AGI vs. MAGI: What’s the Difference?

Just as gross income is considered the starting point for calculating your taxable income, your adjusted gross income (AGI) is the next number in line. Your AGI is your gross income minus certain adjustments, but it doesn’t include deductions like the standard deduction.

However, modified adjusted gross income, or MAGI, is where things get confusing. Even though it doesn’t show up directly on your return, it can have a big impact on which credits you qualify for.

Those adjustments could include alimony payments or one-half of the self-employment taxes you paid. Self-employed and IRA retirement plan contributions can count too. Your modified adjusted gross income adds some of those adjustments back in, and that’s important for determining whether you qualify for certain credits. 

Tax credits like the Child Tax Credit, the Child and Dependent Care Credit, the Earned Income Tax Credit, and the American Opportunity Credit can all be affected by your AGI and your MAGI.

What Is the Difference Between AGI and MAGI?

The simplest way to put it is that AGI takes certain adjustments out, and MAGI puts some of them back in. The IRS says it in one line: “Modified adjusted gross income (MAGI) adds certain amounts to your adjusted gross income (AGI).”

For many taxpayers, MAGI looks a lot like AGI with certain deductions or exclusions added back in (often student loan interest). Exactly what gets added back depends on what you’re calculating. There are other items, but that’s the one most people run into.

How to Calculate AGI

You start with all the income you made during the year and then subtract out the adjustments you qualify for. We won’t try to list every one, but here are some of the common ones:

  • Traditional IRA contributions
  • SEP IRA, SIMPLE IRA, and self-employed 401(k) contributions
  • Health savings account contributions
  • One-half of self-employment tax
  • Student loan interest
  • Alimony, if your divorce agreement was finalized before 2019

Once you’ve taken those out, what’s left is your AGI. You’ll find it on line 11 of Form 1040.

How to Calculate MAGI

The IRS actually gives a pretty straightforward example. Let’s say the items you need to add back for a specific credit come to $1,750 and your AGI is $40,000. You add the two together, and your MAGI for that credit is $41,750.

The tricky part is that what you add back changes depending on what you’re calculating it for, so the Roth IRA version isn’t the same as the premium tax credit version. The IRS says to use each MAGI number only for the benefit you figured it for and then start over for the next one.

Some of the more common things that get added back:

  • Student loan interest
  • Tax-exempt interest, like from municipal bonds
  • Foreign earned income you excluded
  • Nontaxable Social Security benefits, for the premium tax credit

Does MAGI Show Up on Your Tax Return?

It’s not a line item, so you won’t find it on the return itself, but tax software will usually calculate it in the background (or the IRS will calculate). Tax software does the same thing in the background, on worksheets tied to whichever credit or contribution it applies to. If you want to figure it out yourself, you just start with your AGI from line 11 and add back whatever that particular benefit calls for.

Why Does MAGI Matter?

Congress and the IRS offer many credits to help taxpayers. But once your AGI or MAGI goes above a certain threshold, certain benefits start to phase out, like being able to contribute to a Roth IRA or getting the full Child Tax Credit.

A good way to think about it is that your MAGI is one of the final determinants of your eligibility for premium tax credits under the Affordable Care Act.

Can You Lower Your MAGI?

One obvious way to lower your MAGI is to make less money, but that’s not an ideal strategy for most people.

What you can do, though, is lower the income that gets counted. You can use a 401(k), a SEP IRA, a SIMPLE IRA, or a self-employed 401(k), because those contributions are all taken out before your income gets added up. HSA contributions help the same way. A traditional IRA is a little different, since it lowers your AGI but some MAGI calculations, like the one for Roth eligibility, add it right back in.

How to Use AGI and MAGI for Tax Planning

It’s important to look at your taxes as more than something to catch up on or fall behind on. Using these calculations can help you plan ahead, whether you’re starting a family or you’re self-employed, and understanding how it all factors into your MAGI can help you plan for the future.

Maybe your MAGI caught you off guard this year, but next year you’ll be able to plan ahead. That could mean putting more into your 401(k) or a SEP IRA before the year wraps up.

When you understand how MAGI and AGI work, you’ll be more informed about your own personal finances and also be able to plan more effectively. While it would be nice to think your taxable income is simply your gross income, it’s actually a huge benefit that these deductions and credits exist, because they can help you save money over the long run.

When it’s time to file, E-file.com figures out your AGI for you and applies the credits you qualify for.

Note: Tax laws may change with little notice. We do our best to keep this information current, but it is provided on an “AS IS” basis. It should not be considered, legal, financial, or other professional guidance. For more, see our terms.