Modified Adjusted Gross Income
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In U.S. tax law, modified adjusted gross income is determined by taking income from all sources (total, or gross income) and then making adjustments downward to arrive at adjusted gross income (AGI). The downward adjustments come from subtracting, among other items, such outlays as Educator expenses, IRA contributions, 401(K) contributions, alimony paid, self-employed health insurance premiums paid, moving expenses, and student-loan interest paid. Additionally, a deduction is taken for paying penalties on early withdrawal from savings. After all subtractions allowable have been taken, the result is a U.S. taxpayer's AGI.
Once AGI is determined, then under certain circumstances, taxpayers must calculate their modified adjusted gross income (MAGI). Among other situations, this calculation is called for in determining whether Roth IRA income limits have been reached, and therefore whether a Roth contribution can be made. To calculate MAGI, AGI is the starting point; and then it is modified by adding back certain deductions that were allowed in arriving at AGI in the first place. For each deduction that is added back, MAGI rises as compared to AGI.
Upward adjustments that modify AGI are generally made by not allowing any deductions for passive losses, to include all rental losses, not allowing deductions taken for tuition, fees, student loan interest paid, IRA deductions, nor the deduction for paying one-half of self-employment tax. Deductable money placed in a 401(K) are allowed.
Additionally, MAGI is raised by including interest earned from U.S. Savings Bonds that were used for higher education expenses (which is usually excluded income for simple AGI purposes).
Finally, the taxpayer's MAGI is lowered by excluding Taxable Social Security income received.
