What is Modified Adjusted Gross Income (MAGI) and Why It Matters
Definition & Meaning
Modified adjusted gross income (MAGI) is the adjusted gross income (AGI) that has been altered by specific adjustments. AGI represents your total income after subtracting allowable deductions, such as contributions to retirement accounts, alimony payments, moving expenses, and contributions to Keogh plans. MAGI is particularly important for determining eligibility for certain tax benefits and contribution limits for retirement accounts.
Legal Use & context
MAGI is commonly used in tax law and financial planning. It plays a crucial role in various legal contexts, including:
- Calculating eligibility for tax credits and deductions.
- Determining contribution limits for retirement accounts, such as Roth IRAs.
- Assessing eligibility for certain government programs, including healthcare subsidies.
Users can manage their MAGI calculations using legal templates available through services like US Legal Forms, which provide guidance on the necessary adjustments and forms.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A taxpayer has an AGI of $80,000. They have $5,000 in tax-exempt interest and $2,000 in foreign earned income. Their MAGI would be calculated as follows:
- AGI: $80,000
- Add tax-exempt interest: +$5,000
- Add foreign earned income: +$2,000
- MAGI: $87,000
Example 2: A couple with an AGI of $120,000 and no additional adjustments may find that their MAGI remains the same, affecting their eligibility for a Roth IRA contribution. (hypothetical example)