What is it and how to calculate it

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What is modified adjusted gross income (MAGI)? Definition

Modified Adjusted Gross Income (MAGI) is your Adjusted Gross Income (AGI) with some adjustments (modifications) added. If you want to know if you are entitled to certain tax benefits, you will need to know your modified adjusted gross income.

To determine your MAGI, you need to understand a few terms:

  • Gross revenue : Any money you make, whether it’s a 9 to 5 job, tips, rental income, retirement distributions, taxable interest, or dividends.
  • Adjusted gross income: Your gross income after subtracting tax-deductible expenses, such as IRA deductions and health insurance if you are self-employed.

How to calculate modified adjusted gross income

After determining your gross income and adjusted gross income, you can easily calculate your modified adjusted gross income.

Take your adjusted gross income from your Form 1040. Now add back some of the deductions that were made, such as:

  • The deductions you made for student loan interest and tuition.
  • Half of the self-employment tax.
  • Foreign income that has been excluded.
  • Losses of a listed partnership.
  • Deductions you took for your IRA contributions.

How your modified adjusted gross income affects you

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a person brushing their teeth: during your lifetime, you will earn a limited amount of money.  Likewise, you have limited time to devote.  When you are thinking about your financial goals, how you want to spend your time is of the utmost importance.  Would you like to: Work more to increase your income so that you can save more now?  Find a second job to have even more chances of taking early retirement?  Enjoy life now, but work a little longer (maybe it doesn't matter if you really enjoy your job)?  Dramatically reduce your expenses to save as much as possible?  Your income, what you spend, and what you save are all tied to your financial and lifestyle choices.

Once you know your MAGI, you will know if you are entitled to certain tax benefits and / or if you will be able to benefit from a tax deduction for things such as tuition fees. Your MAGI will also determine whether you can make tax-deductible contributions to your individual retirement account. These options – and knowing your MAGI – are important because they could help you financially.

For example, your MAGI can help you determine:

  • That you can contribute to a Roth IRA.
  • If you are able to deduct traditional IRA contributions, depending on whether you or your spouse have a retirement plan from their employer.
  • If you are eligible for a premium tax credit you can use for Medicare plans.

The MAGI limit for certain eligible tax deductions, such as contributions to Traditional IRAs and Roth IRAs, may change each year. For example, from tax year 2020 to tax year 2021, the MAGI limit governing when deductions for traditional IRA contributions start to disappear has increased by $ 1,000. The MAGI limit for Roth IRA contributions has increased by $ 2,000 for a married couple filing jointly. The 2021 limits have been included in the instructions for 2020 tax returns, notifying taxpayers of the changes in advance.

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Modified adjusted gross income (MAGI) vs adjusted gross income (AGI)

The numbers are similar, but they will be slightly different and have a different impact on your taxes. While the AGI is used to determine your eligibility to claim the deductions and credits available through your tax return, MAGI is used to determine what portion of your IRA contribution is tax deductible and whether a taxpayer can be eligible for premium tax credits.

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