Adjusted Gross Income (AGI) Vs. Modified Adjusted Gross Income (MAGI)
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.
I am G.E. Miller, & 
Good post. However, be aware that you repeatedly refer to page 1 of the W4. I think what you mean is the 1040. The W4 is the form you file when you begin employment, setting up your witholdings and so on. You could also resubmit a W4 if you’d like to adjust your current withholdings with an employer. However, the 1040 is the year end return.
Adrienne – yikes, thanks for the catch. Updates made. Brain freeze. Tax content has a way of doing that to you.
It seems there is a limit of $180K in order to take Higher Education deductions when married filing jointly, but I cannot find where this originates. There is no mention of a limit in IRS Code Title 26 Subtitle A, Chapter 1, Subchapter B, Part 1, Section 62. Please help me find where this comes from.
what line on 1040 is modified adjusted gross income line 37 or 43
That is a good question, Mary. As far as I can tell, line 37 is your AGI and line 43 is your MAGI.
I don’t know why the article didn’t also list dependent deductions and standard deduction/itemized deductions as also coming out of the AGI to calculate the MAGI – those are two huge ones for those of use who have kids and a mortgage!
Sorry but Line 43 is not your MAGI that is your taxable income.
The modified adjusted gross income is found by taking your AGI (line 37) and adding back certain items such as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for higher-education costs.
It should be noted that MAGI is also used to determine how much the premiums is going to be for enrolling Medicare Plan B and D (Prescription Drugs). Most of the people pay the base premium. But the premium goes up (up to 260%) depending on the MAGI brackets, unless the person gives up the Medicare benefits totally.
Yes, this happened to me this year My husband and I together file and always have,but was unaware of the penelaty on a one time income he got, he is 77 and I am 71 and still working. the income
affected both of us Seemus unfair for both persons to penelized, the letters was sent November 21, 2012. I saw a comment above about giving up medicare benefits so what do you do.
can you please assure me that the MAGI is line 43 on the Form 1040. I am afraid to be exceeding the 85K limit due to dividends and thus getting penalized for Medicare Part B and the Part D prescription drug plan.
THANK YOU!!
Roger,
Line 42 of the Form 1040 is taxable income, not modified adjusted income (MAGI). MAGI is AGI with certain adjustments listed in the article above. For many people, MAGI and AGI will be the same. The most common MAGI adjustments are taxable social security income, passive income or passive loss, and one-half of self-employment tax. Hope this helps.
Sorry, that should have read “line 43″.
Glen is correct….. everyone keeps talking about their Taxable Income being their MAGI.
Your MAGI is AGI + Tax Free Income 8b + I believe most items netted out on lines 23- 37 (but look up on to be sure it’s all those items…I know some are definately added back in to calculate yoru MAGI.
Thank you so much!! This was a great post and I enjoyed reading your blog and profile as well. Great goal! I’m shooting for it as well. Thanks again for sharing your passion and knowledge!
Miller is correct, see definition of MAGI for IRS above. However, MAGI is a different calculation for Medicare, you must add to your AGI tax exempt interest.