How to calculate MAGI?

MAGI – also known as the Modified Adjusted Gross Income, is an important concept in economics and taxing. It is calculated to be considered by the IRS and IRA for multiple reasons. In this guide, we will learn what is MAGI and how we can calculate it. 

What is MAGI?

MAGI stands for Modified Adjusted Gross Income. As the words speak for themselves, it is the Adjusted Gross Income when the allowable deductions and tax penalties are already taken into account. It is important to understand to understand the taxable income. MAGI is considered by the IRS when it has to check your qualifications for some tax benefits.

What does MAGI determine? 

After understanding what MAGI is, let us dig a little deeper into how it works and what it can determine for a taxpayer –

• It decides your eligibility for ‘Premium Tax Credit’. It significantly lessens the cost of a health insurance if purchased through federal or a state Health Insurance Marketplace.
• It also decides if your income surpasses the limit that makes you eligible to contribute to a Roth Individual Retirement Account (IRA).
• It also determines whether you can deduct the contributions to an IRA when thinking of a retirement plan.

These are largely the things MAGI determines for a taxpayer.

How to calculate MAGI?

Calculate MAGI with these easy steps –

1 – Finding out the Gross Income

The first step is to find out the gross income that you have earned during that year. It includes a lot of things, namely –

1. Business Income and Capital Gains.
2. Dividends and Interest.
3. Royalty income.
4. Retirement income.
5. Farm income.
6. Tips and Wages.
7. Alimony, in case of a divorce.

2- Calculating AGI

The next step is to calculate your AGI. This is the income on which the tax is finally incurred, making it all the more important. If you want to calculate your AGI, just deduct certain tax-deductible expenses from your gross income. These may include –

1. Educator expenses and Student Loan interest.
2. Business expenses for performing arts.
3. Health Insurance Premiums for self-employed people.
4. 50% of the self-employment taxes.
5. Health Savings Account Contributions and Retirement Plan Contributions. 

These are largely the things that are included while the deduction from the gross income takes place.

3 – Adding back a few deductions

This is the final step in the calculation of MAGI. Here, you need to have your AGI and add these to it –

1. Deductions from student loan interest. 
2. Tuition and fees deduction.
3. Foreign income is excluded.
4. Passive income or loss as well as rental losses.
5. Losses in a partnership.
6. The deductions that one has taken for taxable Social Security Payments as well as IRA. 
7. Interest from the EE Savings bond.

These are largely the things that have to be added back to the AGI. 

With this done, you will have your MAGI which can be used by the IRS to check from time to time if you are eligible for certain tax deductions or not.

Now that you have learnt how to calculate the MAGI on your own, you can keep a better track of your taxes and the amount coming in and going out. Not only does it make one mature while handling finances but also helps them find ways to avoid paying extra.