This adjusted gross income (AGI) vs. modified adjusted gross income (MAGI) article has been updated for the 2022 and 2023 tax years. Once a year, when tax time comes around, you get the terms “gross income”, “adjusted gross income (AGI)”, “taxable income”, 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.
What is “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 defines gross income as the net sum of all of the following income sources on your 1040:
- taxable interest
- ordinary dividends
- taxable refunds, credits, or offsets of state and local income taxes
- alimony received
- business income (business losses are subtracted)
- capital gains (capital losses are subtracted)
- other gains
- taxable IRA distributions
- taxable pensions and annuities
- rental real estate
- farm income (farm losses are subtracted)
- unemployment compensation
- taxable Social Security benefits
- and other income
All of these income sources add up to the ‘total income’ amount on line 9 of your 1040.
In some cases, you may be below the threshold of minimum income to file taxes, and not be legally required to submit a return. However, you may still benefit from doing so, if you are eligible for at least one of the many refundable tax credits available.
What is “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 from your gross income on your 1040?
- IRA and self-employed retirement plan (e.g. SEP IRA, SIMPLE IRA, Solo 401K, and other qualified plans) contribution deductions
- Alimony payments (for divorce agreements prior to 2019)
- Self-employed health insurance payments
- One-half of any self-employment taxes paid
- Health Savings Account (HSA) contributions
- Moving expenses if you are a member of the Armed Forces on active duty and due to a military order you move because of a permanent change of station
- Penalties on the early withdrawal of savings
- Educator expenses
- Student loan interest
- Certain business expenses of performing artists, reservists, and fee-basis government officials
- Archer MSA deduction
Adjusted gross income is reported on line 11 of your 1040. Neither the standard deduction or itemized deductions are factored into your adjusted gross income, but they are factored into “taxable income”. More on that ahead.
Note: the student tuition and fees deduction was repealed for years 2021 and after, so it no longer is an applicable deduction factored into your adjusted gross income.
What is “Taxable Income”?
Taxable income is your adjusted gross income minus either the standard deduction or itemized deductions AND minus any qualified business income deduction. It can be found on line 15 of your 1040.
What is “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, SIMPLE 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 with the addition of the following deductions:
- IRA deduction
- Student loan interest deduction
- Foreign earned income exclusion
- Foreign housing exclusion or deduction
- Exclusion of qualified savings bond interest shown on Form 8815
- Exclusion of employer-provided adoption benefits shown on Form 8839
Note that in order to qualify for the retirement savings contribution credit (aka “Saver’s Credit“, you must have an adjusted gross income under these income threshold limits, for 2022:
- $34,000 for single filers and married individuals filing separately
- $51,000 for heads of household
- $68,000 for married couples filing jointly
And for 2023:
- $36,500 for single filers and married individuals filing separately
- $54,750 for heads of household
- $73,000 for married couples filing jointly
There you have it – gross income, adjusted gross income, taxable income, and modified gross income in a nutshell. I’ll be referencing these terms in some upcoming posts. No quizzes at the moment.