Modified Adjusted Gross Income: How You Can Be Affected

Ken Weingarten |
Categories
Tax Planning
Medicare
IRA

Adjusted Gross Income (AGI) is an important line on a tax return which affects taxes owed. Common deductions are taken to arrive at this figure, e.g., IRA contributions, HSA contributions, educator expenses, etc. However, Modified Adjusted Gross Income (MAGI) requires that you add back some deductions and exclusions to qualify for certain credits, deductions, and retirement plans. Here, we will go over the add-back items to calculate MAGI as well as the notable tax benefits that rely on your MAGI.

MAGI Add-Backs

Per the IRS, your MAGI is essentially your AGI with the addition of deductions that were taken to arrive at your AGI, such as:

  • Tax-Exempt income
  • IRA contributions
  • HSA contributions
  • Educator expenses
  • Non-taxable Social Security payments
  • Student loan interest
  • ½ of self-employment tax
  • Passive loss or passive income
  • Foreign earned income exclusion
  • Income from US Savings Bonds
  • Rental losses

Tax Credits/Benefits Affected by MAGI

Depending on your MAGI, you may be eligible for certain tax savings/benefits. Some of the notable benefits are:

  • Roth IRA Contributions – If your MAGI is below certain threshold, you will be eligible to make direct contributions to a Roth IRA. Once above the threshold, you can make partial Roth contributions (subject to a phaseout), or resort to the backdoor Roth IRA contribution strategy.

  • Traditional IRA Contribution Deductions – If you or your spouse have qualified retirement plans and are trying to deduct IRA contributions, your MAGI may prevent you from taking advantage of the deduction.

  • Medicare Premiums – For 2022, the standard Medicare Part B monthly premium is $170.10. However, as your MAGI crosses certain income thresholds, you will be charged an additional premium, known as the Income Related Monthly Adjustment Amount (IRMAA). More on this topic is covered in an earlier blog.

 

Conclusion

As with most planning, taxes are usually at the center of common financial recommendations. Figuring out what deduction or benefits you are eligible for can get complicated. Consulting with a fee-only financial advisor or tax advisor can help you take advantage of the best tax strategies for your financial goals.

Weingarten Associates is an independent, fee-only Registered Investment Advisor in Lawrenceville, New Jersey serving Princeton, NJ as well as the Greater Mercer County/Bucks County region. We make a difference in the lives of our clients by providing them with exceptional financial planning, investment management, and tax advice.