Modified adjusted gross earnings (MAGI) definition
Modified adjusted gross earnings (MAGI) is your adjusted gross earnings (AGI) with extra deductions, and can be utilized to find out should you qualify for specific tax deductions.
Why is MAGI necessary?
Understanding what your MAGI is might help you determine if you’re eligible for sure tax deductions. One of the crucial necessary deductions you would qualify for, relying in your MAGI, is the power to deduct IRA contributions should you or your partner have a retirement plan by way of your employer.
As an illustration, should you’re submitting your taxes for 2023 as a single particular person, you may have a office retirement plan and also you contributed $6,500 to a standard IRA, you would deduct that full $6,500 out of your taxable earnings in case your MAGI is $73,000 or much less.
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Find out how to calculate your MAGI
Determining your MAGI may be difficult, however you possibly can break it down into three steps:
1. Determine your gross earnings.
2. Discover your adjusted gross earnings.
3. Add again sure deductions specific to MAGI.
It could look like you might be subtracting sure objects solely so as to add them again once more, however as a result of there could also be some distinction between the 2 figures it’s necessary to undergo the train — even when your AGI and your MAGI find yourself as the identical quantity.
1. Determine your gross earnings
Your gross earnings is all the cash you earn, together with a wage from a job, capital good points from promoting a home or shares, curiosity or retirement earnings.
2. Discover your adjusted gross earnings
Your adjusted gross earnings, or AGI, is your gross earnings minus sure quantities. Among the most typical changes that may be subtracted from gross earnings embody:
Self-employed retirement plan contributions.
Half of any self-employment taxes paid.
Well being financial savings account deductions.
Some enterprise bills for the performing arts, navy reservists and authorities officers who’re paid instantly from the general public, reminiscent of a justice of the peace.
To know precisely what changes you possibly can subtract out of your gross earnings to get your AGI, it could be greatest to talk with a tax skilled.
3. Add again sure deductions specific to MAGI
Lastly, to determine your MAGI, take your AGI and add again sure deductions.
Listed below are some frequent deductions it’s best to add again in to search out your MAGI:
Half of self-employment tax paid.
Certified tuition bills.
Tuition and costs deduction.
Non-taxable Social Safety funds.
Exclusion for earnings from U.S. financial savings bonds.
International earned earnings exclusion.
International housing exclusion or deduction.
The exclusion below 137 for adoption bills.
Publicly traded partnerships losses.
Different MAGI calculations
Whereas the above methodology ought to have the opportunity that can assist you determine your MAGI, some applications and deductions calculate MAGI in another way. When you arrive at your MAGI, verify every deduction or credit score to see in case your MAGI means that you can qualify for it. Listed below are a couple of examples of how your MAGI might be calculated for numerous tax deductions and credit.
To determine should you can deduct your conventional IRA contribution:
Add your AGI and the next: Pupil mortgage curiosity deduction, overseas earned earnings and housing exclusions, overseas housing deduction, excluded financial savings bond curiosity and excluded employer adoption advantages.
If the quantity you arrive at is lower than the standard IRA deduction restrict then you possibly can deduct the complete quantity. Relying in your submitting standing, and when you’ve got a office retirement plan, these deduction limits can change. No matter your MAGI, you possibly can take the complete deduction if neither you or your partner are coated by a office retirement program.
To determine if you’re eligible for training credit (American alternative credit score and lifelong studying credit score):
Add your AGI and the next: International earned earnings and housing exclusions, overseas housing deduction, excluded bona fide resident of Puerto Rico or American Samoa earnings.
Each the american alternative credit score and the lifetime studying credit score are phased out at sure MAGI ranges. To say the complete credit score in 2023, your MAGI must be $80,000 or much less ($160,000 or much less for married submitting collectively). For single filers with a MAGI between $80,000 and $90,000 you’ll obtain a decreased credit score. After $90,000 you aren’t eligible for the credit score. For these married submitting collectively the section out lasts between $160,000 and $180,000, over which you aren’t eligible. Should you file with the married submitting separate standing you aren’t eligible for these tax credit.
To determine if you’re eligible for the premium tax credit score:
Add your AGI and the next: International earned earnings, tax-free curiosity and the tax-free portion of Social Safety advantages.
The premium tax credit score is a refundable credit score that helps folks pay for his or her medical health insurance premiums from Well being Insurance coverage Market plans. In case your MAGI, as calculated for the premium tax credit score, is between one hundred pc and 400 p.c of the federal poverty line, it’s possible you’ll be eligible. For 2022 (probably the most just lately up to date yr), for a family of 1, the poverty guideline was $12,880. Meaning in case your 2022 MAGI was under $51,520 (400%), it’s possible you’ll qualify for the premium tax credit score.
MAGI: The underside line
Determining your MAGI is a little bit of a tax system nightmare, but it surely has its makes use of. Calculating your MAGI might help you determine should you qualify for sure tax credit and deductions — however relying on the credit score or deduction, the best way you calculate that quantity could change.
Should you’re making an attempt to determine should you can deduct your conventional IRA contribution, or different worthwhile tax breaks, it’s a helpful quantity. Should you’re struggling to determine your MAGI, or what sorts of credit and deductions it’s possible you’ll qualify for, it could be price speaking to a tax professional.