What’s Modified Adjusted Gross Income

Modified Adjusted Gross Income definition

Modified adjusted gross income (MAGI) is an individual’s adjusted gross income (AGI) adjusted for tax-exempt interest income and certain deductions added back in.

In short, MAGI is the sum of:

• A beneficiary’s AGI (from line 11 of Form 1040), plus
• Tax-exempt interest income (from line 8b of Form 1040), untaxed foreign income, non-and taxable Social Security benefits

MAGI is used to determine the eligibility of an individual for certain deductions and credits, it determines the thresholds for;

• The child and dependent care credit
• Credits for the elderly or permanently disabled
• The adoption tax credit
• The Child Tax Credit
• The American Opportunity & Lifetime Learning tax credits
• The Earned Income Tax Credit
• Student loan interest deductions
• Contribution to a Roth individual retirement account (IRA)
• If a Spouse can deduct traditional IRA contributions if the other spouse participates in employer-sponsored 401(k)
• Eligibility for income-based Medicaid coverage and Children’s Health Insurance Program (CHIP).
• Qualifying and coordinating the premium tax credit(PTC) for health reimbursement arrangement(HRA), qualified small employer HRA (QSEHRA), individual coverage HRA (ICHRA)(If your employer offers you an ICHRA allowance that allows you to purchase an affordable qualified plan, you lose your premium tax credits—even if you opt-out of the ICHRA)

It’s important to know the definition of MAGI for any particular benefit (This info can be found in looking at the form instructions). However, most share common threads).

A good example is that most calculations add the excluded foreign-earned income back, but not all add back excludable savings bond interest and excludable adoption benefits.

Adjusted Gross Income vs Modified Adjusted Gross Income

Modified adjusted gross income (MAGI) is the adjusted gross income (AGI) adjusted for such items as student loan interest, qualified education expenses, passive income or losses, IRA contributions, foreign income, etc.

Can a taxpayer have the same MAGI and AGI

MAGI and AGI can be the same if the list of deductions that have to be added back to the AGI to determine MAGI is not significant e.g. some taxpayers do not have a relevant foreign income hence the same MAGI and AGI

Modified Adjusted Gross Income line on 1040

Please note

• MAGI does not appear as a line on your federal income tax return,
• However, your AGI can be found on line 11 of IRS form 1040. This is adjusted as appropriate to calculate MAGI

How is Modified Adjusted Gross Income Calculated

Individuals may become ineligible for certain benefits once their AGI is above a certain threshold.

What is modified adjusted gross income for Medicaid

The Affordable Care Act established a streamlined methodology for determining Medicaid eligibility based on Modified Adjusted Gross Income (MAGI).

The MAGI-based methodology takes into consideration the taxable income and tax filing relationships to determine an individual’s financial eligibility for Medicaid.

How does it work

• When an individual seeks assistance in paying for coverage, the Marketplace calculates household income using the MAGI methodology.
• Then the dollar amount is subjected to the federal poverty level (FPL) test to determine eligibility.

Tax filing relationships

Generally, the Medicaid and CHIP household should be the same as a tax household.

However, the Marketplace may automatically adjust each applicant’s situation for possible additions and exceptions. It may add below people to an applicant’s Medicaid and CHIP household:

• The spouse, if living together but not on the same tax return.
• Pregnant women. It increases the household size to include the child or children she is carrying, but there won’t be additional income to add.

Tax Household rules will not apply to Non-filers (those that don’t file returns and are not claimed as dependents on someone else’s return). This is;

• applicants who do not expect to file federal income taxes and will not be claimed as a dependent.
• Tax dependents claimed by a non-parent or by a non-custodial parent.
• Children living with two parents or step-parents who don’t file a joint tax return.

Instead, the following non-filer rules apply to determine are used to determine the Medicaid and CHIP households of applicants:

For adults, the Medicaid/CHIP household includes:

• The individual;
• The individual’s spouse, if living with the individual; and
• The individual’s children, if living with the individual.

For children, the Medicaid/CHIP household includes:

• The child; and
• Any parent(s), sibling(s), spouse, and the child’s children, if living with the child.

Taxable Income

Medicaid/CHIP MAGI-based income includes:

1. the adjusted gross income (AGI) (taxable income with fewer deductions/adjustments), excluding:

• Certain taxable American Indian/Alaska Native income
• Taxable scholarships/awards used for educational purposes

2. Add back

• The non-taxable portion of Social Security
• Tax-exempt interest
• Untaxed Foreign income

Remember Financial eligibility for Medicaid/CHIP is based on current monthly income an individual must meet all other Medicaid/CHIP eligibility requirements as well. (e.g., state residency and categorical requirement for coverage other than emergency Medicaid).

Some people are exempt from the MAGI-based income counting rules (the blind, disabled, or aged (65 and older)) and may continue to qualify for Medicaid the old-fashioned way.

Modified adjusted gross income for Roth IRA

Participation and the amount to contribute to a Roth IRA are determined by your MAGI. the contributions are phased out if MAGI exceeds the allowed limits.

2023 Roth IRA Income Limits

Modified Adjusted Gross Income Traditional IRA

You can only take the full deduction up to the amount of your contribution limit if neither you nor your spouse contributes to an employer-sponsored retirement plan.

The deduction is limited if any spouse contributes to the work plan.

Excess contributions have to be removed else they face a penalty of 6% per year (as long as the excess amounts are not removed).

Modified Adjusted Gross Income for IRMAA

The income-related monthly adjustment amount (IRMAA) is a surcharge that Medicare levies on high-income earners in addition to their Part B (levied from 2007) and Part D premiums (enacted by ACA in 2011).

MAGI determines if IRMAA applies, $97,000 for an individual return and $194,000 for a joint return. The Social Security Administration (SSA) uses the adjusted gross income reported plus other forms of tax-exempt income.

IRS generally provides to SSA, the two years’ prior return (but not more than 3 years prior) to the year for which the premium is being determined.

Source: CMS

SSA sends notifications to notify individuals of the higher Part B premium. If IRMAA is not payable or miscalculated, individuals have a right to request SSA(with appropriate evidence) to lower or eliminate your premium increase.

Modified Adjusted Gross Income for Social Security

IRS will tax Up to 50 percent of your Social Security benefits if your modified MAGI plus one-half of your Social Security benefits fall within the:

• $32,000 to $44,000 for married and joint return filers; and
• $25,000 to $34,000 for single filers, head of household, or married and filing separately (must have lived apart for the whole year).

Up to 85 percent of Social Security benefits are taxable if MAGI plus one-half of Social Security benefits are more than the ranges stated above, or if filing as married and filing separately but lived together for a portion of the year.

Bottom line

Always remember, MAGI affects your taxes.

• MAGI determines what is owed to the IRS. It adjusts and modifies the AGI for certain exemptions, qualifications, and allowances. MAGI will differ from AGI for individuals with foreign income, qualified education expenses, or passive losses, among other items.
• MAGI determines tax benefits and credits an individual is eligible to receive e.g. it is required when shopping at the Marketplace or your state exchange for your own health insurance plan and begin getting coverage for medical services. It has a bearing on your health insurance premiums.

Alimonies are considered when computing gross income except in the two scenarios below;

• The divorce agreement was executed after the year 2018, and
• The divorce agreement was executed before 2019 but later modified to expressly state that such payments are not deductible for the payer.