MAGI, or Modified Adjusted Gross Income, is a calculation of your income used to determine eligibility for certain tax credits and deductions, as well as various government programs, most notably health insurance subsidies. For many individuals, MAGI is very similar or identical to their Adjusted Gross Income (AGI).
Understanding Modified Adjusted Gross Income (MAGI)
MAGI is fundamentally your Adjusted Gross Income (AGI) with specific types of untaxed income added back. It's a crucial figure because many income-based eligibility thresholds are tied to MAGI rather than just your AGI or gross income.
How is MAGI Calculated?
To calculate your MAGI, you start with your Adjusted Gross Income (AGI) and then add back certain income types that are typically not included in AGI.
Components typically added to AGI to get MAGI include:
- Untaxed foreign income: Income earned from sources outside the United States that is not subject to U.S. income tax.
- Non-taxable Social Security benefits: Portions of Social Security benefits that are not considered taxable income.
- Tax-exempt interest: Interest income received from sources like municipal bonds that is exempt from federal income tax.
What MAGI does NOT include:
- Supplemental Security Income (SSI): This benefit, provided by the Social Security Administration, is explicitly not included in MAGI calculations.
For a clearer picture, here's a simplified breakdown:
| Income Category | Included in AGI? | Added Back for MAGI? |
|---|---|---|
| Gross Income (most types) | Yes | N/A |
| Untaxed Foreign Income | No | Yes |
| Non-Taxable Social Security | No | Yes |
| Tax-Exempt Interest | No | Yes |
| Supplemental Security Income | No | No |
(Note: This table simplifies the calculation for illustrative purposes. AGI itself is gross income minus specific deductions, and then MAGI builds on that AGI figure.)
Why is MAGI Important?
MAGI is a key figure used by various government agencies and programs to assess an individual's or family's financial standing and determine eligibility. Some common uses include:
- Affordable Care Act (ACA) Subsidies: Eligibility for premium tax credits and cost-sharing reductions on health insurance marketplaces is based on MAGI. This is one of the most common reasons people need to understand their MAGI.
- Medicare Premiums: High-income earners may pay higher Medicare Part B and Part D premiums, a surcharge known as the Income-Related Monthly Adjustment Amount (IRMAA), which is determined by MAGI from two years prior.
- Tax Deductions and Credits: Certain tax benefits, such as the Retirement Savings Contributions Credit (Saver's Credit) and the deduction for student loan interest, have income limitations that reference MAGI.
- IRA Contributions and Deductions: Eligibility to contribute to a Roth IRA or deduct traditional IRA contributions can be limited based on your MAGI.
Understanding your MAGI is crucial for financial planning, especially when considering healthcare options or tax planning strategies. You can often find detailed information about MAGI and its specific applications on government websites like HealthCare.gov or the IRS website.
