How to Reduce MAGI With Deductions and Tax Strategies

Modified Adjusted Gross Income, or MAGI, is a figure the Internal Revenue Service (IRS) uses to determine eligibility for certain tax deductions, credits, and retirement plans. The calculation starts with your Adjusted Gross Income (AGI) and adds back specific deductions.

Your MAGI level determines whether you can contribute to a Roth IRA, deduct contributions to a Traditional IRA, or qualify for premium tax credits for health insurance purchased through the Affordable Care Act (ACA) marketplace. It also affects your exposure to the Net Investment Income Tax (NIIT), a 3.8% tax on investment income for higher-income individuals.

The MAGI Calculation Explained

Adjusted Gross Income (AGI) is the starting point for calculating MAGI. Your AGI is your total gross income from all sources, such as wages and business income, minus specific “above-the-line” deductions like contributions to certain retirement accounts. AGI serves as the baseline for calculating your taxable income.

MAGI is calculated by taking your AGI and adding back a list of specific deductions. The exact formula can vary depending on the tax benefit in question. For determining Roth IRA eligibility, the calculation adds back deductions for student loan interest and certain foreign-earned income exclusions.

Other items frequently added back to AGI include tax-exempt interest, the non-taxable portion of Social Security benefits, and foreign housing deductions. Because these items are added back, your MAGI will always be equal to or greater than your AGI.

Reducing MAGI with Retirement Accounts

Contributing to tax-advantaged retirement accounts is an effective way to lower your MAGI. Using accounts that allow for pre-tax or tax-deductible contributions reduces your AGI, which is the basis for the MAGI calculation.

Workplace Plans

For those with a workplace retirement plan like a Traditional 401(k), 403(b), or 457(b), making pre-tax contributions reduces AGI. The money is taken from your paycheck before taxes are calculated, lowering the income on your Form W-2. For 2025, the maximum employee contribution is $23,500, with a $7,500 catch-up for those age 50 and over.

Traditional IRAs

Contributing to a Traditional IRA can also reduce your AGI. The ability to deduct the contribution depends on your income and whether you or your spouse are covered by a retirement plan at work. If neither has a workplace plan, you can deduct the full contribution, up to the annual limit of $7,500 for 2025 ($8,500 if age 50 or older).

If you are covered by a workplace plan, your ability to deduct contributions is phased out based on your MAGI. For 2025, the deduction for single filers is phased out for a MAGI between $81,000 and $91,000. For those married filing jointly, the phase-out range is $128,000 to $148,000.

Self-Employed Plans

The SEP IRA allows for employer contributions of up to 25% of compensation, with a maximum of $71,000 for 2025. These contributions are made by the business and are deductible, which lowers the owner’s AGI.

A SIMPLE IRA allows employee and employer contributions. For 2025, employees can contribute up to $16,500, with a $3,500 catch-up for those 50 and over. The employer must make a matching contribution of up to 3% of compensation or a non-elective contribution of 2%.

The Solo 401(k) is for self-employed individuals with no employees other than a spouse. It allows for both employee and employer contributions. As an “employee,” you can contribute up to $23,500 in 2025 ($31,000 if 50 or over), and as the “employer,” you can contribute up to 25% of compensation, with a total maximum of $71,000.

Using Health and Other Tax-Advantaged Accounts

Certain health and spending accounts also provide above-the-line deductions that lower your AGI. These accounts allow you to set aside pre-tax money for specific expenses.

Health Savings Accounts (HSAs)

A Health Savings Account (HSA) is available to those enrolled in a high-deductible health plan (HDHP). Contributions are made with pre-tax dollars and are deductible, lowering your AGI. For 2025, the maximum contribution is $4,300 for self-only coverage and $8,550 for family coverage, with a $1,000 catch-up for those age 55 and older.

HSA funds grow tax-deferred, and withdrawals are tax-free for qualified medical expenses. This triple-tax advantage makes HSAs useful for both healthcare and retirement savings, while the upfront deduction provides the immediate AGI reduction.

Flexible Spending Accounts (FSAs)

Flexible Spending Accounts (FSAs) are employer-sponsored accounts for setting aside pre-tax money for healthcare or dependent care expenses. Contributions are deducted from your paycheck before taxes, reducing your AGI. For 2025, the contribution limit for a Health FSA is $3,300.

Dependent Care FSAs allow you to set aside up to $5,000 per household annually for the care of a child under 13 or a dependent incapable of self-care. A primary consideration with FSAs is the “use-it-or-lose-it” rule, which requires you to spend the funds within the plan year.

Strategic Deductions and Income Management

Managing investments and utilizing specific above-the-line deductions can also lower your AGI and MAGI.

Tax-Loss Harvesting

Tax-loss harvesting involves selling investments at a loss to offset capital gains. If your losses exceed your gains, you can use up to $3,000 of the excess loss to offset ordinary income, which lowers your AGI. Any remaining losses can be carried forward to future tax years.

This strategy is subject to the wash-sale rule. This IRS regulation prevents you from claiming a loss on a security if you buy a “substantially identical” one within 30 days before or after the sale.

Above-the-Line Deductions for the Self-Employed

Self-employed individuals can deduct 100% of the health, dental, and qualified long-term care insurance premiums paid for themselves, their spouse, and dependents. This above-the-line deduction is not limited by income and directly reduces AGI.

Another deduction for the self-employed is one-half of the self-employment taxes paid. Because self-employed individuals pay both the employee and employer portions of Social Security and Medicare taxes, the IRS allows the employer-equivalent portion to be deducted.

Other Deductions

The student loan interest deduction allows you to deduct up to $2,500 in interest paid on qualified student loans, though it is subject to MAGI phase-outs. For 2025, the deduction phases out for single filers with a MAGI between $85,000 and $100,000 and for joint filers between $175,000 and $205,000.

Eligible K-12 teachers can deduct up to $300 of unreimbursed business expenses. This deduction is available even if you take the standard deduction and contributes to lowering AGI.