What is Modified Adjusted Gross Income?

Man calculating his modified adjusted gross income

Before understanding modified adjusted gross income, you must first master adjusted gross income (AGI). With so much depending on this single number, which goes on line 7 of the new Form 1040, it’s important to get AGI right.

AGI is the sum of money you have earned from all sources, from which certain deductions will later be subtracted. Wages, salaries, tips, tax-exempt interest, qualified dividends, IRAs, pensions, annuities, and Social Security benefits are all examples of items you have to include in your AGI. The deductions you can factor in include IRA contributions, as well as self-employment tax, business expenses and others. Named “above-the-line” deductions, these can be deducted without itemizing.

What Is MAGI And Why Is It Important?

Modified adjusted gross income (MAGI) is calculated by adding certain deductions back into your AGI and determining the eligibility for certain tax credits and exemptions. The exact formula will depend on the type of tax benefit you are looking at.

While AGI is the amount of taxable income, it may not reflect your total earnings, unless your AGI and MAGI are the same. However, if student loan interest, self-employment tax, IRA contributions or qualified tuition expenses apply to you, then the number will be different. In other words, untaxable sources are added back to calculate MAGI, which is then used to determine additional deductions available to you. Don’t be discouraged if your AGI and MAGI are the same, as this is common for many taxpayers.

Other items that you may be able to add back to your AGI for possible tax cuts are tuition and fees deductions, passive income or loss, rental losses, taxable Social Security payments, exclusion for income from U.S. savings bonds, and exclusion for adoption expenses.

Spend some time researching if you qualify for any of these tax benefits, including these lesser-known tax credits to improve your return, based on MAGI:

  • Roth IRA eligibility if you’re within the income threshold
  • Child Tax Credit
  • Adoption Tax Credit
  • American Opportunity Tax Credit

The significance of your additional MAGI determines your eligibility and may vary year to year per the IRS. For example, if you had an income of over $80,000 and filed as a single in 2018, you were not eligible for a student loan interest deduction.

What Now?

Knowing there may be possible deductions based on your MAGI, you’ll need to research the qualifications for each credit or deduction based on your modified adjusted gross income. Whether you would rather scour the guidelines on the IRS website or start by talking to a tax professional, the team at TaxSlayer is ready to help – both during and after tax season.

When you’ve made it through tax season and received the most possible deductions, be sure to store your tax forms and returns in a safe place. You may need your AGI information for future filing information.

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