What Is the Meaning of Modified Adjusted Gross Income?

Understanding how income is calculated for tax purposes can be confusing, especially when terms like Adjusted Gross Income (AGI) and Modified Adjusted Gross Income (MAGI) come into play. MAGI is used to determine eligibility for tax benefits, healthcare subsidies, and retirement contribution limits.

Since MAGI affects financial decisions and tax liabilities, it’s essential to understand what influences this number and how it differs from AGI.

Key Components That Shape This Figure

MAGI starts with AGI but adds back certain exclusions and deductions. Key factors include tax-exempt interest, foreign earned income, and specific deductions that would otherwise reduce taxable income.

Tax-Exempt Interest

Interest from municipal bonds is not subject to federal income tax but is included in MAGI calculations. These bonds, issued by state and local governments, provide tax advantages by excluding interest earnings from taxable income. However, the IRS requires this income to be added back when determining MAGI.

For example, if someone earns $5,000 in tax-exempt municipal bond interest and has an AGI of $75,000, their MAGI would be at least $80,000. This adjustment can affect eligibility for deductions, credits, or phase-out thresholds based on income.

Foreign Earned Income

U.S. citizens and residents working abroad may qualify for the Foreign Earned Income Exclusion (FEIE), which allows them to exclude a portion of their foreign wages from taxable income. In 2024, the maximum exclusion is $126,500.

While this income is excluded from AGI, it must be added back when computing MAGI. This means that even if a taxpayer eliminates foreign earnings from taxable income, it still counts toward income limits for tax benefits. For instance, if someone earns $120,000 overseas and claims the full FEIE, their AGI may be significantly lower, but their MAGI would still reflect the full $120,000. This adjustment is particularly relevant for education credits, healthcare subsidies, and deductions that phase out at higher income levels.

Certain Deductions

Some deductions that reduce AGI are reversed when computing MAGI, meaning they are ignored for certain tax calculations. These include student loan interest, tuition and fees, and rental losses.

For example, student loan interest is deductible up to $2,500 per year, but this deduction is not considered when determining MAGI. Similarly, rental real estate losses, typically deductible up to $25,000 for active participants with an AGI below $100,000, are also added back when calculating MAGI in many cases.

Understanding which deductions are disregarded in MAGI calculations is important because it prevents taxpayers from assuming they qualify for benefits based solely on AGI. This is particularly relevant for those applying for education-related tax benefits or making retirement contribution decisions that depend on income thresholds.

Difference From AGI

AGI serves as the foundation for calculating MAGI, but the two figures are not always identical. While AGI subtracts specific deductions from total income, MAGI adds back certain exclusions and adjustments. Many tax benefits, such as IRA contribution limits and education-related credits, rely on MAGI rather than AGI.

One reason for these adjustments is to ensure income-based phaseouts and eligibility thresholds reflect a taxpayer’s total financial situation. Deductions like passive activity losses and certain business expenses can lower AGI but do not always reduce MAGI. This prevents taxpayers from artificially lowering their reported income to qualify for benefits they might not otherwise be eligible for.

MAGI also determines eligibility for Roth IRA contributions. The IRS sets income limits for Roth contributions based on MAGI. In 2024, single filers with a MAGI above $161,000 and married couples filing jointly with a MAGI over $240,000 are ineligible to contribute. Those who assume they qualify based on AGI alone may find their MAGI exceeds the limit.

Healthcare Subsidy Calculations

Eligibility for healthcare subsidies under the Affordable Care Act (ACA) is based on MAGI. The Premium Tax Credit (PTC) helps lower the cost of health insurance premiums for individuals and families purchasing coverage through the Health Insurance Marketplace. The IRS compares a household’s MAGI to the Federal Poverty Level (FPL) to determine the level of financial assistance available.

For 2024 coverage, households earning between 100% and 400% of the FPL typically qualify for subsidies, though temporary expansions have extended assistance beyond this range. The exact subsidy amount is determined by comparing a household’s expected contribution to the cost of a benchmark plan. If the required contribution exceeds a certain percentage of income, subsidies cover the difference.

The IRS uses a sliding scale to determine the percentage of income a household is expected to pay for coverage. For example, a family of four with a MAGI at 200% of the FPL may be required to contribute around 2% of their income toward premiums, while a household at 350% of the FPL could owe closer to 8.5%. If the benchmark plan costs more than this amount, the PTC reduces the monthly premium.

MAGI also influences eligibility for cost-sharing reductions (CSRs), which lower out-of-pocket expenses such as deductibles, copayments, and coinsurance. CSRs are only available to enrollees in Silver-tier plans and are limited to those with incomes between 100% and 250% of the FPL. Since CSRs directly lower healthcare costs beyond just premiums, understanding how income adjustments impact MAGI is important for those seeking the most comprehensive financial assistance.

Retirement Contribution Calculations

MAGI determines eligibility and contribution limits for tax-advantaged retirement accounts, including Roth IRAs and traditional IRAs. The IRS adjusts these limits annually, so taxpayers must stay informed to maximize contributions while remaining compliant with tax regulations.

For Roth IRAs, contribution eligibility phases out based on MAGI. In 2024, single filers with a MAGI below $146,000 can contribute the full amount, while those earning between $146,000 and $161,000 face a gradual reduction. Beyond $161,000, contributions are disallowed. Married couples filing jointly see similar phase-outs beginning at $230,000, with complete ineligibility at $240,000. Those exceeding income limits may consider a backdoor Roth conversion.

Traditional IRAs, while not subject to a MAGI-based contribution limit, impose restrictions on deductibility when an individual or their spouse is covered by a workplace retirement plan. In 2024, single filers with workplace coverage see deduction phase-outs between $77,000 and $87,000, while married joint filers phase out between $123,000 and $143,000 if the contributing spouse is covered. If only the non-covered spouse contributes, the deduction phases out at $230,000 to $240,000.