MAGI vs AGI, what is the difference?
Published on June 05, 2024
by Deborshi Choudhury, EA
Deborshi Choudhury, an IRS Enrolled Agent with 18 years of expat tax experience, specializes in U.S. tax preparation, tax planning, and tax advice for U.S. citizens and Green Card holders living and working in the UAE and Canada.
Table of Contents
The difference between Modified Adjusted Gross Income (MAGI) and Adjusted Gross Income (AGI) is in the adjustments added back to AGI to determine MAGI. However, both of these are important for US taxpayers, especially when qualifying for various tax benefits.
What is Adjusted Gross Income (AGI)?
AGI is your total gross income minus specific deductions, known as adjustments. It determines your taxable income and eligibility for various tax credits and deductions.
To calculate AGI, you start with your total or gross income, which includes wages, dividends, capital gains, business income, and other earnings. From this total, you subtract specific deductions, known as adjustments. These adjustments can lower your taxable income and potentially your tax bill.
Common Adjustments Subtracted from Gross Income to Calculate AGI
- Student Loan Interest: Up to $2,500 of interest paid on qualified student loans can be deducted.
- Retirement Contributions: Contributions to traditional IRAs, 401(k)s, and certain other retirement accounts can be deducted.
- Tuition and Fees: Qualified education expenses, up to a certain limit, can be subtracted.
- Health Savings Account (HSA) Contributions: Contributions to an HSA can reduce your gross income.
- Self-Employment Taxes: A portion of the self-employment tax can be deducted.
- Alimony Payments: For divorces finalized before 2019, alimony payments can be deducted.
- Moving Expenses: For active-duty military personnel, moving expenses can be deducted.
These adjustments are designed to account for significant expenses that reduce your disposable income. By subtracting them from your gross income, the tax system provides a more accurate representation of your financial situation.
Example Calculation of AGI
Let’s say you have a total gross income of $85,000.
- This includes wages, salary, and any other income sources.
Adjustments to Income:
- Student Loan Interest: $1,500
- Traditional IRA Contribution: $3,000
- Health Savings Account (HSA) Contribution: $2,000
AGI = Gross Income – (Student Loan Interest + IRA Contribution + HSA Contribution)
AGI = $85,000 – ($1,500 + $3,000 + $2,000)
AGI = $85,000 – $6,500
AGI = $78,500
What is Modified Adjusted Gross Income (MAGI)?
MAGI is AGI with certain adjustments added back in. These adjustments can include items like foreign income, tax-exempt interest, and deductions for student loan interest.
To calculate MAGI, you begin with your AGI and then add back specific items. These items typically include income and deductions that were excluded when calculating your AGI but are considered for certain tax purposes.
Items That Are Typically Added Back to AGI to Calculate MAGI
Several adjustments are commonly added back to AGI to arrive at MAGI. Here are a few:
- Foreign Earned Income: If you exclude foreign earned income from your AGI, it is added back to calculate MAGI.
- Tax-Exempt Interest: Interest from tax-exempt bonds is added back.
- Deductions for Student Loan Interest: This deduction is added back to AGI for MAGI calculations.
- IRA Contributions: Deductions for contributions to traditional IRAs are added back.
- Rental Losses: If you have rental losses, these might be added back depending on the context.
These additions ensure that the MAGI calculation reflects a more complete view of your income, particularly for determining eligibility for certain tax benefits.
Example Calculation of MAGI
Let’s start with the AGI calculated above.
AGI = $78,500
Now, we add items (the amount added depends on each individual).
- Foreign Earned Income Exclusion: $5,000
- Tax-Exempt Interest: $1,000
- Student Loan Interest Deduction: $1,500 (added back)
- IRA Contribution Deduction: $3,000 (added back)
MAGI = AGI + (Foreign Earned Income + Tax-Exempt Interest + Student Loan Interest + IRA Contribution)
MAGI = $78,500 + ($5,000 + $1,000 + $1,500 + $3,000)
MAGI = $78,500 + $10,500
MAGI = $89,000