What is Modified Adjusted Gross Income (MAGI)?

Modified Adjusted Gross Income (MAGI) is a figure used by the IRS to determine eligibility for several tax benefits, such as contributions to a Roth IRA, education credits, or the Premium Tax Credit. It is an adjusted version of your Adjusted Gross Income (AGI), which adds back specific deductions that were initially subtracted when calculating your AGI.

Key Takeaways

• MAGI is an adjusted version of your AGI that determines eligibility for important tax benefits, such as Roth IRA contributions and education credits, by adding back specific deductions.
• Your MAGI can significantly affect whether you qualify for various credits and deductions, including health insurance subsidies and retirement savings incentives.
• MAGI thresholds are updated annually, so it is important to verify the most current information when filing your taxes.

How is MAGI Calculated?

In order to calculate your MAGI, you must start with your AGI, which is your gross income minus above-the-line deductions (like contributions to a traditional IRA or student loan interest). From there, certain deductions are added back to arrive at your MAGI. Here are some of the common add-backs included for these purposes, along with explanations:

• Student Loan Interest Deduction: Up to $2,500 of student loan interest can be deducted from AGI. However, when calculating MAGI, this deduction is added back to determine eligibility for certain benefits, as it effectively lowers your taxable income.
• Tuition and Fees Deduction: This deduction helps offset the cost of higher education but is added back when calculating MAGI, affecting eligibility for education-related tax benefits.
• Foreign Earned Income Exclusion: The foreign earned income exclusion allows taxpayers to exclude a portion of their foreign income, but it is added back when calculating MAGI to assess eligibility for specific credits.
• Tax-Exempt Interest: Interest from municipal bonds, which is typically tax-exempt, must be added back to AGI when calculating MAGI to determine whether you qualify for certain tax benefits.

Why Does MAGI Matter?

MAGI is particularly important for determining eligibility for many tax credits and deductions that are subject to income limits or phaseouts. Here are some common areas where MAGI is used:

• Roth IRA Contributions: Roth IRA contributions are subject to income limitations based on MAGI. If your MAGI exceeds a certain threshold, your eligibility to contribute to a Roth IRA may be reduced or eliminated altogether. For 2024, the income phaseout range for single filers is $146,000 to $161,000, while for married couples filing jointly, it ranges from $230,000 to $240,000. If your MAGI falls within these ranges, you can make partial contributions, but if it exceeds the upper limit, you won't be able to contribute to a Roth IRA at all. This phaseout is gradual, meaning contributions are reduced proportionally within the range.
• Education Credits: The IRS uses MAGI to determine eligibility for education-related tax credits, such as the Lifetime Learning Credit or the American Opportunity Credit. These credits help offset the cost of higher education, but they are gradually phased out for individuals or couples whose MAGI exceeds specific thresholds. For example, the phaseout for the Lifetime Learning Credit (LLC) begins at $80,000 to $90,000 for single filers and $160,000 to $180,000 for married couples filing jointly in 2024, while the American Opportunity Credit (AOC) has a phaseout range of $80,000 to $90,000 for single filers and $160,000 to $180,000 for married couples filing jointly.
• Premium Tax Credit (PTC): MAGI is also used to determine eligibility for the PTC, which helps individuals and families afford health insurance purchased through the Health Insurance Marketplace. This credit is designed to make health insurance more accessible by reducing monthly premium costs, but eligibility is restricted based on one’s MAGI, such that the credit phases out gradually as income increases.
• Saver’s Credit and Other Tax Benefits: MAGI also impacts eligibility for the Saver’s Credit, a credit designed to help low- to moderate-income taxpayers save for retirement. For 2024, the phaseout range for single filers is $21,750 to $36,500, while for married couples filing jointly, it ranges from $43,500 to $73,000. Depending on your MAGI, the Saver’s Credit can be worth up to 50% of contributions made to qualified retirement accounts.

Example: Suppose you have an AGI of $80,000. You also have $2,500 in student loan interest deductions and $3,000 in tax-exempt interest from municipal bonds. To calculate your MAGI:

1. Start with AGI: $80,000
2. Add Student Loan Interest: +$2,500
3. Add Tax-Exempt Interest: +$3,000
4. MAGI = $80,000 + $2,500 + $3,000 = $85,500

With a MAGI of $85,500, you could then determine eligibility for different tax benefits. For example, if you are a single filer and want to contribute to a Roth IRA, you fall below the $146,000 phaseout limit and are fully eligible to contribute.