The Modified Adjusted Gross Income (MAGI) is an alternative income measure that limits certain tax exemptions. This figure is your Adjusted Gross Income (AGI) with certain exceptions added back. It is used to determine your eligibility for various tax benefits.
How Modified Adjusted Gross Income (MAGI) Works
Modified Adjusted Gross Income is your Adjusted Gross Income plus certain exceptions. It is used to calculate eligibility for adoption tax credits, adoption assistance programs, the American Opportunity Tax Credit, the Lifetime Learning Credit, student loan interest deduction, and Roth Individual Retirement Account (IRA) eligibility. The exceptions are:
- Any foreign earned income exclusion claimed
- Any housing exclusion claimed
- Any mortgage interest deduction that you may have claimed
When using MAGI for healthcare plans and insurance through the marketplace, the modified adjusted gross income includes foreign income not subject to tax, non-taxable Social Security benefits, and tax-exempt interest.
Note: You must also add any income you excluded from taxes that you received from American Samoa or Guam or the Northern Mariana Islands or Puerto Rico, if applicable.
There is no one general definition of MAGI, as adjusted gross income can be modified in different ways for different purposes.
Adoption Tax Credits and Adoption Assistance Programs
The amount you can claim for the adoption tax credit is limited or phased out if your modified adjusted gross income exceeds certain thresholds. The maximum amount and exclusion per child is $14,890 for 2022 and $15,950 for 2023. The phase-out for the adoption tax credit starts at $223,410 for 2022 and ends at $263,410.
MAGI can also limit the amount you can claim for adoption expenses related to tax-free compensation from an employer-sponsored assistance program. The same MAGI thresholds that apply to the adoption tax credit are used for employer-provided adoption assistance programs.
Note: The value of these tax exemptions begins to decrease at the lower limit, and taxpayers with MAGI above the upper limit have no entitlement to these benefits at all.
Your MAGI is shown on line 7 of Form 8839, which you must complete and submit to claim qualified adoption expenses. It is also shown on line 23 of Form 8839. This is used to determine the maximum amount of benefits that can be excluded from federal income tax for adoption assistance provided by your employer.
American Opportunity Tax Credit
The American Opportunity Tax Credit is a credit for qualified education expenses. Again, the amount of the credit is determined and is gradually phased out completely if your MAGI exceeds certain specified thresholds.
The amount you can claim is reduced if your MAGI is between $80,000 and $90,000 if you are a single filer, and between $160,000 and $180,000 if you are filing a joint return. You cannot claim this tax exemption if your MAGI is more than $90,000, or $180,000 for married taxpayers filing jointly.
Coverdell Education Savings Accounts
A Coverdell Education Savings Account operates similarly to a 529 plan, where the account is a trust or custodial account created solely to pay for the qualified education expenses of a designated beneficiary. Your MAGI also limits the amount you can contribute to a Coverdell Education Savings Account on behalf of someone else.
Calculations for these accounts are made using Worksheet 7-1, “MAGI for a Coverdell ESA,” found in IRS Publication 970. Again, the amount you can contribute is reduced or phased out if your MAGI is above certain thresholds.
The maximum allowable contribution is…
The limits for Coverdell education savings accounts are $95,000 to $110,000, increasing to $190,000 to $220,000 if married and filing a joint tax return.
Note: Total contributions for one child cannot exceed $2,000 annually.
Lifetime Learning Credit
You can calculate your MAGI for the Lifetime Learning Credit using Worksheet 3-1 in IRS Publication 970. Again, if your MAGI is above a certain threshold, the amount you can claim is reduced or eliminated – depending on your MAGI and tax filing status. The amount of the credit can be calculated on IRS Form 8863.
This credit phases out for taxpayers whose modified adjusted gross income exceeds $80,000 or $160,000 for married taxpayers filing jointly.
Student Loan Interest Deduction
Your MAGI is your AGI with the following adjustments for the purposes of claiming the student loan interest deduction:
- Exclusion of the student loan interest deduction
- Any deduction you took for tuition and fees
- Any deduction for domestic production activities
- Any exclusion for foreign earned income, housing, and the housing deduction
- Any exclusion for income from American Samoa or Guam or the Northern Mariana Islands or Puerto Rico
Your modified adjusted gross income must be less than:
- $85,000 if you are single or head of household or qualify as a qualifying widow
- $170,000 if you are married and filing a joint tax return
You can calculate your MAGI for this deduction using Worksheet 4-1 in IRS Publication 970. The deduction limits vary by year and filing status. The income limits for the student loan interest deduction for 2022 are $85,000 for single taxpayers and $175,000 for married taxpayers filing jointly. For 2023, the income limits are $90,000 for single taxpayers and $185,000 for those filing jointly.
Note: Those who use the married filing separately status are completely ineligible for the student loan interest deduction.
IRA Contribution Deduction
Your MAGI calculation also differs and is more complex for the purposes of determining the allowable tax deduction for contributions you made
Source: https://www.thebalancemoney.com/modified-adjusted-gross-income-3193409
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