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This article was fact-checked by our editors and a member of the Credit Karma Tax® product specialist team, led by Senior Manager of Operations Christina Taylor. It has been updated for the 2020 tax year.
You may know that you can have multiple types of income, but for tax purposes, you can also have varying types of calculated income. Modified adjusted gross income, or MAGI, is one of them.
It’s important to understand how the IRS treats income, including how different calculations around income affect the amount of tax you must pay. MAGI helps determine eligibility for certain tax breaks, so knowing yours can help you understand if you qualify for specific tax credits or deductions, or if you can contribute to certain types of tax-advantaged accounts.
Let’s look at what MAGI is, how it works and how it can affect your federal income taxes.
- What is MAGI and how is it different from other types of income?
- How do I calculate MAGI?
- When will I need to know my MAGI?
If you have the fortitude to read the instructions that come with the 1040 federal income tax return, you’ll find different types of income mentioned throughout, including total income, gross income, adjusted gross income and modified adjusted gross income. Although they’re similar, and they’re all based on your income for the tax year, they do have important differences.
Your gross income is simply the total of all the money you made in the year, including from your regular paychecks, interest you earned from your bank accounts and even gambling winnings. It’s more than just cash, though. It can also include property you receive and goods and services that aren’t exempted from tax.
Adjusted gross income, or AGI, on the other hand, is calculated by subtracting certain adjustments from your gross income, like student loan interest or IRA contributions you’ve made from your taxable income.
Adding some of those adjustments back into AGI helps you calculate your modified adjusted gross income.Learn more about adjusted gross income
MAGI gets calculated on an individual basis for each situation where you need it.
The exact MAGI calculation will vary for each case. But the forms needed to claim certain deductions or credits where MAGI is a factor should include the instructions to calculate your MAGI (or point you in the right direction).
For example, if you’re calculating your MAGI to see if you’re eligible to deduct your traditional IRA contributions, the worksheet you’re directed to will have you add back your student loan interest deduction (if you took one), any money an employer paid toward helping you adopt a child, and any income you earned working in a foreign country, among other things.
But if you’re figuring MAGI for the lifetime learning credit, you’ll follow that specific MAGI worksheet, which directs you to add different adjustments back to AGI, like the foreign housing deduction and any income earned as a resident of Puerto Rico.
So you can have several MAGIs, each one related to whichever tax break you’re trying to claim.
Figuring out your MAGI may seem complicated, but it’s still worth doing if it means finding out whether you qualify for certain tax breaks. Here are a few situations in which MAGI matters.
If you adopted a child this year, your MAGI could qualify you for an adoption tax credit for adoption expenses you paid. To qualify for the full credit in 2020, your MAGI needed to be $214,520 or less. If your MAGI was less than $254,520, you could still claim a partial amount of this tax credit. But if your MAGI exceeded that limit, you couldn’t get the credit.
Child tax credit
Another parenthood-related credit, the child tax credit, is also affected by MAGI. If you’re eligible for the credit, you may be able to claim up to $2,000 per qualifying child on your federal return. But your MAGI (as well as other factors) will affect whether you qualify for the full amount of the credit, a reduced amount or not at all.
The government offers certain tax breaks when you save for retirement, but you’ll need to navigate its rules first. That’s where your MAGI comes in.
If your MAGI is less than a certain amount, you may be able to contribute to a Roth IRA retirement plan, which offers several advantages. You can also choose to save in a traditional IRA, and depending on your MAGI you may be able to deduct these contributions from your taxable income — provided you meet other requirements. These MAGI thresholds vary depending on your income and filing status.
If you purchase health insurance through a health insurance marketplace created by federal law and meet the MAGI requirements, you may qualify for a subsidy to help make your premiums more affordable. Similarly, your eligibility for Medicaid is also determined by your MAGI.
Your MAGI helps determine your eligibility for two important education-related tax benefits: the lifetime learning credit or the American opportunity credit. If you qualify for them, these tax credits give you back up to $2,000 or $2,500 on your taxes, respectively.
And if you’re repaying student loans, you might be able to deduct up to $2,500 in interest payments from your taxable income, provided you meet all qualifications. But the deduction is only available if your MAGI is less than $85,000 for single filers ($170,000 for joint filers).
Even though you only really need to calculate your MAGI at the end of the year when you’re filing your taxes, it pays to keep an eye on which tax deductions and credits you might qualify for based on your MAGI throughout the year. For example, if you’ve been contributing to a Roth IRA and you get a big raise at work that boosts your income into a higher tax bracket, your MAGI might be too high to allow you to continue saving in that IRA. In that case, knowing your MAGI sooner rather than later could help you avoid contributing too much and facing a penalty for it.
Finally, you’re not alone in thinking that calculating your MAGI is an exercise in patience. The good news is that if you use an online tax preparation and filing service like always-free Credit Karma Tax®, the software will typically do MAGI calculations for you (based on your inputs) when you need it.
Christina Taylor is senior manager of tax operations for Credit Karma Tax®. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She codeveloped an online DIY tax-preparation product, serving as chief operating officer for seven years. She is an Enrolled Agent and the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s degree in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.