What is Modified Adjusted Gross Income?

In the most basic terms, modified adjusted gross income is defined as your adjusted gross income (AGI) with certain adjustments added back in. I kid you not. I guess it would sound silly calling it “adjusted adjusted gross income,” and modify and adjust mean roughly the same thing. Your modified adjusted gross is used to determine which tax benefits you qualify for, like IRA contribution limits, Health Insurance Marketplace plans, and others.

Now get this: The tricky thing about your modified adjusted gross is that there’s no one set formula to calculate it! It’s calculated differently depending on what it’s being used for. Only one factor remains constant: each MAGI calculation starts with your adjusted gross income.

AGI and MAGI are, of course, closely related. In fact, it’s not uncommon for your MAGI to be the same as your AGI. They’re both adjustments—er, modifications—of your gross income used by the IRS to determine your eligibility for certain tax credits and deductions that can lower your taxes, putting more money back in your bank account (or pocket). After reviewing the research for this article, I’ve come to view MAGI simply as a way for the federal government to more precisely filter who qualifies for those tax-lowering credits and other deductions.

Here are the key differences between AGI and MAGI:

• AGI is your gross income minus all eligible “above-the-line” tax adjustments. (For more about AGI, read “What is Adjusted Gross Income?”) MAGI is your AGI with some of those adjustments added back.
• There is one set calculation to determine your AGI, whereas calculating your MAGI differs depending on which adjustments you add back in to see if you’re eligible for a specific tax break or government program.
• MAGI does not appear as a single line on your tax return, but your AGI can be found on line 8b of your Form 1040.

One important thing to remember about your MAGI is that it’s not your salary. In other words, many of the income limits for determining your eligibility for tax credits and deductions, contributing to a Roth IRA, or even getting health insurance are not based on your actual wages, but your MAGI (or AGI, depending on the tax break). Since your MAGI is typically lower than your gross income, it increases your chance to qualify for tax breaks and so on. So, don’t assume you’re not eligible for a specific tax break because you think your gross income is too high. Calculate your MAGI first—you might qualify.

Keep an eye out for MAGI’s role in the following:

Qualifying for tax credits. Generally speaking, the lower your MAGI, the more likely you are to qualify for certain tax credits (assuming you meet all other qualifications as well). Some common tax credits that rely on your MAGI include the Health Care Tax Credit,¹ Child Tax Credit,² American Opportunity (Education) Tax Credit,³ and Lifetime Learning Credit.⁴ 

Itemizing deductions on taxes. If you choose to itemize deductions when filing your taxes, there’s a chance you’ll have to calculate your MAGI at least once. When it comes to deductions, MAGI is often used to determine at what point certain tax deductions will begin to phase out or be reduced.⁵ For example, if you and/or your spouse is covered by a retirement plan at work and you also have a Traditional IRA, you can’t deduct your Traditional IRA contributions if your MAGI exceeds the IRS’ set limit.

Contributing to a Roth IRA. Your MAGI directly affects how much you can contribute to a Roth IRA. The IRS uses MAGI as a baseline for determining the point at which your income is deemed too high to contribute the full amount—or any amount at all. For example, if you’re a single filer with a MAGI of less than $122,000 you can contribute the full limit to your Roth IRA. Between $122,000 and $137,000 your contribution limits are reduced, and a MAGI over $137,000 means you cannot contribute.⁶

Getting health insurance. If you get your health insurance coverage through a state health insurance marketplace, you may already be familiar with MAGI. Your MAGI is used to determine which health care plans you are eligible for, including Medicaid. The marketplace also uses your MAGI to help determine if—and how much—you can save on health insurance plans.⁷

Every MAGI calculation depends on why you need to calculate it. The government provides appropriate instruction forms for whichever purpose you’ll need. Some adjustments you might add back include tax-exempt student loan interest, foreign earned income, or higher education costs. Here are a few examples of how MAGI is calculated:

• Health Care (aka Premium) Tax Credit: MAGI is your AGI plus any excluded foreign income, nontaxable Social Security Benefits, and tax-exempt interest.⁸
• Traditional IRA Tax Contribution Deduction: MAGI is your AGI plus any student loan interest, domestic production activities, foreign earned income exclusion and/or housing exclusion, foreign housing deduction, excludable savings bond interest, and employer-provided adoption benefits.⁹
• American Opportunity Credit: MAGI is your AGI plus any foreign earned income exclusion, housing exclusion, foreign housing deduction, and any income excluded from Puerto Rico or American Samoa.¹⁰