Adjusted gross income vs. modified AGI

What is adjusted gross income (AGI)?

When you calculate your income taxes for the year, knowing your AGI is a good place to start for determining the amount of taxes you’ll owe.

Simply put, your AGI is your gross income minus any adjustments to your income. It’s a vital first step for knowing how much of your gross income 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 sources. As you may already know, your gross income is the money you earn or have coming into your household.

There are several potential types of income, including:

• Salaries and wages
• Interests
• Dividends
• 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 sources include the following items:

• Contributions to an employer-sponsored retirement plan, like 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 (usually limited to 60% of AGI)¹
• Health savings account (HSA) contributions
• Self-employed health insurance premiums

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 medical insurance payments made 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’s your gross income. Suppose you put $300 per month toward your IRA. In that case, you’ll have 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 calculators to help you during tax season². If you want to skip the calculations altogether, Line 11 of your 1040 tax form lists your AGI³.

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 annual 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 mortgage insurance premiums and medical services.

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 adjust your taxable income further. Most Americans won’t need to file itemized deductions. For 2023 taxes due in April 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 (MAGI)?

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 if you 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 you may include 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 housing deductions and foreign income for qualified individuals
• Any amount of interest the taxpayer received or accrued during the taxable year which is exempt from tax
  • This could include interest from Series EE savings bonds the taxpayer 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. However, 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 federal government begins to phase out deductions for items such as IRA contributions and educational expenses at certain income thresholds.

Some of the most common adjustments used to arrive back at your MAGI include:

• Qualified tuition and fee deductions
• Losses from rental properties
• Half of the self-employment tax you paid during the tax year
• Student loan interest
• Certain business expenses, such as for performing artists, military reservists, and government officials

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.

Want to learn more about how to calculate your MAGI? Check out our blog post

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 IRA and how much of your traditional IRA contributions you can claim as a deduction³4.

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 health insurance premiums for plans purchased through the Health Insurance Marketplace, Medicare, Medicaid, and the Children's Health Insurance Program (CHIP).

MAGI also outlines whether you can claim other deductions. For example, individuals with a MAGI of less than $75,000 or an income level of less than $155,000 for a married couple filing jointly can claim the entire student loan deduction of $2,500 in the 2023 tax year.

Individuals with a MAGI between $75,000 and $90,000 (or between $155,000 and $185,000 if filing jointly) can receive a partial credit. Individuals or spouses with a MAGI that exceeds $90,000 or $185,000 are ineligible⁵.

The 2023 child tax credit is $2,000 per qualifying child, with a maximum refund of $1,600 per child. Single filers must have a MAGI of $200,000 or below, and joint filers must have an income limit of $400,000 or below to receive the full credit.

If your MAGI exceeds these amounts, the federal government will reduce your credit by $50 for each $1,000 of your income above the limit⁶.

Conclusion

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 plan 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 is for informational purposes only. You should contact a tax professional to help you determine your AGI and MAGI.

This article was originally published on March 10, 2021. It was last updated on April 1, 2024.

1. https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions

2. https://money.cnn.com/tmp/networth2.html

3. https://www.irs.gov/pub/irs-pdf/f1040.pdf

4. https://www.investopedia.com/retirement/ira-contribution-limits/

5. https://money.usnews.com/loans/student-loans/articles/how-to-claim-your-student-loan-payments-on-your-2023-taxes

6. https://www.cnet.com/personal-finance/taxes/child-tax-credit-2024-what-to-know-about-filing-your-taxes/