Is MAGI Before or After Standard Deduction?

Modified Adjusted Gross Income (MAGI) is calculated before the standard deduction is applied. These two figures are determined at different stages of your tax return and serve distinct purposes. The standard deduction is used to lower your final taxable income, while MAGI is a figure used to determine your eligibility for certain tax deductions and credits. Both calculations use your Adjusted Gross Income (AGI) as a starting point before proceeding down separate paths.

Understanding Key Income Figures

The starting point for your tax return is Gross Income. This includes all income you receive from any source, such as wages, interest and dividends, and profits from a business. It is the total amount of money earned before any subtractions are made.

From gross income, you subtract specific “above-the-line” deductions to arrive at Adjusted Gross Income (AGI). Common examples include contributions to a traditional Individual Retirement Arrangement (IRA), student loan interest paid, certain self-employment tax amounts, and health savings account (HSA) contributions. Your AGI is a foundational number that serves as the basis for other calculations.

Modified Adjusted Gross Income (MAGI) is not a line item on your main tax form. To calculate MAGI, you start with your AGI and add back certain deductions you may have taken, such as those for IRA contributions or student loan interest. The specific deductions added back can vary depending on the tax benefit being considered.

Taxable Income is the amount on which your income tax is calculated. To determine your taxable income, you take your AGI and subtract either the standard deduction for your filing status or your total itemized deductions, whichever is greater. This shows that the standard deduction reduces your AGI to find taxable income, a path separate from the MAGI calculation.

The Calculation Sequence Step-by-Step

Seeing the calculation with numbers can clarify where each figure fits. The process begins with Gross Income, which is the sum of all earnings. Imagine a single individual earns $75,000 in wages and receives $1,000 in interest income, making their Gross Income $76,000.

The next step is to calculate Adjusted Gross Income (AGI). If this person paid $2,500 in student loan interest and contributed $6,000 to a traditional IRA, these deductions are subtracted from Gross Income. Their AGI would be $76,000 minus $8,500, resulting in an AGI of $67,500.

From AGI, two separate paths are taken. One path leads to Modified Adjusted Gross Income (MAGI). To calculate MAGI for Roth IRA eligibility, you would add back the IRA and student loan interest deductions to the AGI. In this case, the MAGI would be $67,500 plus $8,500, returning to the $76,000 figure.

The other path from AGI leads to your Taxable Income, which is where the standard deduction comes into play. Using the same AGI of $67,500, the individual would subtract the standard deduction. If the standard deduction for a single filer is $15,000, their Taxable Income would be $52,500. This example illustrates that the standard deduction is applied to AGI, a step independent of the MAGI calculation.

Why the MAGI Calculation Matters

While MAGI is not used to compute your income tax liability, it is a gatekeeper for many tax benefits. The Internal Revenue Service (IRS) uses this income measure to determine if you qualify for certain deductions and credits. Because MAGI adds certain deductions back to your AGI, it provides a more standardized income level for these eligibility tests.

Retirement Savings

One of the most common uses of MAGI is to determine your ability to contribute to a Roth IRA. The IRS sets annual MAGI-based income limits that phase out and can eliminate your eligibility to make direct contributions. Similarly, your ability to deduct contributions made to a traditional IRA is also dependent on your MAGI if you are covered by a retirement plan at work. The MAGI calculation for this purpose often adds back deductions like student loan interest.

Healthcare Credits

MAGI plays a significant role in accessing healthcare subsidies. For individuals and families who purchase health insurance through the Affordable Care Act (ACA) Marketplace, eligibility for the Premium Tax Credit is based on MAGI. This credit helps lower the monthly insurance premiums. Your household’s MAGI must fall within a certain percentage of the federal poverty line to qualify for this assistance.

Education Deductions

Certain education-related tax benefits are also tied to your MAGI. For example, the student loan interest deduction, which allows you to deduct up to $2,500 of interest paid on student loans, is subject to a MAGI phase-out. As your MAGI increases over a certain level, the amount of interest you are allowed to deduct is reduced, eventually reaching zero. This ensures the benefit is targeted toward taxpayers with moderate and lower incomes.