How to Come Up With Your Modified Adjusted Gross Income
The current income tax formula uses many numbers, such as gross income and adjusted gross income (AGI), which is gross income minus certain deductions. Then there is taxable income, which is the amount on which you much actually pay tax. But there is another, less well-known figure, Modified Adjusted Gross Income (MAGI), which is used in certain tax computations. The formula used to find this number is fairly simple, and can have a substantial impact on your financial situation in some cases.
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Instructions
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Adjusted Gross Income
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Use your adjusted gross income to determine how much of your traditional IRA contributions you can deduct if you also participate in an employer-sponsored qualified plan. You also need to know your AGI to determine whether you're eligible to make Roth IRA contributions or to convert some or all of your traditional IRA or qualified plan balance into a Roth IRA.
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Determine your adjusted gross income by subtracting certain items from your gross income, such as student loan interest, traditional IRA contributions that are deductible, qualified moving expenses, Health Savings Account contributions and all of the other deductions listed in the second section of the front page of the 1040 form. If you're trying to estimate your modified adjusted gross income for the current year, then you must first estimate all of the items on the front of the 1040. The final number will be your estimated adjusted gross income.
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Add certain items back to your adjusted gross income. This list includes: any deductions you received for traditional IRA contributions or student loan interest; exclusions or deductions for foreign earned income or housing expenses; excludable interest paid from EE bonds that was used to pay higher education expenses; adoption expenses paid by an employer that were excluded from income; and any amount that was deducted as the result of domestic activities.
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Exclude from your modified adjusted gross income calculation any amount of income realized from a Roth conversion. This allows you to make Roth IRA contributions even if your MAGI would otherwise render you ineiligible to do so because your income would be too high. For example, if your AGI and MAGI are both $75,000, then you converted a traditional IRA worth $100,000 to a Roth IRA, then your reportable income is $175,000, which is above the current Roth IRA contribution threshold limit. This means that the conversion amount is excluded (for the purpose of the MAGI calculation only, not from your reportable taxable income on your tax return), leaving you able to make the maximum allowable Roth IRA contribution for the year. Therefore, for the purpose of the MAGI, your income is only $75,000, while your actual reportable income is $175,000.
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Tips & Warnings
Contributions to an employer-sponsored retirement plan are not added back into the MAGI calculation. Therefore, you can lower your MAGI if necessary by making additional contributions to your plan.
References
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