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FAQ - What is Modified Adjusted Gross Income?

Written by: Christina Merhar
January 9, 2015 at 12:00 PM

If you’ve been shopping for personal health insurance, helping a client with taxes, or following the Affordable Care Act, you may have heard the term “Modified Adjusted Gross Income,” or MAGI. In this article I’ll answer the frequently asked question - “What is Modified Adjusted Gross Income?” I’ll also explain how to calculate MAGI and why MAGI matters.

What is Modified Adjusted Gross Income?

First, what is MAGI? Your MAGI is a measure used by the IRS to determine if you are eligible to use certain deductions, credits (including health insurance premium tax credits), or retirement plans.

How Do I Calculate MAGI?

Follow these three simple steps to calculate your MAGI.

Step 1 - Calculate Your Gross Income (GI)

Your gross income is the money you earned through wages, interests, dividends, rental and royalty income, capital gains, business income, farm income, unemployment and alimony. This is the basis for your AGI calculation. Gross income includes salary, interest earned, income from investments and basically any income you made through business, trade or investments.

Step 2 - Calculate Your Adjusted Gross Income (AGI)

Once you have gross income, you "adjust" it to calculate your AGI. You make adjustments by subtracting qualified deductions from your gross income. Adjustments can include items like some contributions to IRAs, moving expenses, alimony paid, self-employment taxes, and student loan interest. There are many free AGI calculators available online.

Step 3 - Calculate Your Modified Adjusted Gross Income (MAGI)

Once you have adjusted gross income, you "modify" it to calculate your MAGI. For most people, MAGI is the same as AGI.

Specifically, Internal Revenue Code ((d)(2)(B)) states that MAGI is AGI increased by:

  • Any amount excluded from gross income in section 911 (Foreign earned 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

  • Any amount equal to the portion of the taxpayer’s social security benefits (as defined in Section 86 (d)) which is not included in gross income under section 86 for the taxable year. (Any amount received by the taxpayer by reason of entitlement to a monthly benefit under title II of the Social Security Act, or a tier 1 railroad retirement benefit.)

Why Your MAGI Matters

The IRS phases out credits and deductions as your income increases. By adding MAGI factors back to your AGI, the IRS determines how much you really earned. Based on that, it determines whether you can take full advantage of special tax credits.

Do you have questions about what MAGI is or how to calculate it? Leave a comment below.

Topics: Modified Adjusted Gross Income, FAQs

Additional Resources

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