MODIFIED ADJUSTED GROSS INCOME (MAGI): How To Calculate It

Modified Gross Adjusted Income
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Basically, there are a number of tax breaks for which you are eligible, and you can determine this using your modified adjusted gross income. The way your modified adjusted gross income (MAGI) will be calculated will vary depending on the tax credit or government program for which you are applying. In order to be able to claim all the tax advantages for which you are qualified, you will need a basic understanding of how MAGI works. You also need to have a clear-cut understanding of the disparity between AGI and MAGI (Adjusted Gross Income vs. Modified Gross Adjusted Income) as well as how the notion affects medicare.

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What Is Modified Adjusted Gross Income?

Your modified adjusted gross income (MAGI) equals the total of your adjusted gross income (AGI), your income from tax-exempt interest, and certain deductions added back. The Internal Revenue Service utilizes your MAGI to determine whether or not you are eligible for certain tax benefits since it can offer a more complete picture of your financial situation.

A significant number of taxpayers believe MAGI to be the same as their AGI. However, when computing your MAGI, you will need to add back any non-taxable income sources. This might include Social Security payments, tax-exempt interest, and untaxed overseas income, to the amount that you reported as your AGI.

The modified adjusted gross income (MAGI) is used to adjust the adjusted gross income (AGI) for various tax deductions and credits. However, to determine your MAGI, you will need to do some calculations. The tax preparation software will make this process much simpler for you.

What income is included in MAGI?

The modified adjusted gross income (MAGI) is calculated by adding the following to the adjusted gross income (AGI) if any: tax-free interest, non-taxable Social Security benefits, and tax-free overseas income. In many cases, the MAGI is the same as or extremely near to the adjusted gross income. Supplemental Security Income (SSI) is not included in the MAGI calculation.

Does MAGI Include Standard Deduction?

Basically, before a person may claim either the standard deduction or any itemized deductions, they must first determine both MAGI and AGI. These deductions will be factored in at a later time. In the real sense, a taxpayer’s adjusted gross income (AGI) might show how much of certain deductions and credits the person is eligible to claim, such as the child tax credit.

What reduces modified adjusted gross income?

Generally, you can reduce your modified adjusted gross income in a variety of ways including the following:

  • Contribute pretax dollars to an employer-sponsored retirement plan such as a 401(k), 403(b), 457, or a Thrift Savings Plan.
  • Make a deposit into a savings account designated for medical expenses.
  • Make a contribution to a flexible spending account for medical expenses.
  • Make a contribution to a flexible spending account designated for the care of dependents.
  • Cut back on whatever revenue you make from your own business.
  • Sell taxable investments for a loss. The first step is for capital losses to cancel out capital gains.
  • Utilize all of the deductions that can bring down your adjusted gross income.

How is Modified Gross Adjusted Income Calculated

Now that we understand what MAGI is and have a clear idea of what it includes; how is the modified adjusted gross income calculated?

To promote an easy understanding of how it is calculated, let’s take a look at a few of the most prevalent tax breaks as well as MAGI computation for each of these breaks. In most cases, reading the instructions that come with the form will help you decide what’s going into it.

Child Tax Credit

Here, the Modified Adjusted Gross Income (MAGI) is calculated by adding the AGI plus the following;

  • Foreign earned income and housing exclusions
  • The foreign housing deduction
  • Income that is excluded from Puerto Rico
  • And the income that is excluded for legitimate residents of American Samoa.

The first thing to do is to determine your applicable MAGI for a particular tax benefit. Once you have your MAGI, you will be able to decide whether or not you are eligible to receive the benefit in its entirety or only in part.

Premium Tax Credit

In this case, you will add your AGI to;

  • Income earned outside the country
  • Interest that is exempt from taxation, and
  • The percentage of Social Security benefits that is not taxable, for your modified adjusted gross income to be calculated.

Education Credits

For credits for educational purposes, the MAGI is calculated by adding the AGI plus;

The overseas earned income and housing exclusions

Foreign housing deduction, and 

Excluded bona fide resident of Puerto Rico or American Samoa income

Traditional IRA Tax Contribution Deduction

Under this tax break, your modified adjusted gross income can be calculated by adding AGI plus the following items:

  • Foreign housing deduction
  • Student loan interest deduction
  • Excluded savings bond interest
  • Foreign earned income and housing exclusions
  • Excluded employer adoption benefits
  • And, for 2017 and previous years, the domestic production activities deduction and the tuition as well as fees deduction that was paid before 2021.

Roth IRA Qualification

The calculation for MAGI is the same as the Traditional IRA formula described above. This, however, is plus any deductions for Traditional IRAs, with those deductions being reduced by any income received by converting an IRA to a Roth IRA or rolling over qualifying plan assets into a Roth IRA.

Tax on Net Investment Income

For your modified adjusted gross income to be calculated, you add AGI plus the foreign earned income exclusion and then make appropriate adjustments for overseas investments. For additional information on how this works, you can review supplementary material regarding Form 8960 and the tax on net investment income.

How do I Calculate Modified Adjusted Gross Income?

You can calculate your MAGI  using the below easy-to-understand basic steps should:

  • Determine your annual gross income and write it down.
  • Calculate your AGI.
  • When calculating your MAGI, you need to add some deductions back in.

Modified Gross Adjusted Income For Medicare

Your health insurance rates under Medicare and the Affordable Care Act (ACA) are precisely proportional to your Modified Adjusted Gross Income. This, however, is if you are retired and have health insurance via either program. As a rule, your monthly premiums will increase in direct proportion to the level of your income.

If you do not prepare your own tax return, it is highly unlikely that you are familiar with the formula used to determine your MAGI. On the other hand, when it comes to your MAGI, ignorance is most certainly not bliss. In point of fact, it may end up costing you.

Generally, you may be able to minimize your health insurance costs under the Affordable Care Act as well as your Medicare premiums by optimizing your modified adjusted gross income. 

Now let’s dive in a bit more. This is where things might start to become more complex. We must take into account some government advantages to be able to calculate your MAGI.

Modified Adjusted Gross Income and Medicare Part B

Medicare Part B is a type of health insurance the federal government provides that covers services like; a visit to a doctor and other medical professionals, as well as outpatient treatment, home health care, use of durable medical equipment, and certain preventative services.

Basically, your Part B of Medicare costs is calculated using your two-year average modified adjusted gross income. This is the most recent information regarding tax returns that the IRS has submitted to Medicare.

Your Medicare Part B Modified Adjusted Gross Income is (a) your Adjusted Gross Income + (b) tax-exempt interest income (line 2a on IRS Form 1040). Municipal bond interest and earnings from assets held within a Roth IRA are both forms of interest income that are exempt from taxation.

The regular monthly premium for Medicare Part B in 2022 is $170.10.

On the other hand, if your MAGI is beyond the threshold, you’ll be responsible not just regular premium but also for an additional Income Related Monthly Adjustment Amount (or “IRMAA”). To your regular premium, you must add the IRMAA. The IRMAA is otherwise an extra charge which will lead to an increase in regular premium.

Modified Adjusted Gross Income with Medicare Part D

Medicare Part D, which provides coverage for some of the costs of medication, faces a similar dilemma.

Medicare Part D premiums, like those for Medicare Part B, are calculated using your Modified Adjusted Gross Income (MAGI).

If your modified adjusted gross income (MAGI) is less than $91,000 ( when filing as an individual) or $182,000 ( when filing as a married couple), you pay nothing for Medicare Part D. (on a joint tax return).

If your MAGI is higher than the thresholds above, you will be responsible for paying both the regular plan premium and an additional IRMAA. The IRMAA is, as before, an additional fee on top of your regular premium.

Adjusted Gross Income vs Modified Gross Adjusted Income

Generally, when you come across some like Adjusted Gross Income vs Modified Gross Adjusted Income, the only thing that comes to mind is their differences. However, both are tools that aid the Internal Revenue Service in deciding whether or not a taxpayer is eligible for a given credit or deduction.

When it comes to calculating your income tax, the AGI and MAGI (Adjusted gross income vs modified adjusted gross income ) are related concepts you should take into account. This is basically because they might both impact your tax liability. The IRS permits taxpayers to decrease their tax liabilities based on their AGI and MAGI. Taxpayers can do this by making use of tax deductions and appropriate credits. 

However, these instruments may produce subtle variations that significantly impact a taxpayer’s tax return. Adjusted gross income (AGI) is a useful tool for lowering taxable income.

On the other hand, when your MAGI rises, the possibility exists that some of these deductions will no longer be available to you.

Adjusted Gross Income vs Modified Gross Adjusted Income- Key Differences

Below are a few points that demonstrate how AGI and MAGI (Adjusted Gross Income vs Modified Gross Adjusted Income) differs;

  • Your AGI is calculated by subtracting all “above-the-line” tax adjustments from your total income. Your MAGI is calculated by subtracting your AGI and then adding some of those adjustments back in.
  • While there is a single formula to estimate your AGI, the number of steps involved in determining your MAGI to assess your eligibility for various tax credits and government programs might vary widely. It all depends on the adjustments you choose to add back in. 
  • For the 2021 tax year, your AGI can be found on line 11 of your Form 1040. Whereas your MAGI cannot be located on a separate line.

What’s the Difference Between Magi and AGI?

Both of these factors are considered by the Internal Revenue Service when determining whether or not a taxpayer is eligible to claim a certain credit or deduction. By deducting certain expenses from your gross income before computing your AGI, you can reduce the total amount of your taxable income. Your MAGI is your AGI after you take into account tax deductions and interest that is free from taxation.

Where do I find my Magi on my tax return?

Your MAGI is not required to be included on your tax return. However, you can calculate it by using the information on your 1040. You will need to locate your adjusted gross income (line 8b) and add many deductions back to it. These deductions can include deductions for IRAs, some kinds of income losses, student loans interest and fees, and perhaps more.

Conclusion

Whether you are aware of it or not, your tax liability is heavily influenced by your modified adjusted gross income. It is the basis on which government determines whether or not you qualify for a tax credit or deduction.

Moreso, it may be a more accurate indicator of your financial well-being than your AGI in some situations. Nevertheless, you may wish to see a tax expert if you’re unsure whether or not your MAGI impacts the total amount of tax deductions and credits you’re eligible for.

MAGI FAQs

Can MAGI be refered to as taxable income

To put it briefly, your MAGI is your AGI plus certain deductions and tax-free interest income. Your MAGI is what the IRS will use in the numerous calculations to determine which tax breaks you qualify for.

Where exactly do I locate my Magi on my tax return?

Although MAGI is not a part of your tax return, you may still calculate it using the info on your 1040. Find your adjusted gross income (line 8b) and add back a number of deductions. This deductions may include individual retirement account, education expenses, certain types of income losses, and more.

Does Magi deduct 401k?

Your contributions to your 401(k) will not be accounted for in your MAGI.

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