Modified Adjusted Gross Income (MAGI)
Candlefocus EditorModified Adjusted Gross Income (MAGI) is a measure of someone's income used to determine eligibility for certain tax benefits and programs. It is calculated using an individual’s Adjusted Gross Income (AGI) and then reducing it by certain adjustments to arrive at the figure. MAGI is a useful tool for understanding your taxable income, and figuring out your eligibility for certain tax deductions and credits, as well as for other programs.
Calculating MAGI
Calculating MAGI requires subtracting certain adjustments from an individual’s AGI. AGI generally includes income received from wages, dividends, and interest, as well as an individual’s income from rental real estate, royalties, self-employment, and other sources. Adjustments to AGI can include retirement plan contribution deductions (like 401(k) deductions or self-employed contributions), student loan interest, tuition and fees deductions, and others. These deductions are subtracted from AGI to calculate MAGI, which can be significantly lower than AGI due to the impact of the adjustments.
Importance of MAGI
The importance of MAGI lies in its ability to determine eligibility for various tax deductions and credits. For example, certain programs relating to qualified retirement account contributions are only available to taxpayers whose MAGI falls within certain income limits. In addition, eligibility for child and dependent care tax credits and tuition and fees deductions is determined by one’s MAGI. Similarly, eligibility for certain tax credits and deductions, such as the child tax credit, earned income tax credit, education credit, and lifetime learning credit, is determined by MAGI. Many of these credits and deductions are designed to encourage investments in financial instruments, education, retirement funds, or to assist with any additional costs associated with raising children.
Fortunately, these days, MAGI can be quickly calculated through tax preparation software programs. Furthermore, due to the lower MAGI figure as compared to AGI, many taxpayers are eligible for deductions and credits they may have previously overlooked or been unaware of. Understanding MAGI can help you maximize your tax refund and can even increase the amount of money you have available to invest in qualified retirement accounts or pursue other financial goals.