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Adjusted Gross Income and Modified Adjusted Gross Income

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With the recent passage of the 2008 tax stimulus package, many people have been asking what their adjusted gross income is and how that differs from their take home pay, their salary, and the other similarly named modified adjusted gross income. The differences are pretty simple once you understand the motivations behind it but it’s easy to confuse many of them together.

First off, you salary is the pre-tax amount your employer pays you to work for them. Next, your take home pay is your salary minus any deductions you may have for health insurance, retirement plan contributions such as a 401(k), taxes, and any other adjustments. Your take home pay is the dollar amount that gets written on the check (or is deposited into your bank account). Your salary is what you tell your parents when you get a job (it’s bigger). :)

Why is this important? The AGI and MAGI are often used to determine if you are eligible for certain benefits, deductions, etc. For example, the MAGI is used to determine contribution eligibility for IRAs such as the Roth IRA.

Adjusted Gross Income

According to the IRS, your AGI is all taxable income you earn including the following categories:

  • wages,
  • salaries,
  • tips,
  • taxable interest,
  • ordinary dividends,
  • taxable refunds, credits, or offsets of state and local income taxes,
  • alimony received,
  • business income or loss,
  • capital gains or losses,
  • other gains or losses,
  • taxable IRA distributions,
  • taxable pensions and annuities,
  • rental real estate,
  • royalties,
  • farm income or losses,
  • unemployment compensation,
  • taxable social security benefits,
  • and other income

minus

  • specific deductions including educator expenses,
  • the IRA deduction,
  • student loan interest deduction,
  • tuition and fees deduction,
  • Archer MSA deduction,
  • moving expenses,
  • one-half of self-employment tax,
  • self-employed health insurance deduction,
  • self-employed SEP, SIMPLE, and qualified plans,
  • penalty on early withdrawal of savings, and
  • alimony paid by you.

Some argue that this is what appears on your 1099 or your W-2′s, but that’s not entirely accurate (self-employment tax isn’t even within scope for a 1099). The full list above is comprehensive and provided by the IRS so that’s the official story (source). Note one important item(s) missing from the “minus” list, the standard deduction or any other itemized deductions (like mortgage interest).

Modified AGI

How does the MAGI differ? You simply take your AGI and exclude the following (source):

  • Any passive loss or passive income, or
  • Any rental losses (whether or not allowed by IRC § 469(c)(7)), or
  • IRA,
  • taxable social security or
  • One-half of self-employment tax (IRC § 469(i)(3)(E)) or
  • Exclusion under 137 for adoption expenses or
  • Student loan interest.
  • Exclusion for income from US savings bonds (to pay higher education tuition and fees)
  • Qualified tuition expenses (tax years 2002 and later)
  • Tuition and fees deduction
  • Any overall loss from a PTP (publicly traded partnership)

Relationships

So your MAGI will be higher than your AGI but smaller than your gross income. Your gross income will be your salary plus any other income, passive or active, and thus larger than MAGI or AGI (since they include subtractions for certain items).

Why is this important?

Knowing what makes up these numbers is important because those values will dictate what you are permitted to do, tax-wise. The best example is with a Roth IRA. If you file as a single and your MAGI is under $99,000 for 2007, you can contribute the maximum $5,000. If your MAGI is between $99,000 and $114,000 then your contribution is phased out (Roth IRA contribution phase outs). If your MAGI is over $114,000, then you can’t contribute to a Roth IRA.

So, if you know you’re within those phaseout ranges, you might want to contribute a little bit more into the 401(k) so you can take advantage of the Roth IRA. Since you know what makes up the MAGI calculation, you would be well informed and smart to do that (if you wanted to contribute to a Roth IRA).

There you have it, AGI and MAGI, all wrapped up in a pretty little (and somewhat complex) bow.

{ 7 comments, please add your thoughts now! }

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7 Responses to “Adjusted Gross Income and Modified Adjusted Gross Income”

  1. Ron White says:

    Thanks for writing this up! Very useful information. One question — where are 401(k) contributions deducted?

  2. hank says:

    EXCELLENT write up about it. Very detailed and very helpful to those looking to understand the MAGI!

  3. Flexo says:

    Very helpful article! Thanks for posting it.

  4. What an outrage to inflict such complicated BS on taxpayers! There’s just no excuse for it.

    I can’t even begin to understand this stuff, much less remember it and apply it. That’s why I have to hire an expert to prepare my taxes. We shouldn’t have to pay extra for the privilege of paying our taxes.

  5. Joanne McMullen says:

    This was so helpful and easy to understand.

  6. James says:

    # IRA,
    # taxable social security

    What are these two items?

  7. James says:

    Does the IRA include 401K?


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