This post was originally published March 26th, 2018. It has recently been updated to give you more recent information on MAGI and how it can affect your taxes.
There’s an important tax calculation that will never show up on any of your tax forms, but it can make the difference between owing money and getting a refund. That calculation Is your MAGI – Modified Adjusted Gross Income.
And if you’ve been getting locked out of taking some tax deductions, receiving tax credits, or benefiting from certain retirement savings options, that all comes down to your MAGI. If you get hit with extra taxes, like the net investment income tax (NITT), that’s because of MAGI. And it can also affect whether or not you’re eligible for certain government benefits
So what exactly is MAGI? It’s a tweak on regular AGI (adjusted gross income). Technically, it’s designed to keep high-earners from reaping certain tax advantages, like deductions for IRA contributions and student loan interest or making Roth IRA contributions. But depending on the circumstances, it can affect almost anyone.
Will You Be Affected By MAGI?
While MAGI calculations are supposed to be aimed toward high earners, that’s not always how it works out.
Who else can get hit by MAGI lockouts?
- Anyone who’s self-employed or owns a business, whether it’s full-time or a side hustle
- Someone who’s paying for college
- People with a lot of investment income
- Retirees
- People using the married filing separately tax filing status
If any of these situations apply to you, you need to get more familiar with MAGI.
How Is MAGI Calculated?
MAGI is an extra weird tax calculation. It’s done differently depending on the purpose of the calculation. In fact, you could have multiple MAGI results in a single tax return. {The U.S. tax code, folks, never skips an opportunity to be extra complicated and confusing for no reason.)
All MAGI calculations start with your AGI. Then, depending on the purpose of the MAGI calculation, certain tax items get added back. Potential MAGI add-backs include:
- Half of your self-employment tax
- Qualified tuition expenses deducted
- Deductible student loan interest
- Tuition and fees deduction
- IRA contributions
- Passive or rental losses
- Foreign earned income (which you may have if you invest in global investment funds)
- Passive losses
- Non-taxable Social Security
Those add-backs can make your MAGI higher than your AGI. And higher MAGI could make you ineligible for things like making Roth IRA contributions, deducting traditional IRA contributions, and deducting student loan interest. It can make your Social Security benefits taxable. It can phase you out of the full Child Tax Credit or increase your taxes by tacking on the NIIT. And it can also increase your Medicare premiums.
Bottom line: A higher MAGI means a higher tax bill for you.
Want to Find Out How Your MAGI May Affect Your Tax Bill?
I explain MAGI, as well as how to make sure your MAGI doesn’t negatively impact your bottom line in my book, Taxes 101.
Plus, you’ll discover the many different ways you can lower your tax bill through tax credits and deductions. This book is designed to help you become more financially literate and independent, so you can always use the tax laws correctly to ensure you’re not paying the IRS a penny more than you need to.
Click on the button below to learn more about Taxes 101 and get your copy now.