IRS.com is not affiliated with the IRS or U.S. government. This article is for educational purposes only. For official guidance, visit IRS.gov.
Why Your Modified Adjusted Gross Income is (Probably) Wrong in Your Tax Calculations
The simplest way we can define the Modified Adjusted Gross Income (MAGI for short) is “your AGI plus a few things”. Things are far more complex than that, of course! But this short explanation is the basis on which we’ll build all our other explanations.
The first layer of added complexity is that there is not single MAGI, since there are different definitions of it for different tax benefits and credits, as well as the amounts required to qualify for them (we told your it got complicated).
> Start Your FREE E-file
Why Your Adjusted Gross Income (AGI) is Inadequate in Your Tax Calculations for the IRS
Your Modified Adjusted Gross Income (MAGI) makes you eligible for a number of tax credits, benefits, and exclusions, making it a vital part of your tax return calculations, particularly since the IRS will put your math to the test.
Your MAGI is used to determine your eligibility for various Federal tax benefits — including education tax breaks, the adoption tax credit, the retirement savings contribution credit, and many more.
Why Does The IRS Use MAGI As A Basis Instead Of Your AGI?
AGI represents your taxable income. It is probably the most important figure for your tax return, but it may not accurately represent your total earnings. Certain sources of income are untaxable (such as foreign investment income).
These non taxable sources are added back into your AGI to calculate your MAGI. So your MAGI is a better description of your ability to pay for education, adoption, or any of the other credits the Federal government may provide.
Calculating Your Modified Adjusted Gross Income (MAGI)
The IRS posts a deceptively simple MAGI calculator on its website, which helps taxpayers and tax professionals determine their MAGI. However, closer inspection reveals a host of terms that sound intuitive but are extremely complex. After a closer look on the page, you might wonder: What is passive income? And why am I adding deductions back into my AGI? The major sticking points are explained in this article.
Any Passive Loss or Passive Income
This is determined on Form 1040 Schedule E, and is defined as any income or loss that occurred without active engagement.
Limited partnerships are one example, in which an individual might not actively manage a firm but still own a percentage. Ownership would transfer passive income or losses onto your AGI but not MAGI.
Passive losses could include any losses from rental property. If you own a rental property that has operating costs greater than the revenue it generates, you would record a passive loss. (Qualified real estate agents do not consider these passive losses because real estate activity counts as their active income.)
Passive losses cannot be deducted from active income, which can be a thorn in the side of many small business owners. However, if your MAGI is less than $100,000, you are allowed to deduct up to $25,000 in real estate losses each year.
To qualify for the deduction, the IRS requires that you participate in the rental activity by contributing to impactful management decisions.
Taxable Social Security Benefits
Most Americans will not be taxed on their Social Security benefits, but some of your social security could be taxable. Approximately one-third of people who receive Social Security are required to pay taxes on their benefits.
Your filing status and income level will determine whether your Social Security payments are subject to tax. In general, your benefits are not considered taxable as long as Social Security is your sole source of income.
Your Social Security may be taxed if you earn income from other sources and your MAGI exceeds the base amount for your filing status.
To determine this, take 50% of the Social Security benefits you received and add that to all your other income. If your total is greater than the following base amount, your Social Security benefits may be taxable:
READ: How to Determine Your Filing Status
Deductions Not Applicable to MAGI
Your MAGI is determined by taking your AGI and “adding back” certain deductions. These are items which can be subtracted from your AGI, but must be included in the calculation of your MAGI:
• Half of self-employment tax (self-employed individuals are required to pay “payroll” taxes that an employer would otherwise take; these extra taxes can be deducted from AGI, but are included in MAGI)
• Student loan interest
• Tuition and fees deduction
• Qualified tuition expenses
• Passive income or loss
• Rental losses
• IRA contributions and taxable Social Security payments
• Exclusion for income from U.S. savings bonds
• Exclusion for adoption expenses (under 137)
Most of the above deductions are rare, so don’t be surprised if your AGI and your MAGI are the same.
READ: Understanding the Different Types of Individual Income Tax Returns
What Is Modified Adjusted Gross Income?: FAQ
1. What is Modified Adjusted Gross Income (MAGI)?
Your Modified Adjusted Gross Income is simply your Adjusted Gross Income with certain deductions and exclusions added back to it. Think of it as the next step for the AGI, and is used by the IRS to see if you qualify for the tax benefits you applied for in your tax return, like tax credits, as well as some other things such as IRA contributions.
2. What’s the difference between MAGI and AGI?
Simply put, your AGI comes from your gross income but with certain deductions subtracted from it, like student loan interest or contributions to an IRA. On the other hand, MAGI is your AGI with some of those deductions (and a few other things) added to it, like tax-exempt income and other benefits. In a nutshell, AGI is your gross income minus some things, and MAGI is your AGI plus some things (that you originally subtracted from it)..
3. What are the things that turn AGI into MAGI?
The most common additions to the MAGI are tax-exempt interests (such as municipal bond income), any foreign-earned income under the Foreign Earned Income Exclusion, and some deductions originally taken from your gross income to calculate your AGI.
4. What credits are determined by my MAGI?
There are a few credits and tax benefits determined by your MAGI, for example:
• Traditional and Roth IRA contributions limits.
• Premium health insurance tax credits under the ACA.
• Some government assistance programs and credits, like the EITC.
• Deductions for student loan interest.
5. How do I calculate my MAGI?
It’s simple in theory. All you have to do is take your AGI from your tax return, then add specific amounts back to it. You can consult the IRS for specifics on what amounts are needed for specific tax benefits or credits.
6. Does that mean there are different MAGIs?
In a sense, yes. There are different adjustments you have to make to your AGI in order to get the MAGI required for specific tax benefits or programs. For example, the MAGI required for Roth IRA contributions is different from the one you would calculate for healthcare premium tax credits.
7. I can’t find my AGI to start calculating my MAGI.
You AGI should be on line 11 of your Form 1040. Be sure to make a note of it so that you can come back to it easily so you can calculate all the different MAGI required for specific tax benefits.
Sources
"Modified Adjusted Gross Income Explained - Easy To Understand!" - On Cash Flow
"How to Calculate MAGI (Modified Adjusted Gross Income) for Health Insurance" by iHealthBrokers
Advertisement
Frequently Asked Questions
What is Modified Adjusted Gross Income (MAGI), and how does it differ from AGI?
MAGI is your Adjusted Gross Income (AGI) with certain deductions and exclusions added back in, making it a more complete picture of your total earnings and financial ability. While AGI represents your taxable income after specific deductions are subtracted, MAGI adds those deductions back in — items like student loan interest, IRA contributions, and passive income or loss. Because AGI may exclude non-taxable sources such as foreign investment income, the IRS uses MAGI as a more accurate measure of your ability to pay for things like education or adoption expenses.
Why does the IRS use MAGI instead of AGI to determine eligibility for tax credits and benefits?
AGI may not fully reflect your total earnings because certain income sources — such as foreign investment income — are not taxable and therefore not included. The IRS adds these non-taxable sources back into your AGI to arrive at your MAGI, which provides a more accurate representation of your financial capacity. MAGI is then used to determine eligibility for federal tax benefits including education tax breaks, the adoption tax credit, and the retirement savings contribution credit, among others.
What deductions get added back into AGI when calculating MAGI?
When calculating MAGI, several deductions that were subtracted from your gross income to arrive at AGI must be added back in. These include half of self-employment tax, student loan interest, tuition and fees deductions, qualified tuition expenses, passive income or loss, rental losses, IRA contributions, taxable Social Security payments, exclusions for income from U.S. savings bonds, and exclusions for adoption expenses under Section 137. Because most of these deductions are uncommon for the average taxpayer, your AGI and MAGI may turn out to be the same amount.
Can rental property losses be deducted when calculating MAGI, and are there income limits?
Passive losses from rental property — meaning operating costs that exceed the revenue a property generates — generally cannot be deducted from active income. However, if your MAGI is less than $100,000, you are allowed to deduct up to $25,000 in real estate losses each year. To qualify, the IRS requires that you actively participate in the rental activity by contributing to meaningful management decisions, and note that qualified real estate agents are not subject to these passive loss rules since real estate activity counts as their active income.
When do Social Security benefits become taxable, and how does MAGI factor into that determination?
Most Americans will not owe taxes on their Social Security benefits, but approximately one-third of recipients are required to pay taxes on them. To determine whether your benefits are taxable, you add 50% of the Social Security benefits you received to all your other income, and if that total exceeds the base amount for your filing status, your benefits may be subject to tax. In general, Social Security benefits are not considered taxable if Social Security is your sole source of income, but receiving additional income that pushes your MAGI above the applicable threshold can trigger taxation.
About the Author
Tax Writer
Markos Banos is a tax professional at IRS.com with expertise in U.S. federal and state tax law. Their articles are written to help taxpayers understand complex tax topics in plain English.