Who is this MAGI person I keep hearing about?
If you’ve watched, listened or read my content long enough, you’ve no doubt come across the acronym MAGI, which stands for Modified Adjusted Gross Income.
MAGI is a special calculation of your income that’s used in determining your eligibility for certain credits, deductions, etc. on your tax return.
However, there are multiple MAGIs used throughout the tax code, and they’re all a bit different. No surprise the tax code makes things more convoluted than they need to be…
I’m aware of about a dozen different MAGIs, but I know there are more than that. To help clear up the confusion, I recently did a podcast episode dedicated to explaining the handful of MAGIs you’re most likely to come across in planning your retirement.
Also, for those who prefer content in video format, I did a YouTube video on this same topic over a year ago.
If you want to skip the podcast and video and get a Cliffs Notes version of the topic, keep reading!
As the name implies, Modified Adjusted Gross Income starts with Adjusted Gross Income (“AGI”) and then modifies it by adding in certain items or taking out other items.
AGI is basically all of your potentially taxable income summed up, and then reduced by certain adjustments you may be eligible for. For example, if you worked and earned wages, your wages would be included in your AGI. But then if you made a contribution to an IRA, that contribution would potentially reduce it.
On your 2021 tax return, you can find your AGI on line 11 of Form 1040.
The few MAGIs you’re most likely to see in planning for your retirement are:
- Eligibility to contribute to Roth IRAs – AGI minus any Roth conversions, plus any deductions for traditional IRA contributions. Plus there are also some deductions added back in for certain foreign income benefits, qualified education expense benefits and adoption expense benefits
- Eligibility to deduct traditional IRA contributions – The same as the MAGI above, but WITH keeping Roth conversions included
- Medicare premium surcharges aka Income Related Monthly Adjustment Amount (“IRMAA”) – AGI plus any tax-exempt interest, such as interest paid on municipal bonds held in a normal taxable brokerage account
- Net Investment Income Tax – AGI plus adding back in certain foreign income benefits
- Affordable Care Act (“ACA” or “Obamacare”) premium tax credits/subsidies – AGI plus any tax-exempt interest plus certain foreign income benefits plus the non-taxable portion of Social Security benefits
Unfortunately, these MAGIs are generally not shown on your tax return, so they may not be very evident to you. However, it’s important to be aware of them and what they are, so you can plan accordingly in case any of them will impact you.