MAGI vs AGI, What is the difference?
Published on July 10, 2024
by Grace Lorraine Angeles
Grace Lorraine, an IRS Enrolled Agent and CPA with 14 years of expat tax experience, specializes in US tax preparation, tax planning, and tax advice for US citizens and Green Card holders living and working abroad.
Table of Contents
What are the key differences between MAGI and AGI?
The main distinction between Modified Adjusted Gross Income (MAGI) and Adjusted Gross Income (AGI) is in the additional adjustments added back to AGI to derive MAGI. Both figures are important for US taxpayers, particularly when qualifying for various tax-related benefits.
What does adjusted gross income (AGI) mean?
Adjusted Gross Income (AGI) is the total of your gross income after subtracting specific allowable deductions. AGI is crucial as it determines your taxable income and your eligibility for various tax credits and deductions.
To determine AGI, you start with your gross income, which includes earnings such as wages, dividends, capital gains, business income, and other types of earnings. You then subtract certain allowable deductions to get your AGI. These deductions can help lower your taxable income, potentially reducing the amount of taxes you owe.
Which adjustments are subtracted from gross income to calculate AGI?
Here are some common adjustments that can be subtracted from your gross income to calculate your AGI:
- Student loan interest: Deduct up to $2,500 of interest paid on qualified student loans.
- Retirement contributions: Contributions to traditional IRAs, 401(k)s, and other retirement accounts can be deducted.
- Tuition and fees: Subtract qualified education expenses up to a certain limit.
- Health savings account (HSA) contributions: Contributions to an HSA can lower your gross income.
- Self-employment taxes: Deduct a portion of your self-employment tax.
- Alimony payments: Deduct alimony payments for divorces finalized before 2019.
- Moving expenses: Deduct moving expenses if you are active-duty military personnel.
These adjustments are intended to account for significant expenses that reduce your disposable income. Subtracting these from your gross income provides a clearer picture of your financial situation for tax purposes.
Grace Lorraine Angeles
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14 years of Expat Tax Experience
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IRS qualified Enrolled Agent (EA) Federally authorized to practice before the IRS on all US tax matters Philippine Certified Public Accountant (CPA) Degree in Bachelor of Science in Accountancy (BSA)
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How do you calculate AGI?
Assume your total gross income is $85,000, which includes wages, salary, and other income sources.
Adjustments to income:
- Student loan interest: $1,500
- Traditional IRA contribution: $3,000
- Health savings account (HSA) contribution: $2,000
AGI = Gross income – (Student loan interest + IRA contribution + HSA contribution)
AGI = $85,000 – ($1,500 + $3,000 + $2,000)
AGI = $85,000 – $6,500
AGI = $78,500
What does modified adjusted gross income (MAGI) mean?
Modified Adjusted Gross Income (MAGI) starts with AGI and includes certain deductions that were initially excluded. These additions often encompass foreign income, tax-exempt interest, and student loan interest deductions.
To calculate MAGI, you begin with your AGI and then add back specific items that were previously deducted. This provides a fuller picture of your income for certain tax purposes.
What items are typically added back to AGI to determine MAGI?
Common adjustments added back to AGI to calculate MAGI include:
- Foreign earned income: Add back any excluded foreign earned income.
- Tax-exempt interest: Include interest from tax-exempt bonds.
- Student loan interest deduction: Add back this deduction.
- IRA contributions: Include deductions for contributions to traditional IRAs.
- Rental losses: Depending on circumstances, rental losses may be added back.
These additions help ensure that MAGI reflects a more complete view of your income, which is crucial for determining eligibility for certain tax benefits.
How do you calculate MAGI?
Starting with the previously calculated AGI of $78,500:
Add the following items:
- Foreign earned income exclusion: $5,000
- Tax-exempt interest: $1,000
- Student loan interest deduction: $1,500 (added back)
- IRA contribution deduction: $3,000 (added back)
MAGI = AGI + (Foreign earned income + Tax-exempt interest + Student loan interest + IRA contribution)
MAGI = $78,500 + ($5,000 + $1,000 + $1,500 + $3,000)
MAGI = $78,500 + $10,500
MAGI = $89,000
How does AGI determine eligibility for tax credits and deductions?
AGI, or Adjusted Gross Income, determines your eligibility for many tax credits and deductions. Knowing your AGI is essential because it affects whether you qualify for specific tax benefits. You can increase your potential tax savings by reducing your AGI through allowable adjustments.
Here are some examples:
- Earned Income Tax Credit (EITC): This credit is aimed at low- and moderate-income workers and is based on your AGI.
- Child Tax Credit: If your AGI exceeds certain thresholds, the amount of this credit can be reduced.
- American Opportunity and Lifetime Learning Credits: These education-related credits also depend on your AGI.
- Medical and Dental Expense Deductions: These expenses can only be deducted if they surpass a certain percentage of your AGI.
How does MAGI affect eligibility for specific tax benefits and programs?
Modified Adjusted Gross Income (MAGI) is used to determine eligibility for various tax benefits and government programs.
Some examples include:
- Roth IRA Contributions: Your eligibility to contribute to a Roth IRA is based on your MAGI. If your MAGI exceeds certain limits, you may not be able to contribute.
- Premium Tax Credits: These credits help lower the cost of health insurance purchased through the Health Insurance Marketplace and are based on your MAGI.
- Education Credits: Credits such as the American Opportunity Credit and the Lifetime Learning Credit have MAGI limits.
- Medicare Part B and D Premiums: Higher-income individuals with a higher MAGI may have to pay higher premiums for Medicare Part B and Part D.
Why is it important to understand the difference between AGI and MAGI?
Understanding the difference between AGI and MAGI is crucial because they are used in different aspects of the tax system.
AGI is the starting point for determining your taxable income and your eligibility for various deductions and credits. On the other hand, MAGI is used to determine eligibility for specific tax benefits and government programs that AGI alone does not cover.
For example:
- AGI: Affects your eligibility for deductions like student loan interest, IRA contributions, and medical expenses.
- MAGI: Determines if you can contribute to a Roth IRA, qualify for premium tax credits for health insurance, and more.
Getting assistance from a tax professional is highly recommended. They can help you identify all possible deductions and credits you qualify for, maximizing your tax savings. Errors in calculating AGI or MAGI can lead to incorrect tax filings, penalties, and missed tax-saving opportunities; a professional can help you avoid these issues.
