Modified adjusted gross income (MAGI) represents your adjusted gross income (AGI), with the addition of certain deductions. Your AGI is your gross income less any allowable deductions, such as for retirement-plan contributions, student loan interest and health insurance premiums paid by self-employed individuals.
Calculating Your MAGI
Determining your MAGI is a three-step process.
- First figure your gross income for the year, which includes anything earned from wages, interest, dividends, rental income, capital gains and business income.
- Then, you calculate your AGI, which means subtracting from your gross income allowable deductions, as described above. Click here for a full list from the front of your Form 1040.
- To get your MAGI (step 3), you would add back to your AGI the value of certain deductions. Not everyone has these deductions so your MAGI and AGI could be the same. But they will be different if you have student loan interest, self-employment tax, IRA contributions and qualified tuition expenses, to name a few. (Click here for a fuller explanation from the IRS.) Typically, a taxpayer’s MAGI and AGI are similar.
MAGI is important for investors because it determines eligibility to contribute to a Roth IRA and the amount of Traditional IRA contributions that can be deducted from your taxes. With Traditional IRAs the amount of deductible contributions is based on your MAGI, filing status and whether you’re covered by an employer’s retirement plan at work.
MAGI and Qualifying for a Roth
To contribute to a Roth IRA, your MAGI must be below the limits specified by the Internal Revenue Service. If you’re within the income threshold, the actual amount you can contribute is also determined by your MAGI. Allowable contributions can be phased out for taxpayers whose MAGI exceeds the allowed limits.
If you contribute more than what’s allowed, based on your MAGI, to a Roth IRA, you would have to remove those excess contributions or face a tax penalty. Excess contributions are taxed at a rate of 6 percent per year for as long as the excess amount remains in your IRA. The deadline for removing excess contributions and avoiding the penalty is the due date of your individual income tax return, including any extensions you filed. Be sure to also remove any income those excess contributions earned.