What Is Modified Adjusted Gross Income (MAGI)?
Key takeaways
Modified adjusted gross income, or MAGI, is your adjusted gross income with certain deductions added back in.
MAGI determines your eligibility for certain tax breaks and participating in certain governmental health insurance programs.
Your MAGI doesn’t impact how much you pay in taxes, and it isn’t reported anywhere on your tax return.
Taxable income is likely a term you’re familiar with: It’s how much of your income you need to pay taxes on. But when filing your taxes, opening an IRA or shopping for health insurance, you may have heard of other terms related to income—like adjusted gross income (AGI), modified AGI or modified adjusted gross income (MAGI).
Here, we’ll help you understand what MAGI is and how it differs from gross income and adjusted gross income. We’ll also brief you on what MAGI is used for and why it’s important to help you see how it might impact your financial situation.
What is MAGI?
MAGI, or modified adjusted gross income, is a figure that’s calculated using a select group of deductions. The Internal Revenue Service (IRS) uses your MAGI to determine eligibility for certain tax benefits and governmental health insurance programs. It may seem a bit complicated to calculate, but there are tax worksheets that can help walk you through the steps to calculate your MAGI. And in many cases, your MAGI ends up being very close (or identical) to your AGI.
According to the IRS, most people’s MAGI will simply be their AGI with their student loan interest payments removed.
How to calculate your MAGI
Your MAGI is determined using your annual gross income as well as itemized deductions or exemptions. To determine your MAGI:
1. Calculate your gross income for the year
Your gross income includes any and all income you’ve made during the tax year, including anything from wages paid by an employer to realized gains on investments. Gross income includes the following:
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Salary and wages (including tips)
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Capital gains on investments
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Business income (like royalty payments or rental property income)
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Interest
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Unemployment benefits
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Alimony payments received
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Retirement income (like Social Security or distributions from a retirement savings account)
2. Determine your adjusted gross income (AGI)
Your adjusted gross income is your gross income with certain expenses deducted. Adjusted gross income is used to determine if you are eligible for certain tax deductions such as the Child Tax Credit, the child and dependent care credit and credit for the elderly or permanently disabled.
To determine your AGI, you’ll subtract certain expenses from your gross income, such as:
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HSA contributions
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Some eligible education expenses (like tuition and fees)
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Student loan interest
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Educator expenses
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Self-employment business expenses (like half of your self-employment tax, health insurance premiums and travel)
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Moving expenses
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Alimony payments
3. Add certain deductions back in
Some of the income in your gross income and some of the deductions you removed to calculate your AGI are not included when calculating your MAGI. The exact calculation for your MAGI, including which deductions are added back in, depends on which tax benefit you’re looking at. You may need to add these deductions and incomes back in:
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Some eligible education expenses (like tuition and fees)
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Student loan interest
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One-half of self-employment tax
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Foreign income
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Contributions made to your IRA
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Non-taxable Social Security benefit payments
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Losses from a partnership business
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Adoption expenses
Can AGI and MAGI be the same?
Some of the deductions added back in for MAGI are rare for most taxpayers, so it is likely that your AGI could be the same as your MAGI. According to the IRS, most people’s MAGI will simply be their AGI with their student loan interest payments removed.
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Get startedWhat is MAGI used for?
MAGI is used to determine your eligibility to take advantage of certain tax breaks and access to health insurance discounts or programs. Your MAGI can help determine the possibilities below:
Whether you can contribute to a Roth IRA
To be eligible to contribute to a Roth IRA, you need to meet certain income requirements that are based on your MAGI and your tax filing status.
In 2023, if you’re married filing jointly or are a qualifying widow(er), you’re able to contribute up to the $6,500 annual IRA contribution limit if your MAGI is less than $218,000.
If your MAGI is higher than $228,000, you’re unable to directly contribute to a Roth IRA that year.
And if your MAGI is somewhere in the middle, you’re able to contribute a reduced amount.
Whether you’re eligible for the premium tax credit
The Affordable Care Act (ACA) allows families to purchase individual health insurance coverage through the Health Insurance Marketplace. If you go this route, you could be eligible for premium tax credits that can lower coverage costs and make coverage more affordable.
To be eligible for the premium tax credit, your MAGI in the prior year needs to be at least 100 percent but no more than 400 percent of the Federal Poverty Level (FPL) for a family your size. In 2023, the FPL is $30,000 for a family of four, so your MAGI would need to be between $30,000 and $120,000 to qualify for a premium tax credit. (Credits are granted on a sliding scale based on your MAGI.)
Whether you’re eligible for income-based health care coverage
Thanks to the ACA, financial eligibility for Medicaid and the Children’s Health Insurance Program (CHIP) are now determined using MAGI.
Eligibility standards vary by state, but in most states, you could be eligible for Medicaid if your MAGI is 138 percent of the FPL (between $42,000 and $60,000 for a family of four in 2023).
How does MAGI affect your taxes?
Your MAGI is not something you’ll report anywhere on your tax return; however, you may use your MAGI in some tax worksheets to calculate other figures on your tax forms. Most commonly, you’ll use your MAGI to determine your eligibility for tax credits come tax time.
If you’re looking for help determining your MAGI and understanding what it might mean for your financial situation, consider reaching out to a Northwestern Mutual financial advisor, who can help you look at all your assets and determine how to most strategically use them to meet your financial goals.
This publication is not intended as legal or tax advice. Financial Representatives do not render tax advice. Consult with a tax professional for tax advice that is specific to your situation.
