AGI vs. MAGI: An Overview
When you calculate your personal income tax, it's important to understand the relationship between the terms "adjusted gross income (AGI)" and "modified adjusted gross income (MAGI)" because they can affect the amount of taxes that you owe.
The Internal Revenue Service (IRS) allows individual taxpayers to use tax deductions and applicable credits to reduce their tax liability based on their AGI and MAGI. These figures may involve small differences that can greatly affect an individual's tax return.
AGI can reduce your taxable income by accounting for deductions from your gross income. But some of those deductions may be negated through your MAGI as your income increases.
Key Takeaways
- Adjusted gross income and modified adjusted gross income are calculations based on your gross income.
- Both help the IRS determine whether taxpayers may take advantage of certain credits and deductions.
- AGI can reduce the amount of your taxable income by subtracting certain deductions from your gross income.
- MAGI is your AGI after factoring in tax deductions and tax-exempt interest.
- You can't find your MAGI on your tax return, although your AGI appears on line 11 of Form 1040.
Adjusted Gross Income (AGI)
AGI is a tax term that is used by the IRS. The agency defines it as a modification ofyour gross income, which is the total amount of money you receive from various sources in a tax year.
AGI is generally more useful than gross income for individual tax purposes and it becomes the starting point for determining your tax liability.
Put simply, it is an important but intermediate step in determining how much of your gross income is taxable.
It factors in allowabledeductions from your gross income to reach the figure on which your income taxes will be calculated. Some of these adjustments and expenses may include student loan payments, alimony payments, and self-employment taxes.
As such, think of your AGI as accounting for these (and other eligible) IRS tax deductions. You can find your AGI on line 11 of Form 1040.
Calculating AGI
To reach your AGI, add all the income you earned during the year and subtract any allowable adjustments, such as:
- Educator expenses
- Self-employed retirement contributions
- Individual retirement account (IRA) contributions
- Student loan interest
- Alimony payments under a divorce agreement that was entered into on or before Dec. 31, 2018.
To arrive at your AGI, you also may deduct self-employed health insurance premiums for you and your family members and 50% of any self-employment taxes you paid.
AGI's Effects on Your Taxes
As noted earlier, your gross income is all the money you received from various sources during the tax year. Your AGI, on the other hand, is a modified version of this figure. It becomes the starting point in determining whether you'll have a tax bill or get a refund.
This means that your AGI has a big impact on whether you qualify for certain deductions or tax credits. It directly influences your eligibility for many of the ones that can be claimed on your tax return.
For instance, both the earned-income credit (EIC) and the child and dependent care credit depend on AGI calculations. Similarly, certain tax deductions are based on your AGI. These include medical expense deduction thresholds.
Gross income is the sum of all income that you receive in a year, including wages, dividends, alimony, capital gains, interest income, royalties, rental income,and retirement distributions.
Modified Adjusted Gross Income (MAGI)
MAGI is your adjusted gross income after taking certain tax deductions and tax-exempt interest into account. It modifies your AGI by adding back items like foreign earned income, student loan interest,and the excluded portion of adoption expenses.
For most taxpayers, MAGI is simply AGI with the student loan interest deduction added back in. As such, you may consider it as taking away those deductions.
Your MAGI is important because it allows you to determine whether you can contribute to a Roth IRA and whether you can deduct contributions made to a traditional IRA if you or your spouse have an employer-sponsored 401(k).
Your MAGI also determines your eligibility for the premium tax credit. This credit helps lower any costs incurred through a health insurance plan purchased through the marketplace, Medicaid, as well as the Children's Health Insurance Program (CHIP).
In addition, your MAGI must stay below certain thresholds in order for you to be eligible for certain deductions and credits. For instance, you don't qualify for the adoption credit if your MAGI exceeds $279,230 in the 2023 tax year or $292,150 in the 2024 tax year.
Unlike your AGI, your MAGI doesn't appear on your annual tax return.
Calculating MAGI
To calculate your MAGI, add certain adjustments back to the AGI total to determine whether you are able to take full advantage of tax perks. Some of the most common adjustments used to determine your MAGI include:
- Tuition-related costs or deductions
- Losses from rental properties
- Half of the self-employment tax you paid during the tax year
- Student loan interest
The IRS begins to phase out deductions for items such as IRA contributions and expenses related to education at certain income levels.
MAGI's Effects on Your Taxes
As noted above, the IRS uses the MAGI figure to determine how much of an individual's IRA contribution is deductible if they or their spouse also contribute to a retirement plan at work.
The higher the MAGI, the fewerdeductionsyou can take for IRA contributions and the less of a deduction you can take for student loan interest.
If your MAGI is too high, IRA deductions may even be eliminated. If this happens, you can still contribute to anIRA plan if you have a workplace retirement plan, but cannot deduct any of the contributions on your taxes.
Your MAGI also dictates whether you're eligible for premium tax credits outlined by theAffordable Care Act (ACA) as of 2023.
It also determines whether you can claim certain deductions, such as student loan interest. Individual taxpayers with a MAGI under $90,000 ($185,000 for married couples filing jointly) can claim the deduction for tax years beginning in 2023. For 2024, those figures are $95,000 and $195,000. People with a MAGI that exceeds those amounts don't qualify.
It's normal for a person's MAGI to be similar to or the same as their AGI.
Example of AGI vs. MAGI
Here's a hypothetical example to show the difference between adjusted and modified adjusted gross income and how to calculate both of them.
We know that AGI appears on line 11 on Form 1040 of your annual tax return. Let's say the sum of all your W-2s is $30,000 (your gross earned income). You have additional unearned income (from interest and dividends) totaling $1,500. So, your gross or total income is $31,500, This figure is reported on line 9 of Form 1040.
Now let's say you have the following:
- Student Loan Interest: $1,200
- IRA Contributions: $3,500
The total of these adjustments is $4,700. When you subtract these from your total income, you get your AGI, or $26,800 ($31,500 - $4,700).
Note that you would also factor in other expenses like alimony, educator expenses, and tuition fees, among others.
Deducting these figures from your gross income can take you to a lower tax bracket, thus lowering your tax liability. And a lower AGI means you'll be able to claim more credits and deductions.
Now. we need to figure out your MAGI. Let's say you had a total of $200 in tax-exempt interest for the year from municipal bonds. This is added back into your AGI ($26,300 + $200), giving you a MAGI of $26,500.
You would also add in any income that was excluded from foreign sources as well as any non-taxable Social Security benefits.
It's important to note, again, that your MAGI doesn't appear on your annual tax return. Depending on where your MAGI falls, you may be able to claim a greater portion of allowable deductions such as the student loan interest. That figure is lower if your MAGI is higher and vice versa.
What Does Modified Adjusted Gross Income Include?
Your modified adjusted gross income is your adjusted gross income plus certain deductions and tax-exempt interest, such as untaxed foreign income, factored back in.
Is Modified Adjusted Gross Income on My Tax Return?
No, you can't find your MAGI on your tax return. But you can locate your AGI. This figure is found on line 11 of Form 1040.
How Do I Lower My MAGI?
The easiest (but probably not the most desirable) way to lower your MAGI is to earn less. If you're not willing to take a pay cut, there are other options available to you. Consider making or increasing contributions to retirement accounts that are funded using pre-tax dollars, such as a traditional IRA, 401(k), SIMPLE IRA, or SEP IRA. Just make sure you don't go over the annual limits. You can also lower your MAGI by opening a health savings account or flexible savings account, both of which help you save for your health care costs.
Is Social Security Included in MAGI?
Social Security is included in your MAGI. This includes retirement income, Social Security Disability Insurance, and any survivor's benefits. All of these benefits count even if they aren't taxable.
The Bottom Line
Adjusted gross income and modified adjusted gross income are two figures that taxpayers should understand.
Your AGI is your gross income (the total amount of earned and unearned income you find on your W2s and other sources) less any adjustments for allowable deductions and credits. It is the starting point for determining your overall tax liability. AGI appears on line 11 of Form 1040.
MAGI, on the other hand, is your AGI with certain deductions and excluded amounts of money added back. This includes any foreign income, qualified education expenses, or passive losses, among other figures. MAGI doesn't appear on your tax return.
