Understanding Modified Adjusted Gross Income
It’s true that you won’t find your modified adjusted gross income listed on your Form 1040, but that doesn’t mean it’s not important. MAGI is a vital calculation for many taxpayers. Unfortunately, taxpayers may not be familiar with what modified adjusted gross income is or its impact on various potential tax benefits.
The calculation for MAGI can vary depending on what it is being applied to. The IRS uses this calculation to determine your eligibility for various tax deductions and credits, as well as retirement plan contributions, including:
Traditional IRA contribution deductibility
Roth IRA contribution levels
Premium Tax Credit eligibility
American Opportunity Credit eligibility
Lifetime Learning Credit eligibility
Child Tax Credit eligibility
Eligibility doesn’t just potentially lower your overall tax burden via the various tax credits mentioned above, it can also allow you to participate in an individual retirement account, known as an IRA. These accounts also offer tax advantages, either through tax-deductible contributions or tax-free withdrawals. Knowing what your MAGI is can help you determine how much you can contribute to these accounts without facing any penalties.
How to Use Your MAGI
Your modified adjusted gross income can help determine your eligibility for several benefits. Below is a look at how to use your MAGI to determine your eligibility for Traditional and Roth IRA contributions.
Roth IRA
A Roth IRA is a type of individual retirement account that requires after-tax contributions but typically offers tax-free distributions. Roth IRAs are different from Roth TSPs, they are a popular investment option for retirement and estate planning because withdrawals are potentially tax and penalty-free after you reach the age of 59 and a half. Additionally, unlike Traditional IRAs, Roth IRAs are not subject to Required Minimum Distribution rules.
The government does, however, have rules and limitations for Roth IRA contributions. Your allowable contribution amount will depend on your taxable compensation income received during the year, tax filing status, age, and modified adjusted gross income. If you’re married and filing separately, it also depends on whether you lived with your spouse at any point during the year. See the table below for 2022 Roth IRA contributions limits.
Tax Filing Status
MAGI
Roth IRA Contribution Limits
Single, head of household, or married filing separately (and didn’t live with spouse at any point in the year)
Less than $129,000
$6,000 or $7,000 if age 50 or over
$129,000 to $143,999
Reduced contributions
$144,000 and over
Zero contributions
Married filing jointly or qualified widow
Less than $204,000
$6,000 or $7,000 if age 50 or over
$204,000 to $213,999
Reduced contributions
$214,000 and over
Zero contributions
Married filing separately (and did live with spouse during the year)
Less than $10,000
Reduced contributions
$10,000 and over
Zero contributions
Despite these IRA contribution limits, there may be an opportunity to fund a Roth IRA by making a nondeductible Traditional IRA contribution and later converting it to a Roth IRA, even if your income exceeds the limits discussed above. This process, known as a backdoor Roth IRA conversion, can be quite technical and may not be advisable for everyone. If you are going to attempt a “backdoor” Roth Conversio n, it’s recommended to seek advice from a professional tax preparer or financial advisor to determine your eligibility and to understand all the tax implications involved.
How to Reduce Modified Adjusted Gross Income
If your MAGI is above the threshold to make a Roth IRA contribution, you can look for ways to reduce your MAGI. For example, you can consider increasing your tax deductible contributions to various employer offered benefits such as your 401k, health savings account and flexible spending accounts to the maximum allowable amount. This step, as well as a reduction in your taxable income, can help to lower your MAGI.
Traditional IRAs
Traditional IRAs are another type of individual retirement account. Unlike Roth IRAs, you are generally eligible to contribute to a Traditional IRA at any income level, as long as you (or your spouse) have received taxable compensation during the year. However, your contribution will be considered “deductible” or “nondeductible” based on various factors, such as your MAGI. For the 2022 tax year, you can contribute up to $6,000 ($7,000 if age 50 or older) to a Traditional IRA.
Deductible Traditional IRA contributions allow you to receive a current tax deduction, but you’ll be taxed on future distributions. Nondeductible contributions will not provide an immediate tax benefit, however you will receive tax-deferred growth. When you take your regular IRA distributions during retirement, you pay taxes on the growth, but any non-deductible contributions are treated as your basis. Since you effectively paid tax on the money when you made the contributions, you won’t have to pay tax on it again later.
The IRS determines the deductibility of your Traditional IRA contributions based on your MAGI, tax filing status, and whether you or your spouse are covered by a retirement plan at work, such as a 401k. See the following tables for 2022 Traditional IRA Deduction limits.
2022 Traditional IRA Deduction Contribution Limits – Covered by a Retirement Plan at Work
If Your Filing Status Is…
And Your Modified AGI Is…
Then You Can Take…
single or head of household
$68,000 or less
a full deduction up to the amount of your contribution limit.
single or head of household
more than $68,000 but less than $78,000
a partial deduction.
single or head of household
$78,000 or more
no deduction.
married filing jointly or qualifying widow(er)
$109,000 or less
a full deduction up to the amount of your contribution limit.
married filing jointly or qualifying widow(er)
more than $109,000 but less than $129,000
a partial deduction.
married filing jointly or qualifying widow(er)
$129,000 or more
no deduction.
married filing separately
less than $10,000
a partial deduction.
married filing separately
$10,000 or more
no deduction.
2022 Traditional IRA Deduction Contribution Limits – NOT Covered by a Retirement Plan at Work
If Your Filing Status Is…
And Your Modified AGI Is…
Then You Can Take…
single, head of household, or qualifying widow(er)
any amount
a full deduction up to the amount of your contribution limit.
married filing jointly or separately with a spouse who is not covered by a plan at work
any amount
a full deduction up to the amount of your contribution limit.
married filing jointly with a spouse who is covered by a plan at work
$204,000 or less
a full deduction up to the amount of your contribution limit.
married filing jointly with a spouse who is covered by a plan at work
more than $204,000 but less than $214,000
a partial deduction.
married filing jointly with a spouse who is covered by a plan at work
$214,000 or more
no deduction.
married filing separately with a spouse who is covered by a plan at work
less than $10,000
a partial deduction.
married filing separately with a spouse who is covered by a plan at work
$10,000 or more
no deduction.
It’s important to note that the IRS combines both Roth IRA and Traditional IRA contributions when calculating your overall contribution limit. For 2022, total contributions that you make to all of your traditional IRAs and Roth IRAs cannot be more than the lesser of $6,000 ($7,000 if you’re age 50 or older), or your taxable compensation for the year. For example, if you are under age 50 and qualify for full contribution limits and you make $4,000 in Roth IRA contributions, you can only make $2,000 in Traditional IRA contributions, for a total of $6,000.
If your contributions exceed your qualified limits, you must remove them. Otherwise, the excess amount is taxed at a rate of 6% per year. Fortunately, the IRS gives taxpayers until the tax filing deadline for the applicable tax year – often April 15 – to make final IRA contributions. This gives you plenty of time to determine your MAGI and IRA contribution limits before facing any unnecessary tax penalties.
How to Calculate Your Modified Adjusted Gross Income
To determine your Roth and Traditional IRA eligibility and contribution or deduction limits, you need to calculate your modified adjusted gross income. This calculation isn’t difficult, but it does require you to have your tax information readily available. The following three steps show how to calculate modified adjusted gross income.
Step 1: Calculate Adjusted Gross Income
In order to calculate your MAGI, you first need to determine your adjusted gross income for the tax year. Once you have finalized your income tax return, with the exception of your IRA contributions, you will know your adjusted gross income (AGI). Your AGI will be listed on Form 1040 and is the basis for determining your MAGI. Your AGI will include income items such as, but not limited to:
Wages
Tips
Commission
Self-employment income
Capital gains
Interest
Rents
Royalties
Retirement income
Farm income
Your adjusted gross income is also reduced by various qualified tax deductions, including but not limited to:
Direct contributions to a health savings account
Deductible Traditional IRA contributions
Health insurance premiums (if self-employed)
Self-employed retirement plan contributions
Moving expenses (if qualified member of the armed forces)
One-half of self-employment tax
Penalties for early withdrawal of savings
Qualified educator expenses
Qualified interest from student loans
Step 2: Calculate Modified Adjusted Gross Income
Now, to get your modified adjusted gross income, you need to add some deductions back into your income. Traditional and Roth IRAs require different adjustments for calculating MAGI. Please see the worksheets below provided by the IRS in Publication 590-A (2021), Contributions to Individual Retirement Arrangements (IRAs).
Traditional IRAs (note – line items referenced are for 2021 tax forms):
Roth IRAs (note – line items referenced are for 2021 tax forms):
MAGI vs. AGI
The IRS defines adjusted gross income (AGI) as gross income minus adjustments to income. Your AGI represents your taxable income amount for the year, which the IRS uses to calculate your tax liability. It factors in various tax deductions, such as self-employment tax, contributions to a Health Savings Account, and student loan interest. You calculate your AGI when completing your tax filing paperwork and can find it on Line 11 of Form 1040.
However, you won’t find your modified adjusted gross income on your tax returns. You also don’t use your MAGI to determine your taxable income. Instead, the IRS uses this figure solely to determine your eligibility for certain benefits, such as Traditional and Roth IRA contribution levels, child tax credit eligibility, and premium tax credit eligibility.
The way you calculate AGI and MAGI also varies significantly. You calculate your AGI by subtracting various deductions. However, you must add some of these deductions back into your adjusted gross income amount to calculate your modified adjusted gross income.
In many cases, a person’s AGI and MAGI are very similar because many of the relevant deductions don’t impact them. However, this isn’t always the case, so it’s very important that you understand the difference between your gross income, adjusted gross income, and modified gross income and how to calculate each amount.
How to Find Modified Adjusted Gross Income
Unfortunately, there isn’t a specific location on your income tax return that lists your modified adjusted gross income. However, you can find your adjusted gross income on Line 11 of your Form 1040. In general, your AGI will always be the starting point for calculating your MAGI.
Our Take
Knowing how to calculate your modified adjusted gross income is crucial for both retirement planning and tax preparation. As previously mentioned, there is not a standard calculation for MAGI, and the calculation will vary depending on what benefit or tax item it is being applied to. Understanding how to calculate your MAGI may help to ensure you are receiving all tax benefits, credits and deductions you are eligible for, as well helping to maximize your retirement saving strategy.
Consider talking to a fee-based fiduciary financial advisor to learn more about leveraging your income levels to make the most of these benefits.
