Your Adjusted Gross Income (AGI) is used to determine how much of your income is taxable, and your Modified Adjusted Gross Income (MAGI) is used to determine whether or not you are eligible for certain tax deductions and credits.
These two types of income are related in that, your AGI is used to calculate your MAGI. (If you need a refresher on what is included in AGI, check out Lines 1-7 of the 2018 Form 1040, Page 2.) The image below highlights a few deductions that are added back to AGI to determine MAGI.
Although MAGI does not appear as a line item on your tax return, several IRS publications provide a worksheet to help taxpayers determine MAGI. Most tax software programs will automatically calculate MAGI to determine a taxpayer's eligibility for certain deductions and credits. IRS Publication 590-A provides a helpful worksheet to determine a taxpayer's MAGI for the purpose of taking the IRA deduction. This publication also includes specific examples to reference as seen in the image below.
A MAGI that is too high can render you ineligible for certain tax deductions and credits. For example, in 2018, a single person with MAGI over $80,000 would not be eligible to take the American Opportunity Tax Credit for qualified tuition expenses. It is important to consider MAGI when tax planning to determine which deductions and credits will apply in the current tax year.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.