Adjusted Gross Income (AGI) Vs. Modified Adjusted Gross Income (MAGI)

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Once a year, when tax time comes around, you get the terms gross income, adjusted gross income (AGI), and modified adjusted gross income (MAGI) shoved in your face… a lot. And since you’re only faced with having to know what these somewhat ambiguous tax terms mean once a year, they are very easy to forget. Heck, I already did.

So, what I’m going to do in this post is highlight what each of these terms mean, where you will encounter them, and why they are important to know so that you can refer back to this post in the future when the ambiguity returns.

Gross Income (aka Gross Earnings)

We’ll start with the easy one. Gross income is simply the total money, or income, that you receive per year before any deductions and taxes are taken out. Gross income is also referred to as ‘gross earnings’, ‘total income’, or simply ‘gross’. At first, you might just think, OK, it’s my salary, simple enough. Not quite. The IRS factors all of the following income sources into your gross income, and it runs from line 7 to line 21 of your 1040. Gross income is the net sum of the following:

• wages
• salaries
• tips
• taxable interest
• ordinary dividends
• taxable refunds, credits, or offsets of state and local income taxes
• alimony received
• business income or loss
• capital gains or losses
• other gains or losses
• taxable IRA distributions
• taxable pensions and annuities
• rental real estate
• royalties
• farm income or losses
• unemployment compensation
• taxable social security benefits
• and other income

All of these income sources add up to the ‘total income’ amount on line 22 of your W4.

Adjusted Gross Income (AGI)

Thankfully, we aren’t taxed on gross income. We get to subtract a number of deductions. Your gross income minus all of these deductions is what becomes your adjusted gross income (AGI) or Net Income. What deductions do you get to subtract? Why, thank you for asking. The following deductions make up lines 23-35 of the first page of your 1040:

• educator expenses
• individual business expenses
• health savings account (HSA)
• moving expenses
• one-half of self employment tax
• self-employed SEP, SIMPLE, and qualified plans
• self-employed health insurance deduction
• penalty on early withdrawal of savings
• alimony paid
• the IRA deduction
• student loan interest deduction
• tuition and fees deduction
• domestic production activities deduction
• Archer MSA deduction

The sum of these deductions adds up to line 36 of your 1040. To get your adjusted gross income, you subtract line 36 from line 22. Your adjusted gross income is what’s left, and it goes in line 37. If you use Turbotax or HR Block, it probably didn’t occur to you how these actual terms related to your 1040. Neither the standard deduction or itemized deductions are factored into your adjusted gross income.

Modified Adjusted Gross Income (MAGI)

Modified adjusted gross income (MAGI) are important because they are used to calculate income phaseout limits that indicate what your Roth IRA, SEP IRA, and traditional IRA maximum contribution limits are. And doing things to reduce your income such as increasing to the maximum 401k contribution, might actually lower your overall MAGI and allow you to contribute more to your IRA’s.

The IRS defines MAGI as:

AGI without:

• Any passive loss or passive income, or
• Any rental losses (whether or not allowed by IRC § 469(c)(7)),  or
• IRA, taxable social security or
• One-half of self-employment tax (IRC § 469(i)(3)(E)) or
• Exclusion under 137 for adoption expenses or
• Student loan interest.
• Exclusion for income from US savings bonds (to pay higher education tuition and fees)
• Qualified tuition expenses (tax years 2002 and later)
• Tuition and fees deduction
• Any overall loss from a PTP (publicly traded partnership)

Also, in order to qualify for the retirement savings contribution credit,  you must have an adjusted gross income under these limits:

• $55,500 (married filing jointly),
• $41,625 (head of household), or
• $27,750 (single, married filing separately, or qualifying widower)

There you have it – gross income, adjusted gross income, and modified gross income in a nutshell. I’ll be referencing these terms in some upcoming posts. No quizzes at the moment.