What is Modified Adjusted Gross Income (MAGI)?

In writing about Roth IRA contribution limits (and how to fix Roth IRA contribution mistakes) over the past week, I came to realize that some readers might not be familiar with the term modified adjusted gross income (MAGI). As it turns out, this is a critical value for determining things like whether or not you are eligible to: (1) contribute to a Roth IRA, (2) deduct traditional IRA contributions, or (3) convert funds from a traditional (or SEP) IRA to a Roth IRA. Thus, it’s important that people understand what it is and how it is calculated.

Here’s my understanding of the situation…

In order to figure out your MAGI you first need to know what your AGI represents. In short, your AGI is your total income (including wages, interest, income from retirement accounts, capital gains, and alimony received) less certain “adjustments.” These adjustments include things like deductible IRA contributions, 401(k) or 403(b) contributions, alimony payments, health insurance premiums (if you’re self-employed), moving expenses, and interest on student loans (consult the IRS web site or a tax professional for a full rundown). Note that AGI does not reflect standard or itemized deductions. Nor does is it influenced by personal exemptions.

In order to arrive at your modified AGI, you then need to add back certain things like income that you exluded due to the foreign earned income exclusion, any deductions for foreign housing, interest income for series EE bonds that you may have excluded because you used the proceeds to pay for qualified educational expenses, any deduction that you may have claimed for student loan interest or allowable tuition expenses, employer-paid adoption expenses, and any deduction that you may have claimed for a traditional IRA contribution (note that employer plans, such as 401(k) and 403(b) contributions still reduce your MAGI). Also, if you’re age 70-1/2 and receiving minimum distributions from a traditional, these funds do not count against your MAGI.

As a final note, it’s important to keep in mind that funds being converted from a traditional IRA to a Roth IRA do not count against your MAGI even though they may be taxable.

19 Responses to “What is Modified Adjusted Gross Income (MAGI)?”

  1. Anonymous

    Is the SEP deduction on Form 1040 line 38 added back for the MAGI to determine Roth contribution limits? On the ‘MAGI for Roth IRA Purposes IRS’ worksheet it only mentions adding back “Traditional IRA deduction from Form 1040 line 32”. Above in this chain you say IRA/SEP are added back. Why wouldn’t the IRS worksheet mention the line 38 “Self-Employed SEP, SIMPLE and qualified plans in its MAGI worksheet if this is added back? Appreciate help with this.

  2. Anonymous

    Download html Pub 590 from IRS.gov; Chapter 2 – Roth IRAs. When I try to download the pdf Pub 590, my computer freezes. Any unconverted IRA distribution adds to MAGI, along with other tax preferences listed in 590.

  3. Anonymous

    For Alan: not according to IRS pub 590 and Form 8815

    For Mark: If all of the pension money is rolled-over into Roth, no. Any not rolled over would be counted in MAGI. In 2009, you could not convert (roll-over) any approved pension plan money into Roth if MAGI was over 100K. No such restriction in 2010.

  4. Anonymous

    There was no mandatory minimum required IRA distributions in 2009. However, I did take some money out. I also did a Roth conversion during 2009. I know the conversion amount is not included in my MAGI, but what about the “voluntary” distributions taken. I believe they are excluded from the MAGI. Is this correct? If not, I will have to re characterize the conversion.

  5. Anonymous

    My broker tells me that capital gains are deducted from AGI to get MAGI for $100,000 limit for IRA to Roth conversion. does not sound right to me. It it?

  6. Anonymous

    Re: MAGI for IRA purpose, if I have a rental loss on line 17 of 1040 and the loss is included in AGI line 37, do I take the loss out of AGI to derive the MAGI? The MAGI for passive activity loss limitation (Form 8582) excludes the rental loss. Is the MAGI calculation for IRA different from the MAGI calculation for passive acitivy loss limitation?

  7. Mike: Correct. That’s what I said. Those things get taken out for AGI, and traditional IRA goes back in for MAGI. So yes, an employer plan can be used to reduce MAGI, but a trad/SEP IRA cannot.

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