Meaning of “adjusted gross income” in the English Dictionary
(Definition of “adjusted gross income” from the Cambridge Business English Dictionary © Cambridge University Press)
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How to Calculate Modified Adjusted Gross Income (MAGI)
The Affordable Care Act (ACA) introduced premium tax credits to give you and your family a discount to buy individual health insurance coverage through the Health Insurance Marketplace. If you are eligible, these tax credits can reduce your family’s health insurance cost to no higher than 9.5 percent or as low as 2 percent of your household income . Before you can calculate the amount of your premium tax credit, you must first calculate your modified adjusted gross income (MAGI).
Note: Keep in mind that premium tax credits can work with reimbursement plans like the Small Business HRA, but that you must report your HRA allowance amount to avoid tax penalties.
Your MAGI is a measure used by the IRS to determine if you are eligible to use certain deductions, credits (including premium tax credits), or retirement plans. Eligibility for the premium tax credits is based upon whether your income is no more than 400 percent of the federal poverty line (FPL)—modified adjusted gross income, not adjusted gross income (AGI). Here's a quick overview of how to calculate your modified adjusted gross income.
Generally, your adjusted gross income is your household's income minus various adjustments. Adjusted gross income is calculated before the itemized or standard deductions, exemptions, and credits are taken into account.
Generally, your modified adjusted gross income (MAGI) is the total of your household's adjusted gross income plus any tax-exempt interest income you may have (these are the amounts on lines 37 and 8b of IRS from 1040).
Your gross income (GI) is the money you earned through wages, interests, dividends, rental and royalty income, capital gains, business income, farm income, unemployment, and alimony. This is the basis for your AGI calculation.
Gross income includes salary, interest earned, income from investments, and basically any income you made through business, trade, or investments.
Once you have gross income, you "adjust" it to calculate your AGI. You make adjustments by subtracting qualified deductions from your gross income.
Adjustments can include items like some contributions to IRAs, moving expenses, alimony paid, self-employment taxes, and student loan interest. There are many free AGI calculators available online.
How to Calculate Your Modified Adjusted Gross Income
Once you have adjusted gross income, you "modify" it to calculate your MAGI. For most people, MAGI is the same as AGI.
Specifically, Internal Revenue Code ((d)(2)(B)) states that MAGI is AGI increased by:
Any amount excluded from gross income in section 911 (Foreign earned income and housing costs for qualified individuals)
Any amount of interest received or accrued by the taxpayer during the taxable year which is exempt from tax
Any amount equal to the portion of the taxpayer’s social security benefits (as defined in Section 86 (d)) which is not included in gross income under section 86 for the taxable year. (Any amount received by the taxpayer by reason of entitlement to a monthly benefit under title II of the Social Security Act, or a tier 1 railroad retirement benefit.)
The IRS phases out credits (including premium tax credits) and deductions as your income increases. By adding MAGI factors back to your AGI, the IRS determines how much you really earned.
Based on that, it determines whether you can take full advantage of premium tax credits. If you are eligible for a tax credit, an online premium tax credit calculator will help you estimate your actual tax credit.
Editor's Note: This post was originally published in August 2014.
Do you have any questions about premium tax credits? Please leave a comment below.
Adjusted Gross Income (AGI) Vs. Modified Adjusted Gross Income (MAGI)
Once a year, when tax time comes around, you get the terms gross income, adjusted gross income (AGI), and modified adjusted gross income (MAGI) shoved in your face… a lot. And since you’re only faced with having to know what these somewhat ambiguous tax terms mean once a year, they are very easy to forget. Heck, I already did.
So, what I’m going to do in this post is highlight what each of these terms mean, where you will encounter them, and why they are important to know so that you can refer back to this post in the future when the ambiguity returns.
We’ll start with the easy one. Gross income is simply the total money, or income, that you receive per year before any deductions and taxes are taken out. Gross income is also referred to as ‘gross earnings’, ‘total income’, or simply ‘gross’. At first, you might just think, OK, it’s my salary, simple enough. Not quite. The IRS factors all of the following income sources into your gross income, and it runs from line 7 to line 21 of your 1040. Gross income is the net sum of the following:
- taxable interest
- ordinary dividends
- taxable refunds, credits, or offsets of state and local income taxes
- alimony received
- business income or loss
- capital gains or losses
- other gains or losses
- taxable IRA distributions
- taxable pensions and annuities
- rental real estate
- farm income or losses
- unemployment compensation
- taxable social security benefits
- and other income
All of these income sources add up to the ‘total income’ amount on line 22 of your W4.
Thankfully, we aren’t taxed on gross income. We get to subtract a number of deductions. Your gross income minus all of these deductions is what becomes your adjusted gross income (AGI) or Net Income. What deductions do you get to subtract? Why, thank you for asking. The following deductions make up lines 23-35 of the first page of your 1040:
- educator expenses
- individual business expenses
- health savings account (HSA)
- moving expenses
- one-half of self employment tax
- self-employed retirement plans (i.e. SEP, SIMPLE, and qualified plans)
- self-employed health insurance deduction
- penalty on early withdrawal of savings
- alimony paid
- the IRA deduction
- student loan interest deduction
- tuition and fees deduction
- domestic production activities deduction
- Archer MSA deduction
The sum of these deductions adds up to line 36 of your 1040. To get your adjusted gross income, you subtract line 36 from line 22. Your adjusted gross income is what’s left, and it goes in line 37. If you use Turbotax or HR Block, it probably didn’t occur to you how these actual terms related to your 1040. Neither the standard deduction or itemized deductions are factored into your adjusted gross income.
Modified adjusted gross income (MAGI) are important because they are used to calculate income phaseout limits that indicate what your Roth IRA, SEP IRA, SIMPLE IRA and traditional IRA maximum contribution limits are. And doing things to reduce your income such as increasing to the maximum 401k contribution, might actually lower your overall MAGI and allow you to contribute more to your IRA’s.
- Any passive loss or passive income, or
- Any rental losses (whether or not allowed by IRC § 469(c)(7)), or
- IRA, taxable social security or
- One-half of self-employment tax (IRC § 469(i)(3)(E)) or
- Exclusion under 137 for adoption expenses or
- Student loan interest.
- Exclusion for income from US savings bonds (to pay higher education tuition and fees)
- Qualified tuition expenses (tax years 2002 and later)
- Tuition and fees deduction
- Any overall loss from a PTP (publicly traded partnership)
Also, in order to qualify for the retirement savings contribution credit, you must have an adjusted gross income under these limits, for 2016:
- $30,750 for single filers and married individuals filing separately
- $46,125 for heads of household
- $61,500 for married couples filing jointly
- $31,000 for single filers and married individuals filing separately
- $46,500 for heads of household
- $62,000 for married couples filing jointly
There you have it – gross income, adjusted gross income, and modified gross income in a nutshell. I’ll be referencing these terms in some upcoming posts. No quizzes at the moment.