AGI or the Adjusted Gross Income is the gross income minus the adjustments to income. The Gross Income will include dividends, wages, business income, capital gains, retirement distributions, and other income. Then, the Adjustments to Income are your student loan interest, educator expenses, retirement account contributions, or alimony payments. (Don’t forget about RMD calculations). So, in most cases, your AGI may be lower than your Gross Total Income on your return and it will never be more than that.
What is Modified Adjusted Gross Income on W2
In the simplest terms, the MAGI or the Modified Adjusted Gross Income is your AGI plus some items added to it, such as excluded or exempt deductions and income. The Internal Revenue Service will then make use of your Modified Adjusted Gross Income to see if you qualify for certain credits, and deductions, and to know if you’re eligible for any retirement plans.
You also have to keep in mind that your MAGI can vary depending on the tax benefits you qualify for. So if you want to determine your MAGI for a specific tax benefit, you have to know the right definition of MAGI for the purpose of that specific tax benefit.
How to Calculate Modified Adjusted Gross Income
As mentioned earlier, the Internal Revenue Service will make use of your Modified Adjusted Gross Income in many ways for them to know if you qualify for a particular credit or deduction. So your MAGI will let you know if you can or cannot contribute to a Roth IRA, be eligible for a premium tax credit, or deduct your contributions from your traditional IRA if your spouse or you have a retirement plan sponsored by an employer. But if you have an employer who offers you an HRA, there are special rules that you need to check to coordinate your credit for the premium tax with your allowance from the HRA.
Moreover, calculating your Modified Adjusted Gross Income is crucial for you to know if you’re eligible to take advantage of the tax credit and other tax deductions. So if you’re using a particular software to help you prepare your tax return, the system will automatically calculate your Adjusted Gross Income after you input the number.
However, if you want to do it yourself, you need to tally all of your reported taxable income for the entire tax year. It’ll include the income that your employer reported on a W-2 Form and even the dividends and miscellaneous income that was reported on the IRS Form 1099. With that, please check these few steps below to help you do the calculation for your MAGI correctly.
First Step – Gross Income Calculation: As mentioned above, yoru GI is considered your simplest form of income, including all of the money you’ve earned before taxes. It means that your Gross Income may come from your salary if you’re working for a company, dividends, capital gains, royalty and rental earnings, farm income, unemployment benefits, or the alimony you received. You can look for your Gross Income on line 7b of IRS Form 1040. You will be using your GI as the basis for your AGI calculator.
Second Step – Adjusted Gross Income Calculation: After determining your Gross Income, you can now make the necessary adjustments to it to get your Adjusted Gross Income. All you need to do is subtract the amount of all the qualified deductions from your GI. These adjustments may include items, such as moving expenses, some IRA contributions, student loan interest deduction, self-employemnt taxes, or the paid alimony. You can do this calculator yourself. But to make your job a lot easier, you can find Adjusted Gross Income on line 8b of IRS Form 1040.
Third Step – Modified Adjusted Gross Income Calculation: Once you’re done determining your Adjusted Gross Income, you’re now ready to do the calculator for your Modified Adjusted Gross Income. You have to keep in mind that as your income increases, the Internal Revenue Service phases out tax deductions and credits. Hence, the agency will figure out how much will be the total of your earnings by summing up these factors back to your Adjusted Gross Income. It will then give you your Modified Adjusted Gross Income.
Moreover, according to the IRS, for you to determine your Modified Adjusted Gross Income, you should add the following below:
- Any amount of interest that the taxpayer received or accrued during the tax season in which that amount is exempt from tax
- Any amount that has been excluded from your Gross Income as stated in section 911
- Any amount that is equal to the social security benefits of the taxpayer
Example of Adjusted Gross Income on W2
The Adjusted Gross Income makes the adjustments to your GI for you to know the particular figure that will be used as the basis to calculate your tax liability. In fact, many states in the U.S. are also making use of the AGI from the federal tax return for them to calculate the amount of the state income taxes that a particular taxpayer owes. Besides that, the states can further change this figure if there are state-specific credits and deductions.
Here’s an example of Adjusted Gross Income that can affect your deductions on W2.
Let’s say that during the tax year, you had some dental expenses that your insurance company wasn’t able to reimburse. Now, you’re ready to itemize your tax deductions and file your returns. According to the Internal Revenue Service, you are permitted to deduct the portion of those dental expenses that exceed 7.5% of your Adjusted Gross Income.
So if the total amount of the dental expenses that your insurance company wasn’t able to reimburse is $12,000 and your Adjusted Gross Income is amounting to $100,000, it means that you can deduct the $4,500 because that exceeds the 7.5% of your AGI, which is $7,500. But if your AGI is $50,000, you will then have a deduction of $8,250.
Moreover, you don’t have to worry about the list of itemized deductions because the Internal Revenue Service will provide everyone on their official website as well as the requirements you need to comply with for you to claim them. You also have to remember that if you have various tax credits and deductions on your returns, your Adjusted Gross Income can also affect your eligibility for them. So the more your AGI gets lower, the more tax credits and deductions on your returns will be available that you can take advantage of to minimize your tax liability.
You always have to keep in mind that you report your Adjusted Gross Income on line 11 of IRS Form 1040. It’s the particular form you have to use when filing your income taxes during the entire tax year. Also, once you’ve completed your taxes, you need to keep that number because you’ll be needing it again when you plan to e-file your tax return the following tax year. The agency will use that number for your identity verification. Also, you have to know that almost every taxpayer may now use the Free File program of the IRS to process their federal taxes online without paying anything and it has been effective as of January 2022.
Many taxpayers who have simple financial lives may find their Adjusted Gross Income and their Modified Adjusted Gross Income the same or in a very close number. But if you find yours more complicated, don’t hesitate to get in touch with a tax professional to avoid any mistakes or errors upon filing your returns to the IRS.