Most taxpayers are used to seeing the term adjusted gross income, or AGI, when filing their tax returns. This is mostly due to the fact that your AGI dictates which tax credits and deductions you qualify for. While the term modified adjusted gross income, or MAGI, is not heard as often, it too plays a big role in determining eligibility for some tax credits and deductions. Here’s a breakdown of AGI and MAGI and how they affect your taxes.
What is AGI?
The IRS defines adjusted gross income (AGI) as gross income minus adjustments. To break this down even further, gross income is the sum of your wages, dividends, capital gains, business income, retirement distributions, interest earned, and other income. The IRS allows you to reduce this figure by subtracting certain allowable deductions including, but limited to:
- Self-employed health insurance payments
- Half of self-employment taxes
- IRA plan contributions
- Self-employed retirement plan contributions
- Health savings account (HSA) deductions
- Tuition and fees
- Student loan interest
How does AGI affect my taxes?
Your AGI is important because it will determine your eligibility for several tax credits, such as:
- The Child Tax Credit
- The Earned Income Tax Credit
- The American Opportunity Tax Credit
- The adoption tax credit
- The Lifetime Learning Credit
- The Child and Dependent Care Credit
When it comes to tax deductions, your AGI will also play a major role. For example, the amount of cash contributions made to charity you can deduct is generally up to 60% of your AGI. In addition, you can deduct medical expenses that exceed 7.5% of your AGI. That said, your AGI, combined with the number of eligible deductions, will greatly determine if it’s best to itemize your deductions rather than taking the standard deduction.
What is MAGI?
Modified adjusted gross income (MAGI) is your adjusted gross income after adding back certain tax deductions. These deductions can include:
- Student loan interest
- Half of self-employment tax
- Some tuition expenses
- Passive loss or income
- IRA contributions
- Tuition and fees
- Foreign earned income exclusion
- Foreign housing exclusion
- Rental losses
- Non-taxable social security payments
- Adoption exclusions
- Losses from publicly traded partnerships
Some of these tax deductions can be uncommon so your MAGI may not differ from your AGI much.
How does MAGI affect my taxes?
Your MAGI may not be listed on your tax return like your AGI, but your MAGI does help determine your eligibility for some tax deductions. Most notably, it determines how much of your IRA contributions are deductible, if any and up to the $6,500 limit. The rules for how much you can deduct based on your MAGI are as follows:
| Single, or Head of Household | MAGI of $73,000 or less | Full deduction |
| Single, or Head of Household | MAGI of $73,001 to $82,999 | Partial deduction |
| Single, or Head of Household | MAGI of $83,000 or more | No deduction |
| Married Filing Jointly, or Qualified Widow | MAGI of $116,000 or less | Full deduction |
| Married Filing Jointly, or Qualified Widow | MAGI of $116,001 to $135,999 | Partial deduction |
| Married Filing Jointly, or Qualified Widow | MAGI of $136,000 or more | No deduction |
| Married Filing Separately | MAGI of less than $10,000 | Partial deduction |
| Married Filing Separately | MAGI of $10,000 or more | No deduction |
Additionally, your MAGI may determine your eligibility for premium tax credits that help lower your health insurance costs and the amount of student loan interest you may deduct.
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Taxes can get complicated, even more so when you owe the IRS. Figures like AGI and MAGI can play a big role in your tax savings, so understanding how they both work is critical. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
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