Modified Adjusted Gross Income
What is Modified Adjusted Gross Income?
Modified adjusted gross income (MAGI) is used to determine whether an individual can qualify for certain tax deductions. It is also used to determine how much of the IRA contribution is deductible and if the individual is eligible for premium tax credits. The higher a person’s modified adjusted gross income is, the more the deductible amount is reduced. This can potentially be reduced to zero. In this case, a person is still able to contribute to an IRA plan, but the whole amount won’t be tax deductible. Many times, an individual’s MAGI will be similar to their adjusted gross income (AGI). However, it’s possible for there to be small differences. These differences greatly affect the overall tax return, as they dictate whether an individual is able to receive certain benefits.
How to Calculate Modified Adjusted Income
To begin, gross income is calculated. Gross income is an individual’s total income earned. This includes any wages, interest, dividends, capital gains, business income, rental and royalty income, and other similar activities.
After the gross income is calculated, the adjusted gross income must be calculated. To do this, an individual must subtract any of the qualified deductions from the gross income. These deductions are found on the front page of the tax form 1040. They are made up of standard adjustments, such as contributes to a retirement plan, self-employed health insurance plans, tuition for higher-education, and student-loan interest. The AGI is calculated before any deductions, credits, or exemptions are considered. Adjusted gross income decides tax credits and deductions an individual can apply for.
Finally, to calculate the MAGI, certain deductions are added back to the adjusted gross income. It is uncommon for a person’s MAGI to greatly differ from their AGI. Your MAGI determines whether you can take full advantage of premium tax credits.