The modified adjusted gross income of a taxpayer or a MAGI is the line of items on your taxes that holds the most significance. MAGI decides whether you are eligible for certain tax benefits or not. Therefore, we have written this comprehensive guide to discuss the definition of modified adjusted gross income and how you can calculate it.
Understanding the Modified Adjusted Gross Income
Modified Adjusted Gross Income is your adjusted gross income that has certain tax deductions included back in it. MAGI can be considered a check to know if you are qualified for specific tax deductions, medical aid, or other government-initiated programs. Understanding your MAGI can help you understand if you are eligible for the following things:
- Eligible to cut your traditional IRA contributions.
- Make a contribution to the ROTH IRA.
- Avail any premium tax credit on the basis of your adjusted gross income.
What are Traditional IRA Deductions?
If you (and your spouse or both) are not availing of any retirement plan from a workplace, then you can avail of the full IRA deduction upon filling for the annual tax return. On the other hand, if you are an employee who is willing to avail of any sponsored retirement plans, then your MAGI will help you decide if you are eligible for that specific deduction. Moreover, you will also be able to calculate the amount of deduction that you can take.
Example
Let’s say that you have filed your 2023 taxes by yourself (as a single person) with a retirement plan, and you have made a contribution of $6,500, which is the max eligible amount allowed in the traditional IRA. Now, if your MAGI was around $72,000 or below, then you would be able to deduct that $6,500 from your tax-applicable income.
What are ROTH IRA Contributions?
Understanding the MAGI helps you calculate the amount that you can contribute to the Roth IRA. The ROTH IRA account allows you to contribute money once you have paid taxes on it, and these distributions are not tax-applicable. If you wish to contribute to a Roth IRA, you have to fulfill certain limitations on income, which are according to your modified AGI. The contributions may be reduced or become inapplicable at various income levels.
Does the Modified Adjusted Gross Income Appear on Tax Return?
The MAGI is not mentioned on your tax return that you file with the IRS. However, it can be used on various IRS worksheets to calculate the amount that is used on your tax return forms.
Calculating MAGI (Modified Adjusted Gross Income)?
Here is a step-by-step guide on how to calculate modified AGI is a bit complex, and it requires you to follow these three steps:
- Calculating your gross income.
- Calculating your adjusted gross income.
- Calculating the modified adjusted gross income by adding back certain deductions.
Let’s discuss these steps in detail to guide you on how to follow each step precisely.
Step#1: Calculating Gross Income
Your gross income denotes all the income that you have earned from your salary or various other resources, including:
- Amount received from divorce agreements
- Business income
- Capital gains
- Dividends
- Farm income
- Interest
- Investment Income
- Rental income
- Retirement distributions
- Royalty income
- Unemployment benefits
- Wages, tips, and salary
Instead of going through the hassle of calculating the gross income (GI) by yourself, it is better to check your annual tax return online. It is vital to calculate your GI as it sets the basis of your adjusted gross income, which further leads to finding modified adjusted gross income. Hence, you save the hassle of listing and calculating on your own, as most of the time, people lose the receipts.
Step #2: Calculating Adjusted Gross Income
Adjusted gross income defines the total taxable income, excluding any stand, exemptions, or deductions, that defines if you are eligible for specific tax credits such as:
- Dependent or child care credit.
- Credit for permanently disabled individuals or senior citizens.
- Adoption Tax Credit
- Child Tax Credit.
- Life learning tax credit or American opportunity.
- Tax credit of earned income.
Besides earning the benefits, you may have to face some adjustments that could be deducted from your gross income, which are mentioned below:
- Half of any self-employment tax paid.
- Health savings account deductions.
- IRA contributions.
- Self-employed retirement plan contributions.
- Student loan interest.
- Tuition and fees.
- Some miscellaneous business expenses.
Calculating the exact adjustments may not be very accurate if you perform the additions on your own. Therefore, its recommended to approach a tax professional to help you calculate the AGI.
Step #3: Calculating Modified AGI
Now is the final step, where we find the modified adjusted gross income. You have to consider the adjusted gross and add back specific deductions, which are mentioned below:
- Exclusion for income from U.S. savings bonds.
- Exclusion on income earned from foreign resources.
- Foreign housing exclusion or deduction.
- Half of the self-employment tax is paid.
- IRA contributions.
- Non-taxable Social Security payments.
- Passive loss or income.
- Publicly traded partnerships losses.
- Qualified tuition expenses.
- Rental losses.
- Student loan interest.
- The exclusion under 137 for adoption expenses.
- Tuition and fees deduction.
If you don’t have any of these incomes described above, then your adjusted gross income can be considered as your modified AGI. Most of the above-mentioned expenditures are a part of the daily dues or expenditures that you have to bear. Especially if you are availing additional services or investing in some area, the above-mentioned expenditures would be applicable.
Conclusion
The modified adjusted gross income plays a vital role when you are filing for tax returns as it determines what you have to pay to the IRS and what you are eligible to receive as a taxpayer. Once you have calculated your MAGI, you can approach your state exchange to apply for your own health insurance plan as well. Hopefully, this article has helped you to understand what is MAGI and how you can calculate it.
