Adjusted gross income (AGI)
$
Foreign-earned income
$
Foreign housing cost
$
Non-taxable social benefits
$
Self-employment taxes
$
IRA contributions
$
Passive income or losses
$
Others
$
Modified adjusted gross income (MAGI)
130,000
$

Modified adjusted gross income (MAGI) Calculator

By Oghenekaro Elem
Last updated: Dec 10, 2020

MAGI calculator helps you estimate your modified adjusted gross income to determine your eligibility for certain tax benefits and government-subsidized health programs and whether you can make tax-deductible contributions to an individual retirement account or contribute to a Roth IRA. Essentially, your MAGI is a 'modification' of your AGI. You 'modify' your AGI by adding back some of the adjustments or expenses that you initially deducted. These 'adjusted' incomes ensure that you don't pay taxes on every cent you earn, i.e. your gross income.

MAGI is calculated differently for different situations. This article will explore what is MAGI and why it's called a 'modified' AGI, the difference between MAGI and AGI, what makes MAGI an important measure, and finally, we'll learn how to calculate MAGI for different purposes.

What is MAGI?

Depending on the tax benefit or government program you're applying for, there are different ways in which the government evaluates your earnings to ascertain your eligibility. Usually, these evaluations begin by assessing your AGI – your total or gross income for a year minus adjustments to the income that the IRS considers tax-deductible expenses – to reflect your real earning power.

Modified adjusted gross income (MAGI) is a further 'adjustment' or 'modification' of your adjusted gross income (AGI) by adding back some of the expenses you initially deducted. The goal is to ascertain that people who eventually qualify for these tax benefits or programs genuinely need it while ensuring that everyone pays their fair share in taxes.

Thus, most of these expenses added back into the AGI are not standard deductions for everyone but are usually specific to high-income earners. That is why, for most people, their AGI and MAGI amounts are very close, sometimes the same.

MAGI vs AGI

Therefore, the differences between AGI and MAGI are:

  • AGI is your gross income minus all eligible "above-the-line" tax adjustments, while MAGI is your AGI with some of those adjustments added back.
  • There is one set calculation to determine your AGI, whereas calculating your MAGI differs depending on which adjustments you add back in to see if you're eligible for a specific tax break or government program.
  • You can't find your MAGI on your tax return, but you can find your AGI on line 8b of your Form 1040.

Why is MAGI important?

Generally, the lower your MAGI, the higher your chances of qualifying for certain tax benefits and government programs. It is crucial to understand MAGI because it directly determines:

  • If you qualify for tax credits such as health care tax credit, child tax credit, American opportunity (education) tax credit, and lifetime learning credit.
  • If you can deduct your traditional IRA contributions if you and your spouse have a retirement plan at work.
  • If – and how much – you can contribute to a Roth IRA.
  • Your eligibility and how much you can save on health care plans such as Medicaid if you buy a plan on the health insurance marketplace. The percentage of income you must pay for individual health insurance depends on how close you are to the federal poverty line (FPL) based on modified adjusted gross income, not adjusted gross income (AGI).

How to calculate MAGI?

As stated earlier, different government programs evaluate your MAGI differently. The good thing is that they use your MAGI income, not your gross income, which is usually much higher than your MAGI. So it's good to calculate your MAGI even though you worry that you're not eligible because you 'earn too much,' you might still qualify for the benefit. Therefore, every MAGI calculation has its instructions.

According to the Internal Revenue Code, you should add the following to your AGI to determine your MAGI:

  • Any amount excluded from gross income in section 911 (foreign earned income and housing costs for qualified individuals).
  • Any amount of interest received or accrued by the taxpayer during the taxable year is exempt from tax.
  • Any amount equal to the portion of the taxpayer's social security benefits, which is not included in gross income for the taxable year.

Some of the common examples of how to calculate MAGI are as follows:

  1. Traditional IRA tax contribution deduction: You calculate MAGI by adding AGI plus student loan interest deduction:

    • Foreign earned income and or housing exclusion;
    • Excluded savings bond interest; and
    • Excluded employer-sponsored adoption benefits.
  2. Roth IRA eligibility: MAGI is the same calculation as the Traditional IRA formula above plus any Traditional IRA deduction.

  3. Net investment income (NII) tax: You calculate MAGI by adding AGI plus

    • foreign earned income exclusion and certain foreign investment adjustments.

    The IRS provides information for this tax benefit in Form 8960, which is used to calculate your total net investment income (NII) tax for individuals, estates, and trusts.

  4. American opportunity AKA education credit: You calculate MAGI by adding AGI plus:

    • Foreign earned income and housing exclusions; and
    • Excluded Puerto Rico income and or American Samoa income.
  5. Child tax credit: You calculate MAGI by adding AGI plus:

    • Foreign earned income and housing exclusions; and
    • Excluded Puerto Rico income and or American Samoa residents' income.
  6. Health care AKA premium tax credit: You calculate MAGI by adding AGI plus:

    • Foreign earned income and housing expenses if you live abroad;
    • Tax-free interest (typically earned on municipal bonds); and
    • Non-taxable Social Security benefits.

As you'll observe above, the adjustments added to the AGI are not common ones. Most people don't have these income sources, so their MAGI definition is, in fact, the same as their AGI's in practice.

MAGI calculation example

Using the MAGI calculator is a simple process of inputting figures into the necessary fields. Supposing you want to calculate your MAGI to determine your qualification for the Health care tax credit, this is how you can go about it:

  1. Compute your AGI - you can use the AGI calculator to do this swiftly.

  2. Input your AGI into the MAGI calculator - once you input a figure, the calculator begins to sum up your MAGI. Let's say your AGI is $100,000.

  3. Input only the necessary adjustments - we've already summarised what adjustments to add in Number (6) of the how to calculate MAGI section above.

    • Assuming your foreign earned income totaling $37,000 and foreign housing cost while you are living abroad is $7,000. Note that you will have to convert your earnings into USD if it's in a different currency.
    • Add your tax-free interest earnings. If your interest in a savings bond was $2,000 for the year, input it.
    • Add your non-taxable Social Security benefits. You don't have to input anything if you don't get any social security benefit (the calculator assumes it's $0 by default).

    Also, if you're wondering whether to add the stimulus payment, you don't have to. The CARES Act instructs that its benefit does not affect when calculating income "for any purpose". The exclusion applies to all Medicaid eligibility categories.

  4. Final result - get your MAGI amount = $130,000 (the last field of the calculator).

When you need to add any other adjustment to income, you can use the advanced mode to bring up more options that you may require.

Understanding MAGI calculations can be the critical difference in qualifying for a Roth account or a government-subsidized health insurance plan when you file your taxes. If you fail to add the right adjustments back into your AGI, e.g., the more common non-taxable social security benefits, it gets reconciled the next time you file your taxes. You will have to pay back all or part of the overpaid subsidy, depending on your income. But when you know the relevant modified adjusted gross income (MAGI) calculation for a specific tax benefit, you can determine how to take advantage of it and save money on your taxes.

Oghenekaro Elem
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