Income Tax Credit (EITC)
- Contributions to Roth IRAs (phased out based on MAGI)
- Retirement plan contributions: Some retirement plans, like Roth IRAs, have income limits for contributions. Your MAGI is used to determine whether you’re eligible to contribute the full amount or if your contribution amount is limited.
For most people, their MAGI won’t be significantly different from their AGI. However, it’s important to understand how MAGI is calculated, especially if you’re applying for tax benefits or credits that use MAGI for eligibility.