People understandably gripe about the complexities of the federal income tax laws. Filling out your tax return is not as easy as just writing a couple of numbers down on a postcard and sending it to the IRS.
Just when you think that you might have a handle on your taxes, Congress changes the laws – sometimes retroactively. Confusing tax terminology add to the challenge. One example of that is the many meanings of the term “modified adjusted gross income,” sometimes referred to as modified AGI or MAGI.
What is modified adjusted gross income?
Modified adjusted gross income (MAGI) is often used by the IRS and other federal agencies to determine your eligibility for certain tax benefits or tax breaks or to determine whether you are subject to surtaxes or surcharges.
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For example, in the tax code, MAGI is used to calculate income thresholds for the health premium credit, the child tax credit, the American Opportunity Tax Credit, the adoption credit, the clean vehicle tax credit, and for making Roth IRA contributions. Your MAGI also determines whether you will be hit with the 3.8% surtax on net investment income and whether your Social Security benefits are taxed. For people on Medicare, MAGI dictates whether you owe monthly premium surcharges for Parts B and D coverage.
The confusing part is that the definition of modified adjusted gross income often differs depending on what it is used for. However, the one constant of MAGI is that it always starts with your adjusted gross income. (That is the amount shown on Line 11 of your Form 1040 or Form 1040-NR.)
But from there, figuring out your modified adjusted gross income gets complicated.
MAGI for popular tax credits
There are some common situations involving popular tax credits where you will need to calculate your MAGI. For example, several popular tax credits (i.e., the child tax credit, the adoption credit, the clean vehicle credit and the American Opportunity tax credit) use the same definition of modified adjusted gross income.
To calculate your modified adjusted gross income for those credits, start with the AGI shown on line 11 of your Form 1040 or 1040-SR and add the foreign earned income exclusion, foreign housing exclusion, and any amounts excluded from gross income because they were received from sources in Puerto Rico, or American Samoa.
Child Tax Credit. The child tax credit of up to $2,000 per child begins to phase out once your modified AGI exceeds $400,000 on a joint return, or $200,000 on a single or head-of-household return.
The Adoption Credit. The maximum $15,950 tax credit for adopting a child for 2023 phases out at modified AGI over $239,230. (For 2024, the credit cap is $16,810, and the phase-out begins at modified AGI of more than $252,150.)
Clean Vehicle Credit. You can get up to a $7,500 tax credit for buying a new electric vehicle this year, provided you meet all the rules. One of the requirements is that your modified AGI not exceed $300,000 on joint returns, $225,000 on head-of-household returns or $150,000 on single returns. There’s also a tax credit of up to $4,000 for buyers of used electric cars, but that tax break ends at modified AGI over $150,000 on joint returns, $112,500 on head-of-household returns and $75,000 on single returns.
American Opportunity Tax Credit. The American Opportunity tax credit for the first four years of college is worth up to $2,500 per child per year in costs for tuition, fees and books. The credit starts to phase out for joint filers with modified AGI over $160,000 and for single and head-of-household filers with modified AGI over $80,000.
MAGI and the 3.8% net investment income tax
The additional 3.8% tax on net investment income generally affects upper-income investors – either joint filers with modified AGI over $250,000 or single or head-of-household taxpayers with modified AGI over $200,000. (Net investment income includes, among other things, taxable interest, dividends, gains, passive rents, annuities and royalties.) The 3.8% tax is due on whichever is smaller: net investment income or the excess of modified AGI over the set income thresholds.
For purposes of this 3.8% surtax, modified AGI is the AGI shown on line 11 of your Form 1040 or 1040-SR plus tax-free foreign earned income.
MAGI for monthly Medicare premiums
Most people on Medicare pay the basic monthly fee for Medicare Part B coverage, which for 2024 is $174.70 per month. And many also sign up for the cost of Part D prescription drug coverage. However, some seniors pay higher Part B and D premiums if their modified AGI exceeds a specific income threshold.
For 2024 coverage, Medicare Parts B and D monthly premium surcharges kick in for joint filers with modified AGI over $206,000 and single individuals with modified AGI of more than $103,000. The surcharges increase as income rises.
Medicare premium surcharges are calculated using the income reported on the most recent filed tax return. The amounts for 2024 are based on modified AGI from 2022 returns filed in 2023.
Modified AGI for this purpose is AGI shown on line 11 of Form 1040 or Form 1040-SR, plus tax-exempt interest.
MAGI for common tax deductions
The definition of modified AGI for purposes of tax breaks for student loan interest, savings bond interest used for education, and rental losses (each of which are described below) is even more complex. That’s because more tax items are taken into account in determining MAGI for those tax breaks.
Student Loan Interest Deduction. If you’ve taken out student loans to pay for college, you may be able to deduct up to $2,500 in interest on your tax return once you start repaying the loans. The write-off is considered an above-the-line deduction because it is claimed as an adjustment to income, and you can take it even if you don’t itemize.
However, the student loan interest deduction starts to phase out if your modified AGI for 2023 exceeds $155,000 for joint filers and $75,000 for other filers (the 2024 modified AGI thresholds are $165,000 and $80,000).
Savings Bond Interest Used for Education. Buyers of EE or I savings bonds have a choice when they acquire the bonds. They can pay federal income tax each year on the interest earned or defer the tax bill to the end. Most people choose the latter. They report the interest income on their Form 1040 for the year the bonds mature or when they’re cashed in, whichever comes first.
One way to avoid paying federal income tax on accrued EE or I bond interest is to cash in the bonds before the maturity date and use the proceeds to help pay for college or other higher education expenses for you, your spouse or your dependent. But there are lots of rules and hurdles to jump over to be able to take advantage of this tax perk.
For example, the exclusion is subject to strict income limits. For 2023, the interest exclusion begins to phase out at modified AGI of more than $137,800 for joint filers and $91,850 for others (the 2024 modified AGI thresholds are $145,200 and $96,800).
Deduction for Rental Losses. The passive loss rules usually prevent the deduction of rental real estate losses, but there are important exceptions. For example, if you actively participate in the renting of your property, you can deduct up to $25,000 of loss against your other income. This $25,000 allowance begins to phase out as your modified AGI exceeds $100,000.
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