AGI vs. Taxable Income vs. MAGI —Why it Matters

Mary Grace Paoletti, CPA, CFP®, Financial Planner

When determining your eligibility for a variety of deductions, credits, and retirement plans, you will often come across terms such as AGI, taxable income, and MAGI. Let's explore what each of these terms mean, how to compute them, and why they matter.

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Adjusted Gross Income, or AGI, is your gross income minus adjustments to income. Gross income is comprised of several different items such as wages, dividends, capital gains or losses, business income, and retirement distributions. Lines 1-8 of your tax return are aggregated together to arrive at your gross income, which is reported on line 9 of your Form 1040. Schedule 1 of your tax return sums up the many different items that are considered to be adjustments to income such as student loan interest, alimony payments, or contributions to a retirement account. The difference between your gross income and your adjustments to income are what make up your AGI, which is then reported on line 11 of your 1040.

Taxable income is then computed by reducing your AGI by the standard or itemized deduction you are entitled to, as well as a qualified business income deduction if you qualify for one. This is shown on line 15 of your 1040.

Modified Adjusted Gross Income (MAGI) , however, is not as clearly defined and is an important measure of income for many different tax benefits. Depending on what MAGI is being used for, the calculation may vary.

Traditional IRA Deductibility

Your eligibility for deducting traditional IRA contributions will depend on whether your MAGI is within the income restriction limits. MAGI is your AGI plus any of the following:

  • Student loan interest deduction
  • Foreign earned income and housing exclusions
  • Foreign housing deduction
  • Excluded employer adoption benefits

Roth IRA eligibility

The calculation for Roth IRA eligibility would be the same as the calculation for Traditional IRA Deductibility, but you would have to add back any deduction you took for contributing to a traditional IRA.

Net Investment Income Tax

If you are one of the individuals affected by the Net Investment Income Tax, your tax will be assessed based on your MAGI, which is computed by adding back any foreign earned income exclusion and certain adjustments for foreign investments to your AGI.

Premium Tax Credit

If you are fortunate enough to qualify for the premium tax credit in your state, the amount of your credit will be based on your MAGI which is your AGI plus:

  • Foreign earned income
  • Tax-free interest
  • Non-taxable social security benefits

Education Credits & Child Tax Credit

For the purposes of determining your ability to claim these credits, your MAGI will be calculated as your AGI plus:

  • Foreign earned income
  • Housing exclusions
  • Foreign housing deduction

Medicare Premiums

Your MAGI is what determines whether you will pay an Income Related Monthly Adjustment Amount, also known as IRMAA, in addition to the standard premium associated with Medicare. For this calculation, you will need to add back any tax-exempt interest income to your AGI to arrive at your MAGI.

If you are still left with questions on what MAGI would be for your particular situation, our team of financial professionals at Howe & Rusling includes a CPA and we are here to help.

Mary Grace Graniero

Mary Grace is a Certified Public Accountant and CERTIFIED FINANCIAL PLANNER™, responsible for working with clients to achieve both short-term and long-term financial goals.

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