Modified Adjusted Gross Income, or MAGI, is a measure used by the IRS to determine eligibility for certain deductions, credits (including premium tax credits), or retirement plans.
Although the term MAGI is frequently used, few small business owners understand what it is, how it’s used, or how to calculate it. In this article, we’ll provide four surprisingly simple tips for understanding MAGI.
Note - This article is based off of our free eBook, The Small Business Owner's Guide to Modified Adjusted Gross Income. To access the complete resource, click here.
What is MAGI?
MAGI is your gross income adjusted for deductions and then modified by adding specific deductions back in. If you purchase your own health insurance through the Marketplace, eligibility for premium tax credits is based on your MAGI.
Tip #1 - MAGI is Different than AGI
MAGI is a different calculation than Adjusted Gross Income (AGI). How so? First, let’s look at AGI.
To calculate AGI, you take your gross income and make adjustments by subtracting qualified deductions. Adjustments can include items like some contributions to IRAs, moving expenses, alimony paid, self-employment taxes, and student loan interest. (Tip - There are many free AGI calculators available online.)
Once you have your AGI, you "modify" it to calculate MAGI. 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.)
Here is a simple summary chart of MAGI:
Tip #2 - For Most, AGI and MAGI are the Same
For most people, MAGI is the same as AGI. That’s because the deductions added back in to calculate MAGI do not apply to most; they include items such as foreign earned income, some social security benefits, and tax-exempt interest.
Tip #3 - Know Your Available Deductions
Now that you understand how MAGI is calculated and how AGI and MAGI are different, the next tip is to understand the available deductions. Knowing the available deductions will help you accurately calculate your MAGI. This is important when applying for the health insurance premium tax credits.
Tip - If you have questions about what deductions are available to you, consult with your tax or accounting professional.
Tip #4 - Take Advantage of Available Tax Credits
The last tip is to take advantage of the tax credits and deductions available to you.
For example, the health insurance premium tax credits provide significant discounts to many business owners (and employees) who make between 100% and 400% of the Federal Poverty Line (FPL), and who do not have access to health insurance through work or the government. This means a family of four earning up to $97,000 in 2015, or an individual earning up to $47,080, may qualify for health insurance discounts.
Understanding MAGI can be simple. First, understand how to accurately calculate MAGI. Then, take advantage of the available tax credits and deductions available to you.
Do you have a question about MAGI or the health insurance premium tax credits? Leave a comment below.