Modified Adjusted Gross Income (MAGI)

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What is Modified Adjusted Gross Income (MAGI)?

Modified Adjusted Gross Income (MAGI) is your Adjusted Gross Income (AGI) after certain deductions, exclusions, or tax-preferred amounts are added back. MAGI is used by the IRS and other agencies to determine eligibility for a variety of tax benefits, retirement account rules, and government programs. Because it’s AGI plus specific adjustments, MAGI is always equal to or higher than AGI.

Why MAGI matters

MAGI is the income measure used to determine eligibility or phase-out limits for many important items, including:
* Roth IRA contributions and phase-out ranges
* Deductibility of Traditional IRA contributions (when you or your spouse have workplace retirement plans)
* Premium tax credits and other subsidies on Health Insurance Marketplaces (ACA)
* Eligibility for certain education-related tax benefits and student loan interest deductions
* Medicaid and other income-based assistance programs

Getting MAGI right is essential for tax planning and avoiding penalties (for example, excess IRA contributions).

Basic MAGI calculation (three steps)

  1. Determine your gross income for the year (all taxable sources such as wages, business income, capital gains, dividends, interest, rental and royalty income, retirement income, etc.).
  2. Calculate your AGI by subtracting allowable adjustments (retirement plan contributions, HSA contributions, half of self-employment tax, educator expenses, student loan interest, and other qualifying adjustments) from gross income.
  3. Add back specific items to AGI to arrive at MAGI. The exact add-backs depend on the purpose for which MAGI is being calculated.

Common add-backs to AGI

Depending on the program, MAGI often requires adding back some of the following:
* Tax-exempt interest and other tax-exempt income
* Excluded foreign earned income
* Deductions for student loan interest or tuition and fees (if claimed)
* IRA deduction amounts and taxable Social Security included in AGI
* Half of self-employment tax (in some definitions)
* Passive activity losses or rental losses (certain calculations)
* Interest from Series EE bonds used for education (when excluded)

Note: Not every add-back applies to every MAGI calculation. Always check the specific MAGI definition for the credit or program you’re evaluating.

How MAGI varies by program

MAGI is a flexible concept; the IRS and other agencies tailor the exact formula to the benefit being evaluated. Examples:
* Roth IRA eligibility: MAGI = AGI + specific exclusions per IRS rules. Phase-outs are based on that MAGI.
* Traditional IRA deduction limits: MAGI is used to determine if your deduction is reduced or eliminated when either spouse has a workplace retirement plan.
* Premium tax credit (Marketplace): MAGI typically includes household income plus certain tax-exempt amounts and exclusions.
* Student loan interest deduction: MAGI for this deduction may require adding back the student loan interest claimed.

Always use the MAGI definition specified in the instructions for the tax credit, deduction, or program you’re applying to.

Strategies to reduce MAGI

Lowering MAGI can preserve eligibility for tax breaks and subsidies. Common strategies include:
* Maximize above-the-line deductions (traditional 401(k) contributions, HSA, and other qualified retirement or health savings plans).
* Contribute to employer retirement plans or defer income where possible.
* Use tax-advantaged investments (municipal bonds, 529 plans) to generate tax-exempt or tax-favored income.
* Harvest capital losses to offset gains and reduce taxable investment income.
* Time income recognition (when feasible) to keep income below phase-out thresholds.
* Manage rental property deductions and document expenses to reflect legitimate losses.

Consult a tax professional before implementing strategies that change tax timing or character.

Frequently asked questions

Bottom line

MAGI refines AGI by adding back specific deductions and exclusions to determine eligibility for many tax benefits and public programs. The exact MAGI formula depends on the benefit or program in question, so always use the MAGI definition tied to that rule. Accurate MAGI calculation and proactive planning can preserve tax benefits and government subsidies. If you’re uncertain how MAGI applies to your situation, consult a tax professional.