As 2024 comes to a close, it’s important to consider a key tax planning aspect: managing modified adjusted gross income (MAGI).
This often-overlooked and confusing figure can have significant tax implications for many taxpayers, including retirees. That's partly because your MAGI can impact everything from Medicare premiums and capital gains rates to required minimum distributions and taxes on Social Security benefits.
Here’s more of what you need to know.
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What is modified adjusted gross income (MAGI)?
MAGI (modified adjusted gross income) is a financial measure often used by the IRS to determine eligibility for various tax benefits and potential additional charges.
The MAGI calculation begins with your adjusted gross income (AGI) and is modified (with certain deductions and excluded income added back) for different tax provisions or programs. (Meanwhile, your AGI is your total annual income from all taxable sources less specific allowable deductions.)
Strategically managing your MAGI can potentially help you save on taxes and optimize your finances.
So, as you review your year-end tax situation, here are a few important aspects to consider.
Medicare premiums
MAGI determines whether you pay a surcharge on Medicare Part B and D premiums, known as an income-related monthly adjustment amount or IRMAA.
- IRMAA is calculated based on your MAGI two years prior.
- So, for example, your 2024 Medicare premiums are determined by your 2022 federal income tax return.
“Even a modest increase in income (e.g., due to a large retirement plan withdrawal, sale of an asset, or other taxable event) could push [retirees] into a higher IRMAA bracket, resulting in higher premiums for the next year,” explains Joshua Hanover, a managing director and office lead at accounting firm CBIZ Marks Paneth.
As a result, “retirees should review their expected MAGI with their accountants before year-end to determine if any planned income will push them over the threshold,” Hanover says, adding that some retirees might delay certain transactions to avoid a Medicare premium increase.
Strategies to prevent spikes pushing you into a higher premium bracket include offsetting gains with capital losses or maximizing contributions to tax-deferred retirement accounts.
“If a retiree is required to take a required minimum distribution from their retirement plan, they should consider making part of it a qualified charitable distribution,” Hanover notes.
Note: Using a qualified charitable distribution (QCD) can satisfy your required minimum distribution without increasing your modified adjusted gross income. (A QCD is a direct transfer of funds from an individual retirement account (IRA) to a qualifying charitable organization.)
- QCDs are available to those 70½ or older.
- Eligible IRA owners can donate to charity up to $105,000 per year as of 2024.
- The amount is excluded from your taxable income and can count toward your RMD if you are 73 or older.
Preparing for RMDs
On a related note, don’t let the year end without calculating how required minimum distributions (RMDs) might affect your MAGI.
(RMDs are the minimum amounts that must come out of given retirement plan accounts each year once the account holder reaches a certain age.)
- For instance, you may want to avoid doubling required distributions in a single tax year.
- (Retirees generally must take distributions starting at age 73.)
Kelly Regan, vice president and Certified Financial Planner™ with wealth management and advisory firm Girard, says, “It is important to remember that for most required minimum distributions, the deadline to withdraw from your IRA is December 31st.”
Also, Regan points out, “You can aggregate RMD distributions, meaning if you have two IRAs, you can withdraw the total RMD from one of the accounts — as long as the total RMD is taken, it is satisfied.”
If you’re uncertain about your distribution options (IRS rules have changed in recent years and inherited IRAs have their own complicated rules), consult a trusted and qualified financial or tax planner to help calculate your distribution and avoid IRS penalties.
Balancing capital gains
Year-end is also a time to consider how your realized capital gains might affect Medicare premiums. Investment gains are factored into your MAGI, which can increase your Part B and Part D premiums through IRMAA.
And don’t forget about calculating taxes on Social Security. Up to 85% of Social Security benefits can be subject to tax depending on your overall income, including capital gains, which are included in your “combined income.”
Regan points to tax loss harvesting to help mitigate impacts: “Capturing losses in your portfolio can offset gains to reduce your tax bill.”
“If you don’t have any capital gains, you can still capture $3,000 of losses to offset your income for the year, Regan explains, but “be mindful of wash sale rules — if you sell a security to capture a loss, you cannot buy back that security in any of your accounts until 30 days have passed.”
Additionally, a 0% long-term capital gains tax rate applies to those in lower tax brackets. Some strategies may keep your total income within the threshold for that favorable rate.
For more information, see IRS Updates Long-Term Capital Gains Tax Thresholds for 2025.
Year-end tax planning in retirement: Bottom Line
With any tax strategy, think about your overall tax situation.
Will you take the standard deduction or itemize? What about tax benefits or credits and your long-term financial goals beyond immediate tax savings?
Also, keep in mind potential tax changes, given that several key aspects of the Tax Cuts and Jobs Act (TCJA) will expire after 2025 if Congress doesn’t act. These could involve marginal federal income tax rates, the standard deduction, the state and local tax deduction (SALT), and the estate tax exemption, to name a few.
As always, your approach should align with your broader financial plan. Consult a trusted tax advisor before you ring in the New Year to determine the best tax moves for you.
Note: This item first appeared in Kiplinger’s Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.
This article has been edited to include additional details about QCDS and adjusted gross income.
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