As the year comes to an end, it’s important to make sure you have all your ducks in a row when it comes to filing taxes. One crucial aspect of filing taxes is determining your Modified Adjusted Gross Income, or MAGI. Whether you’re filing your taxes on your own or seeking the help of a professional, understanding what MAGI is and how to calculate it will help you avoid any confusion during the tax season. In this blog post, we will discuss what MAGI is, how to calculate it, and what you need to know about it.
What is MAGI
To begin, let’s define what MAGI is. Essentially, your MAGI is your Adjusted Gross Income for the year with certain deductions added back in. These deductions can include things like student loan interest, IRA contributions, and self-employment tax. Once these deductions are added back in, your MAGI is then used to determine certain limitations on things like IRA contributions and eligibility for premium tax credits if you’re purchasing health insurance through the marketplace.
How to Calculate MAGI
So, how do you calculate MAGI? Luckily, it’s not too complicated. To start, you’ll want to determine your Adjusted Gross Income (AGI) for the year. This can be found on your tax return (1040 or 1040SR line 11) or calculated by subtracting your deductions from your total income. Once you have your AGI, you’ll need to add back in certain deductions to arrive at your MAGI. These deductions will vary based on your purpose. For example:
Trudy would like to calculate her MAGI for Education credits. She would add…
- Foreign earned income Exclusion,
- Foreign housing exclusion or deduction, and
- American Samoa and Puerto Rico bona fide resident income exclusion
to her AGI.
Alternatively, Mike would like to calculate his MAGI for IRA Deduction. He would add…
- Student loan interest deduction.
- Foreign earned income exclusion.
- Foreign housing exclusion or deduction.
- Excluded U.S. Savings Bond interest, used for education.
- Excluded employer-provided adoption benefits.
to his AGI.
What’s it Mean?
Now that you know how to calculate your MAGI, it’s crucial to understand what it means. As mentioned earlier, your MAGI is used to determine certain limitations on things like IRA contributions and eligibility for premium tax credits. It can also impact your eligibility for certain deductions, such as tuition and fees deductions. Understanding how your MAGI impacts your overall tax situation is key to making sure you’re getting the deductions and credits you’re entitled to.
Calculating your Modified Adjusted Gross Income can be daunting, due to the flexible additions, but it’s an important step in the tax filing process. When in doubt, use tax preparation software. All tax preparation programs will be able to calculate your MAGI without you needing to understand what to add to your AGI for a specific purpose. You can also have a qualified tax preparation specialist do it for you.
Happy filing!
IRS Publication 17 has the basic information on MAGI. You can find it here.
*** This article is for informational purposes only and does not constitute tax, legal, or financial advice. Before making any decisions related to taxes, please consult a licensed CPA, Enrolled Agent, or other qualified professional. ***
Other posts that might interest:
Taxable Income: What You Need To Know
Tax Deductions: Should You Itemize Or Take The Standard Deduction?
