WHERE DO I FIND MY MAGI (Modified Adjusted Gross Income)?
Modified Adjusted Gross Income, or MAGI is important to taxpayers because several benefits are allowed or denied based on the annual amount. Believe it or not, your MAGI is not a line item on the Form 1040. This is because there are several forms of MAGI, each tailored to specific tax incentives, and even another form of income taxes. Each MAGI starts with your Adjusted Gross Income (AGI) 1040 line 11 and then you add back any of the deductions that apply to your situation. The benefits that have thresholds based on you MAGI include the deductibility of your IRA contribution(s), eligibility to make Roth IRA contributions, the child tax credit, education credits, student loan interest deduction and health insurance credits. A MAGI is also used to determine if a surtax is to be paid, such as the Net Investment Income Tax, this is a 3.8% tax on passive income producing assets.
Certain deductions are allowed without the need to itemize deductions, these are referred to as “above the line” deductions. They are subtracted from your gross income to arrive at Adjusted Gross Income (AGI). Each MAGI starts with AGI and then adds back specific “above the line” deductions. Here are the “add backs” to calculate MAGI for the more popular programs:
Traditional IRA Deduction – starting with your AGI, first you need to add the IRA contribution amount that was taken “above the line”, you can’t deduct this before calculating this MAGI, otherwise you would be claiming at tax break twice for the same expense. Then add back the following: student loan interest deduction, foreign earned income and housing exclusions, foreign housing deduction, savings bond interest that was excluded from AGI, and employer adoption benefits that were excluded from AGI to arrive at your MAGI. This MAGI is what is used to determine if you are eligible to deduct your Traditional IRA contribution. Traditional IRA deductions are phased out based on the amount of this MAGI and your filing status. If phased out, you can still fund your Traditional IRA, you just can’t take this deduction.
Roth IRA Eligibility – this adds back all the same items as above in the Traditional IRA MAGI calculation, although it goes further by adding back any Traditional IRA deduction reduced by income from a conversion of an IRA to a Roth IRA, similarly it adds back a rollover of pre-tax monies from a qualified plan to a Roth IRA.
Child Tax Credit – this MAGI starts with AGI and then adds back foreign earned income and housing exclusions, foreign housing deduction, any excluded income from Puerto Rico and excluded income from residents of American Samoa.
Education Credits – like the Child Tax credit, this MAGI starts with AGI and then adds back foreign earned income and housing exclusions, foreign housing deduction, excluded bona fide resident of Puerto Rico and American Samoa income.
Student Loan Interest Deduction – this tax deduction phases out at certain income limits; it starts with AGI and adds back the student loan interest taken before arriving at AGI (above the line deduction) then it adds back the foreign earned income exclusion, foreign housing exclusion, foreign housing deduction, and the income exclusions for residents of Puerto and American Samoa.
Premium Tax Credit (PTC) – these refundable tax credit subsidies are available to eligible individuals and families to assist with the premiums for their health care insurance. To determine eligibility, this MAGI adds foreign earned income, tax-free interest, and the tax-free portion of Social Security benefits to AGI.
Net Investment Income Tax (NIIT) – this is a 3.8% surtax on passive investment income. It is applicable to taxpayers filing single with a MAGI of $200,000 and $250,000 if married filing joint. To calculate the NIIT MAGI, start with your AGI and then add back the foreign earned income exclusion and certain other adjustment for foreign investments. These can be found on the instructions for Form 8960.
Knowing how to determine any specific MAGI allows for better tax planning, including how to use your money wisely by making timely tax payments to avoid the dreaded underpayment of taxes penalties and interest.