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Everything You Need To Know About Modified Adjusted Gross Income
Everything You Need To Know About Modified Adjusted Gross Income
If you've ever tried to understand the difference between Adjusted Gross Income (AGI) and Modified Adjusted Gross Income (MAGI) or wondered how to shrink your MAGI for tax purposes, you're in the right place.
So, what exactly is MAGI income? Think of it as the deluxe version of AGI—a bit more complex, but with added perks. MAGI takes AGI and makes some further adjustments to include certain deductions that AGI doesn't cover.
Why does MAGI matter? Well, it's often used to determine if you're eligible for tax credits, deductions and benefits. Understanding your MAGI can help you make strategic financial decisions and save some hard-earned cash. We'll help you understand Modified Adjusted Gross Income and how to calculate it.
Table of contents
What is Modified Adjusted Gross Income?...Read more
Adjusted Gross Income (AGI)...Read more
Difference between adjusted gross income and modified adjusted gross income...Read more
How to calculate modified adjusted gross income...Read more
1. Calculate your gross income...Read more
2. Calculate your AGI...Read more
3. Add back deductions...Read more
How does MAGI affect tax credits?...Read more
MAGI and IRA contributions...Read more
How to lower modified adjusted gross income...Read more
What is Modified Adjusted Gross Income?
Let’s start with the most basic question – what is modified adjusted gross income? MAGI is like the souped-up version of your regular AGI. Think of it as AGI with extra bells and whistles. MAGI includes your AGI plus any tax-exempt interest income and certain deductions like:
- 50% of self-employment tax
- Overall loss from a publicly traded partnership
- Passive loss or passive income
- Qualified tuition expenses
- Rental losses
- Student loan interest
- Tuition and fees deduction
Adjusted Gross Income (AGI)
We just talked about how your AGI is used to find MAGI. But how do you actually calculate AGI? To find your AGI, first, add all your income sources for the year (wages, salaries, 1099 income, rental income and interest). Then, subtract any qualifying adjustments like HSA contributions and educator expenses. That's your AGI.
Now, you might be asking, “What line is AGI on Form 1040?” AGI is reported on Line 11 of Form 1040. Your MAGI on the other hand, is not reported on any tax return. It’s also important to highlight that neither your MAGI nor your AGI is your taxable income, it’s simply a starting point to calculate it.
Difference between adjusted gross income and modified adjusted gross income
How to calculate modified adjusted gross income
If you want to take the easy way out, you can just use a modified adjusted gross income calculator to find your MAGI. If you’re interested in doing it yourself, here’s how it works:
1. Calculate your gross income
First things first, you need to figure out your gross income. This is all the money you made in a year before any deductions. It includes your wages from your job, any side hustles you might have, interest from savings accounts and rental income. Basically, it's all the cash that flowed into your pocket throughout the year.
2. Calculate your AGI
Once you've got your gross income figured out, it's time to subtract some stuff to arrive at your Adjusted Gross Income (AGI). The IRS lets you deduct certain expenses from your gross income to get this number.
These deductions could include things like contributions to retirement accounts and student loan interest payments. So, subtract those deductions from your gross income, and you've got your AGI.
3. Add back deductions
Now, here's where things get a little tricky. After you've got your AGI all sorted out, you need to add back certain deductions you took when calculating your AGI. These deductions are typically related to things like IRA contributions, student loan interest and some other specific expenses. Adding these deductions back to your AGI gives you your MAGI.
If you’re self-employed and wondering how to figure out modified adjusted gross income, FlyFin’s expert CPAs can help. They'll handle everything from tax prep to filing, and A.I. finds every business deduction that can save you money.
How does MAGI affect tax credits?
Like we mentioned earlier, you won't find your MAGI listed directly on your tax return. However, you might need to use it in certain tax worksheets to crunch numbers and figure out other details on your tax forms. You also need it to determine your eligibility for some tax credits.
The Child Tax Credit, which can go up to $2,000 per child, starts to decrease once your MAGI surpasses $400,000 on a joint return or $200,000 on a single or head-of-household return.
The American Opportunity Tax credit, available for the initial four years of college, provides a maximum benefit of $2,500 per child annually for tuition, fees and books. However, this credit begins to decrease for joint filers with a MAGI exceeding $160,000 and for single or head-of-household filers with a MAGI surpassing $80,000.
You could also snag a Clean Vehicle Credit of up to $7,500 for 2023, but your MAGI can't top $300,000 for joint filers, $225,000 for head-of-household, or $150,000 if you're filing solo. If you have a used electric car, you might still qualify for a tax credit of up to $4,000. But this deal starts phasing out if your MAGI goes over $150,000 for joint filers, $112,500 for head-of-household, or $75,000 for single filers.
MAGI and IRA contributions
If you’re self-employed, you have to pay for an IRA from your pocket. Your MAGI can significantly affect your deduction limits. Here are the limits for 2023:
How to lower modified adjusted gross income
First off, think of retirement savings. Maxing out contributions to your traditional IRA or 401(k) not only secures your future but also lowers your MAGI. Plus, it's like giving yourself a little tax break.
Next up, consider health-related accounts like an HSA or FSA. Putting money into these babies helps cover medical expenses while also giving your MAGI a nice little haircut. And don't forget about your deductions. Whether it's student loan interest or certain educational expenses, claiming above-the-line deductions is a surefire way to give your MAGI a much-needed trim.
Speaking of investments, consider parking some cash in tax-efficient options like municipal bonds. They can generate tax-exempt income, which means less income factored into your MAGI. Lastly, if you're planning any big financial moves, like selling investments or property, consider spreading them out over multiple years to avoid MAGI spikes.
When it comes to filing taxes, your MAGI is a key player. It dictates both your tax liabilities to the IRS and the tax benefits you qualify for. So, it’s important you understand how to calculate it and get professional help if you need it.
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