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Adjusted Gross Income (AGI) vs Modified Adjusted Gross Income (MAGI) – How to Calculate and When to Use AGI or MAGI

Adjusted Gross Income (AGI) and Modified Adjust Gross Income (MAGI) are important numbers when filing your taxes. Both AGI and MAGI must be known when determining allowable deductions, tax credits, and eligibility for retirement plans. Your taxes may even increase if your income is too high based on certain income limits. AGI may be used in certain situations while MAGI used in other scenarios. Adding to the confusion, MAGI does not appear on your 1040. Below we aim to explain how to calculate AGI and MAGI and when to use each.

 

Adjusted Gross Income (AGI)

Adjust Gross Income (AGI) is your gross total income minus certain adjustments. It represents an individual’s total income from various sources with specific allowable deductions subtracted. AGI is crucial for determining eligibility for tax deductions and credits, serving as the starting point for calculating taxable income and eventual tax liability. You can find the allowable reductions to your income on the front page of your Form 1040. AGI is the base number the IRS will use to determine total taxes owed.

 

How to Calculate Gross Income

 

  • W2 and 1099 jobs (wages and salaries)
  • Businesses and self-employment income
  • Investments*
  • Real estate
  • Rental income
  • Retirement Withdrawals (traditional)
  • Social security
  • Pensions
  • Unemployment Benefits
  • Fringe Benefits

*Investments include interest income, dividend income, business profits, and capital gains.

 

Commonly Used Adjustments for AGI:

 

  • Retirement plan contributions and self-employed retirement plan contributions
    • (401(k), IRA, other traditional plans)
  • Self-employed health insurance premiums
  • 1/2 of any self-employment taxes paid (FICA)
  • Health savings account (HSA) deductions
  • Student loan interest
  • Certain business expenses
  • Early withdrawal penalties
  • Educator expenses (books, supplies, etc)
  • Moving expenses for military

 

Adjusted Gross Income (AGI) Can Affect Eligibility and Taxes Owed

Many tax credits and deductions phase out or disappear altogether if you have an AGI above certain limits. In addition, taxes owed may increase.

Deductions affected by your AGI include the following:

  •  Tax credits
    • Earned Income Tax Credit (EITC)
    • Saver’s Credit
  • Certain Itemized Deductions
    • Charitable donations
    • Medical expenses
    • State and local taxes
    • Miscellaneous deductions
  • Alternative Minimum Tax (AMT)
  • Social Security Benefits
  • Credit for the Elderly or Disabled

 

Modified Adjusted Gross Income (MAGI)

Modified adjusted gross income (MAGI) starts with your adjusted gross income (AGI) and then adds certain deductions back in. Many tax credits and deductions phase out or disappear altogether if you have an AGI above certain limits. Surprisingly, you cannot find your MAGI on your Form 1040 tax return which can add to the confusion.

 

How to Calculate Your MAGI

 

  1. Determine gross income.
  2. Find adjusted gross income (AGI).
  3. Add back certain deductions required for MAGI.

While it might appear that you are deducting specific items only to reintroduce them, it is essential to undergo the process because there could be variations between the two figures. It is crucial to go through this exercise, even if your Adjusted Gross Income (AGI) and Modified Adjusted Gross Income (MAGI) ultimately result in the same number, as there might be nuanced differences in the components.

 

Adding Back Certain Deductions for MAGI

Here are some common deductions you should add back in to find your MAGI:

  • IRA contributions
  • 1/2 of self-employment tax paid
  • Passive activity losses
  • Non-taxable Social Security payments
  • Student loan interest
  • Rental losses
  • Exclusion of income from U.S. savings bonds
  • Foreign earned income exclusion
  • Foreign housing exclusion or deduction
  • Adoption tax credit
  • Publicly traded partnerships losses

***A different formula for adding deductions back must be used for IRA and Roth IRA contributions, Net Investment Income Tax (NIIT), the Premium Tax Credit (PTC), American Opportunity Credit, Lifetime Learning Credit, and Child Tax Credit.

 

Modified Adjusted Gross Income (MAGI) Can Affect Eligibility and Taxes Owed

Many tax credits and deductions phase out or disappear altogether if you have a MAGI above certain limits. In addition, benefits received and taxes owed may increase.

Deductions affected by your MAGI include the following:

  • Retirement Contributions (IRA and Roth IRA)
  • Medicare Premiums
  • Net Investment Income Tax (NIIT)
  • Eligibility for subsidized health insurance
    • Premium Tax Credit
    • Cost Sharing Reduction
  • Education Tax Credits
    • American Opportunity Credit
    • Lifetime Learning Credit
    • Deduction for student loan interest
  • Medicare Surtax
  • Child Tax Credit
  • Adoption Tax Credit

 

When to Use AGI vs MAGI

Below is a complete guide to when to use AGI or MAGI for each tax credit, deduction, benefits received, and taxes owed. The figures below are based on 2024. 

 

When to Use Adjusted Gross Income (AGI)

Tax Credits

  • Earned Income Tax Credit (EITC)
    • Maximum credit for taxpayers
      • No children = $600
      • 1 child = $3,995
      • 2 children = $6,604
      • 3 or more children = $7,430
    • Joint Income Limit
      • No children = $17,250
      • 1 or more children = $29,640
      • Other Filing Status Income Limit
      • No children = $10,330
      • 1 or more children = $22,720
    • How to Claim the Earned Income Tax Credit
  • Saver’s Credit (The Retirement Savings Contributions Credit)
    • Helps to offset the first $2,000 workers voluntarily contribute to IRAs, 401(k) plans and similar workplace retirement programs.
    • Maximum Saver’s Credit
      • Single = $1,000
      • Joint = $2,000
    • Income Limits
      • Single Income Limit = $38,250
      • Joint Income Limit = $76,500
      • Head of Household = $57,375
    • Savers Credit IRS Guidance
  • Credit for the Elderly or Disabled
    • To determine if you can claim the credit, you must consider two income limits. The first limit is the amount of your adjusted gross income (AGI). The second limit is the amount of nontaxable social security and other nontaxable pensions, annuities, or disability income you received.
    • The income limits are complex and multiple factors must be taken into consideration. See the link below for more information.
    • IRS Publication 524

Deductions (certain itemized deductions)

  • Medical and dental expenses
    • Taxpayers can deduct only the amount of unreimbursed medical and dental expenses that exceeds 7.5% of AGI
  • Certain taxes paid
    • State and local income tax (max of $10,000 deduction)
    • Sales taxes
    • Real estate taxes
    • Personal property taxes
  • Home mortgage interest
  • Gifts to charity
    • The amount of charitable donations you can deduct may range from 20% to 60% of your AGI.
  • Casualty and theft losses (only losses derived from federally declared disaster areas are allowed)
  • Certain miscellaneous deductions
    • Allowed to deduct the portion of these miscellaneous expenses that exceed 2% of AGI
  • IRS Itemized Deductions Overview

Educator Expenses

  • If you’re an eligible educator, you can deduct up to $300 ($600 if married filing jointly and both spouses are eligible educators, but not more than $300 each) of unreimbursed trade or business expenses.
  • Educator Expenses IRS Topic 458

Alternative Minimum Tax (AMT)

  • Single exemption = $85,700
  • Single phaseout = $609,350
  • Joint exemption = $133,300
  • Joint phaseout = $1,218,700

Social Security Benefits

  • Taxation of social security is based on AGI
  • Income limits
    • Single = over $34,000 up to 85% of benefits may be taxable
    • Joint = over $44,000 up to 85% of benefits may be taxable
  • How Social Security Is Taxed

 

When to Use Modified Adjusted Gross Income (MAGI)

Retirement Contributions

  • IRA
    • Single = $77,000 – $87,000
    • Joint = $123,000 – $143,000
  • RIRA
    • Single = $146,000 – $161,000
    • Joint = $230,000 – $240,000
  • MAGI is calculated differently: add AGI plus the following: student loan interest deduction, foreign earned income and housing exclusions, foreign housing deduction, excluded savings bond interest, excluded employer adoption benefits

Medicare Premiums

  • Used to determine Income-Related Monthly Adjustment Amount (IRMAA) for Medicare Part B and Part D premiums
  • Medicare Costs

Net Investment Income Tax (NIIT)

  • MAGI is calculated by adding AGI plus the foreign earned income exclusion and certain adjustments for foreign investments. If you don’t have foreign income or deductions, your AGI and MAGI may be the same.
  • The excess of modified adjusted gross income over the following threshold amounts:

Eligibility for Subsidized Health Insurance

  • Premium Tax Credit
    • Reduces enrollees’ monthly payments for insurance coverage in the health insurance marketplace as a subsidy. Premium tax credits can be applied to Marketplace plans in any of four “metal” levels of coverage: bronze, silver, gold, and platinum.
    • MAGI is calculated differently: add AGI plus foreign earned income, tax-free interest, and the tax-free portion of Social Security benefits.
  • Cost Sharing Reduction
      • Cost sharing reductions lower enrollees’ out-of-pocket cost due to deductibles, copayments, and coinsurance when they use covered health care services.
      • Eligibility for the Premium Tax Credit

Education Tax Credits

  • American Opportunity Credit
    • The American opportunity tax credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student.
    • Single = $80,000 – $90,000
    • Married = $160,000 – $180,000
    • MAGI is calculated differently: add AGI plus foreign earned income and housing exclusions, foreign housing deduction, excluded bona fide resident of Puerto Rico or American Samoa income
    • American Opportunity Credit
  • Lifetime Learning Credit
    • The lifetime learning credit (LLC) is for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution. This credit can help pay for undergraduate, graduate and professional degree courses — including courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit. It is worth up to $2,000 per tax return.
    • Single = $80,000 – $90,000
    • Married = $160,000 – $180,000
    • MAGI is calculated differently: add AGI plus foreign earned income and housing exclusions, foreign housing deduction, excluded bona fide resident of Puerto Rico or American Samoa income
    • Lifetime Learning Credit
  • Deduction for student loan interest
    • Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntarily prepaid interest payments. You may deduct the lesser of $2,500 or the amount of interest you actually paid during the year.
    • Single = $80,000 – $95,000
    • Joint = $165,000 – $195,000
    • Those phase-outs change in 2024 to be between $80,000 and $95,000 for single filers and between $165,000 and $195,000 for those who are married and filing jointly.
    • Student Loan Interest Deduction

Medicare Surtax

  • Additional Medicare Tax of 0.90% on all wages in excess of:

Child Tax Credit

  • Credit of $2,000 per child 
  • Income limits
    • Single = $200,000
    • Joint = $400,000
  • MAGI is calculated differently: add AGI plus foreign earned income and housing exclusions, foreign housing deduction, excluded bona fide resident of Puerto Rico or American Samoa income
  • Child Tax Credit

Adoption Tax Credit

  • Tax benefits for adoption include both a tax credit for qualified adoption expenses paid to adopt an eligible child and an exclusion from income for employer-provided adoption assistance.
  • The maximum amount (dollar limit) for $16,810 per child.
  • Income limits
    • $252,150 – $292,150
  • Adoption Tax Credit Income Limits

 

Reach Out to Us!

If you have additional federal benefit questions, reach out to our team of CERTIFIED FINANCIAL PLANNER™ (CFP®), Chartered Federal Employee Benefits Consultants (ChFEBC℠), and Accredited Investment Fiduciaries (AIF®). At PlanWell, we focus on retirement planning for federal employees. Learn more about our process designed for the career federal employee.

Preparing for a federal retirement? Check out our scheduled federal retirement workshops. Sign up for our no-cost federal retirement webinars. Make sure to plan ahead and reserve your seat for our FERS webinar, held every three weeks. Interested in having PlanWell host a federal retirement seminar for your agency? Reach out, and we can collaborate with HR to arrange an on-site FERS seminar.

Want to fast-track your federal retirement plan? Skip the FERS webinar and start a one-on-one conversation with a ChFEBC today. You can schedule a one-on-one meeting using our contact form.

 

Reach Out to Us!

If you have additional federal benefit questions, reach out to our team of CERTIFIED FINANCIAL PLANNER™ (CFP®) and Chartered Federal Employee Benefits Consultants (ChFEBC℠). At PlanWell, we focus on retirement planning for federal employees. Learn more about our process designed for the career federal employee.

Preparing for a federal retirement? Check out our scheduled federal retirement workshops. Sign up for our no-cost federal retirement webinars here! Make sure to plan ahead and reserve your seat for our FERS webinar, held every three weeks. Interested in having PlanWell host a federal retirement seminar for your agency? Reach out, and we can collaborate with HR to arrange an on-site FERS seminar.

Want to fast-track your federal retirement plan? Skip the FERS webinar and start a one-on-one conversation with a ChFEBC today. You can schedule a one-on-one meeting here.

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