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This number determines if you can contribute to a Roth

This number determines if you can contribute to a Roth IRA

Quick Summary

  • To calculate your modified adjusted gross income (MAGI), take your adjusted gross income (AGI) and add back certain deductions.
  • In some cases, MAGI and AGI are identical.
  • Your MAGI determines if—and how much—you can contribute directly to a Roth IRA.

Modified adjusted gross income (MAGI) is an important number. First of all, it determines whether you can contribute directly to a Roth IRA and if you can deduct IRA contributions. In addition, MAGI determines your eligibility for certain education tax benefits and income tax credits. Furthermore, it’s used to determine your eligibility for income-based Medicaid and subsidized health insurance plans on the Health Insurance Marketplace.

Still, as important as this number is, you won’t find it on your tax return. Therefore, you’ll have to do some number crunching. Here’s how.

How to Calculate Your Modified Adjusted Gross Income

Determining your MAGI is a three-step process:

  1. Figure your gross income for the year.
  2. Calculate your adjusted gross income (AGI).
  3. Add back certain deductions to find your MAGI.
Figure your gross income for the year

Your gross income includes everything you earned from:

  • Alimony
  • Business income
  • Farm income
  • Investment income
  • Rental income
  • Retirement income
  • Wages

Your gross income appears on line 7b of the newly redesigned Form 1040

Calculate your AGI (or find it on your tax return)

Your adjusted gross income is equal to your gross income, less certain tax-deductible expenses, including:

  • Certain business expenses for performing artists, reservists, and fee-basis government officials.
  • Educator expenses.
  • Half of any self-employment taxes.
  • Health insurance premiums (if you’re self-employed).
  • Health Savings Account (HSA) contributions.
  • Moving expenses for members of the Armed Forces.
  • Penalities on early withdrawal of savings.
  • Retirement plan contributions (including IRAs and self-employed retirement plan contributions).
  • Student loan interest.
  • Tuition and fees.

You can do the math to figure out your AGI. Or you can look it up on your federal tax return. You’ll find it on line 8b of Form 1040

Add back certain deductions

To find your MAGI, take your AGI and add back any deductions you took for:

  • Half of any self-employment taxes.
  • IRA contributions and taxable Social Security payments.
  • Losses from a publicly traded partnership.
  • Passive income or loss.
  • Qualified tuition expenses.
  • Rental losses.
  • Student loan interest.
  • The exclusion for adoption expenses.
  • The exclusion for income from U.S. savings bonds.
  • Tuition and fees.

Not everyone has these deductions, so your MAGI and AGI could be the same. Typically, a taxpayer’s MAGI and AGI are similar.

Why MAGI Matters

MAGI is important for investors because it determines your eligibility to contribute to a Roth IRA. At the same time, it affects the amount of traditional IRA contributions you can deduct from your taxes. With traditional IRAs, the amount you can deduct 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 IRS. If you’re within the income threshold, the actual amount you can contribute is also determined by your MAGI. If your MAGI exceeds the allowed limits, your contributions are phased out.

Of course, if you contribute more than what’s allowed, you have to remove the excess contributions. Otherwise, you’ll face a tax penalty. Excess contributions are taxed at a rate of 6% 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. If you filed an extension, it’s that date. Finally, be sure to also remove any income those excess contributions earned.

 

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