What it means
Adjusted gross income (AGI) is the figure on a US tax return after certain deductions, such as contributions to some retirement accounts, are subtracted from total income. Modified adjusted gross income takes that figure and adjusts it again.
The purpose is to give a fuller picture of a taxpayer's financial position for the programme in question. There is not a single MAGI.
Different parts of the tax code define it differently, so the figure used to test eligibility for a retirement account contribution can differ from the one used for health insurance subsidies. Common add-backs include tax-exempt interest, foreign earned income that was excluded, and the student loan interest deduction.
MAGI matters because it acts as a gate. Crossing a threshold can reduce or eliminate eligibility for credits, limit the amount a person can contribute to certain accounts or increase the premiums paid for some health plans.
The thresholds are adjusted regularly, so the figures should always be checked against current official guidance. Planning around MAGI is a common part of tax and financial advice.
Timing income, making deductible contributions or realising gains in a different year can bring a household below a threshold. This must be balanced against other consequences, since a step taken to lower MAGI in one area may have effects elsewhere.
For readers outside the United States, the concept is similar to the income tests used in many countries to target benefits. The detailed rules, however, are specific to US tax law, so employers with US staff and anyone completing a US return need to follow the official definition that applies to each item.
In practice, most people never calculate MAGI by hand. Tax software or the worksheet in the official instructions walks through each add-back line by line, and an adviser can run what-if tests before the year ends.
The risk is usually not the arithmetic but using the wrong worksheet for the benefit being claimed.
In practice
Real-world examples
Example 1
A couple filing jointly checks whether they can contribute to a Roth individual retirement account. Their adviser calculates MAGI using the definition for that purpose and compares it with the published phase-out range. They find they are just below the range and can contribute in full.
Example 2
A self-employed designer applies for a subsidised health insurance plan through a marketplace. Her estimated MAGI for the year determines the size of the tax credit. When her income rises midyear, she updates her estimate to avoid repaying part of the credit later.
Example 3
A retiree receives tax-exempt municipal bond interest that does not appear in his taxable income. His adviser points out that it is added back for certain tests, which pushes his MAGI above a threshold for higher Medicare premiums. He changes the mix of his investments for future years.
Think of it
Imagine a weight-loss competition where people are weighed while wearing heavy boots. To make the contest fair, the judges calculate your weight without the boots, but then add back the heavy jacket you were wearing because it hides your actual size.
Formula
Calculation
MAGI = Adjusted gross income + Specified add-backs
Suppose, using a definition that adds back tax-exempt interest and untaxed foreign income, a taxpayer has an adjusted gross income of $60,000, tax-exempt interest of $4,000 and excluded foreign income of $6,000. MAGI = 60,000 + 4,000 + 6,000 = $70,000. If an income threshold for a particular benefit were $65,000, the taxpayer would be $5,000 over it, since 70,000 - 65,000 = $5,000. The threshold and the add-backs are illustrative and differ by rule.Case study
Seen in the real world
Brookfield Household is an illustrative, fictional couple, Daniel and Priya, who earn $118,000 together, with adjusted gross income of $112,000 after a deductible retirement contribution. They also receive $3,000 of tax-exempt interest and claim a $2,000 student loan interest deduction.
Using a definition that adds back the student loan interest deduction, their MAGI for one benefit is 112,000 + 2,000 = $114,000. For another benefit that also adds back tax-exempt interest, it is 112,000 + 2,000 + 3,000 = $117,000. They discovered that the second figure took them $2,000 over a $115,000 threshold.
By increasing their deductible retirement contribution by $2,500, they brought the figure back below the limit. The illustrative lesson is that MAGI depends on which rule is being tested, so the calculation must follow the correct definition each time.
Watch out
Common mistakes
- Assuming there is one universal MAGI, when different tax rules add back different items.
- Using last year's thresholds, when limits are updated and phase-out ranges change.
- Forgetting that income such as tax-exempt interest, though not taxed, can still count towards the tests.
Questions
People also ask
Is MAGI the same as taxable income?
No, taxable income is the amount on which tax is calculated after deductions, while MAGI is an eligibility measure that starts from adjusted gross income and adds items back.
Where do I find my adjusted gross income?
It appears on the main US tax return form, and MAGI is then worked out using the worksheet or instructions for the specific benefit.
Can I lower my MAGI?
Sometimes, for example through deductible retirement contributions or health savings account contributions, but eligibility rules and limits apply, so a tax professional should confirm.