When tax season rolls around it’s important to understand not just how much income you brought home, but what your adjusted gross income (AGI) and modified adjusted gross income (MAGI) are because they may impact how much tax you owe.
Depending on what your AGI and MAGI are, you can take advantage of various tax deductions and credits to reduce your tax liability and save money on your federal tax return.
In this article, we’ll review how to calculate AGI and MAGI. Understanding these will give you a better idea of how the IRS determines your eligibility for certain tax deductions, credits, and retirement plans. As always, contact your CPA or financial professional for expert advice if you have specific tax questions.
What is adjusted gross income?
When you calculate your income taxes for the year, knowing your AGI is a good first place to start when determining the amount of taxes you’ll owe.
Simply put, your AGI is your gross income minus any adjustments to your income. It’s an essential first step for understanding how much of your gross income amount is taxable. Your AGI will never be higher than your regular gross income for individual tax purposes, and in many cases will be lower than that amount.
Let’s break down the aspects of your AGI, starting with your gross income. As you may already know, your gross income is the money you earn or have coming into your household.
There are several potential gross income sources, including:
- Salaries and wages
- Social Security benefits
- Rental income
- Royal income
- Capital gains
- Business income
- Farm income
- Unemployment benefits
- Investment income
- Student loan payments
- Alimony payments
- Retirement income
Next, let’s talk about what items can “adjust” your gross income, which is the second part of determining your AGI.
Adjustments to income include the following items:
- Contributions to an individual retirement account (IRA)
- Moving expenses for active-duty military service members
- Alimony paid
- Self-employment taxes
- Educator expenses
- Student loan interest
- Charitable contributions (limited to 60% of AGI)
- Health savings account (HSA) contributions
How to calculate your adjusted gross income
Now that you understand the pieces that make up your AGI let’s try calculating it. You can get your AGI by adding all the household income you earned during the year and subtracting any allowable adjustments.
If applicable, you can deduct 50% of any self-employment taxes you paid and self-employed health insurance payments for you and your family members to reach your AGI.
Now, let’s do an example calculation. If you earned a salary of $60,000 last year, that amount is your gross income. If you contributed $300 monthly to your IRA, that amounts to a $3,600 adjustment to your gross income.
If you take your gross income of $60,000 minus your adjustments of $3,600, you get a calculated AGI of $56,400.
Of course, you’ll likely have a more complicated list of income and adjustments than our example, but you don’t have to do the math alone. There are several online AGI calculators1 to help you during tax season. If you want to skip the calculations altogether, Line 11 of your 1040 tax form lists your AGI2.
Why is adjusted gross income important?
Your AGI represents your total taxable income before you factor in any itemized or standard deductions, exemptions, and credits. That income directly influences which deductions and credits you can claim on your tax return, determining whether you’ll have a tax bill or get a refund.
Your AGI directly impacts your eligibility for tax credits like the earned-income credit (EIC) and the child and dependent care credit. Similarly, your AGI determines whether you can claim tax deductions on things like include mortgage insurance premium payments and medical expenses.
Generally speaking, if you want to be eligible for tax deductions and credits, you want your AGI to be low. Your AGI will never be more than your gross income, but the lower your AGI is, the more deductions and credits you’ll be eligible to receive.
Once you have your AGI, you can take either itemized or standard deductions to further adjust your taxable income. Most Americans won’t need to file itemized deductions. For 2023 taxes (due in 2024), filers can use the standard deduction of $13,850 for single filers, $27,700 for joint filers, and $20,800 for heads of households.
Generally, if your AGI minus itemized deductions is larger than your AGI minus the standard deduction, you’ll take the standard deduction to save more on taxes.
What is modified adjusted gross income?
Now that you’ve got a handle on AGI let’s cover MAGI. For many taxpayers, MAGI is simply AGI with the student loan interest deduction added back in. But for some that have more complex tax returns, it can include more items. As such, you may consider MAGI as your AGI with specific deductions or tax-exempt interest income added back in.
A few examples of items that are included in your MAGI are:
- Any deductions you took for IRA contributions and taxable Social Security payments
- Any amount excluded from your gross income
- This includes foreign income and housing costs for qualified individuals
- Any amount of interest received or accrued by the taxpayer during the taxable year which is exempt from tax
- This could include interest from Series EE savings bonds used to pay for higher education expenses
- Losses from a partnership
- Passive income or loss
- Rental losses
- Income exclusion for adoption expenses
If you’re looking at your 1040 form, you’ll find these tax-exempt interest amounts on lines 37 and 8b. But these items are uncommon, so your AGI and MAGI will likely be identical. Lastly, your total MAGI doesn't appear on your annual tax return, unlike your AGI.
How to calculate your modified adjusted gross income
Once you have your adjusted gross income, you simply "modify" it by adding any tax-exempt interest income or deductions to calculate your MAGI to determine whether you can take full advantage of tax benefits.
The IRS begins to phase out deductions for items such as IRA contributions and educational expenses at certain income levels.
Some of the most common adjustments used to arrive back at your MAGI include:
- Qualified tuition expenses or deductions
- Losses from rental properties
- Half of the self-employment tax you paid during the tax year
- Student loan interest
But again, you typically won’t have much, if any, tax-exempt interest income to add, so calculating your MAGI can be as easy as taking your AGI and adding zero.
Why is modified adjusted gross income important?
The IRS phases out credits and allowable deductions as your household income increases. By adding MAGI factors to your AGI, the IRS determines how much you truly earned. Based on that, it determines whether you can take full advantage of income tax credits.
For example, the IRS uses your MAGI to determine if and how much you can contribute to a Roth IRA3 and how much of your traditional IRA contributions you can claim as a deduction.
The higher the MAGI, the fewer deductions you can take on IRA contributions. If your MAGI is too high, IRA deductions may even reach zero. You can still contribute to an IRA plan if this is the case. But you can’t deduct any of the contributions.
Your MAGI also dictates whether you're eligible for any premium tax credits. If you qualify, you can use premium tax credits to help lower your premiums on health insurance coverage purchased through the Health Insurance Marketplace, Medicare, Medicaid, and the Children's Health Insurance Program (CHIP).
MAGI also outlines whether you can claim other sorts of deductions. For example, individuals with a MAGI of less than $85,000 or less than $175,000 for a married couple filing jointly can claim the student loan deduction of $2,500 in the 2023 tax year4.
To receive the 2023 child tax credit of $2,000, single filers must have a MAGI of $200,000 or below, and joint filers must have a MAGI of $400,000 or below. Those whose MAGI exceeded those amounts don't qualify.
It's normal for a person's MAGI to be similar to or the same as their AGI. But it’s always good to double-check each tax season. While these incomes may take a minute to calculate, they’re essential in helping you determine what kind of tax deductions you can claim on your next return and how much you’ll pay for your health insurance premiums.
The more you understand how the IRS categorizes your annual household income, the more prepared you’ll be to determine your taxable income, fill out your federal income tax return, and receive any credits coming your way.
This article was originally published on March 10, 2021. It was last updated on August 11, 2023.