Difference between Adjusted Gross Income and Adjusted Gross Income

Difference between Adjusted Gross Income and Adjusted Gross Income

When calculating your income tax, it’s important to understand the relationship between the terms Adjusted Gross Income (AGI) and Modified Adjusted Gross Income (MAGI) because they affect how much you owe in taxes. AGI can reduce your taxable income by subtracting certain deductions from your gross income. …

When calculating your income tax, it’s important to understand the relationship between the terms Adjusted Gross Income (AGI) and Modified Adjusted Gross Income (MAGI) because they affect how much you owe in taxes. AGI can reduce your taxable income by subtracting certain deductions from your gross income.  

On the other hand, MAGI can eliminate some deductions because as your income increases, the Internal Revenue Service (IRS) begins to prohibit certain deductions and credits. You may want to think of AGI as “giving” deductions and MAGI as “taking” those deductions.

key takeaways

  • Adjusted Gross Income (AGI) and Modified Adjusted Gross Income (MAGI) are calculations that help the IRS determine whether taxpayers can take advantage of certain credits and deductions.
  • AGI can reduce your taxable income by subtracting certain deductions from your gross income.
  • But MAGI can add back these deductions, and the IRS doesn’t allow certain deductions and credits when income increases.

U.S. tax law tools

The IRS allows individual taxpayers to use tax deductions and applicable credits based on AGI and MAGI calculations to reduce their total tax liability. It is normal for a person’s magician to be similar or identical to his magician. However, these calculation tools can make small differences that can have a significant impact on an individual’s tax return. Specifically, these differences will determine whether a person is eligible for certain benefits outlined in the Affordable Care Act, as is the case today.  

Adjusted Gross Income

Gross income is the sum of all your income for the year, including wages, dividends, alimony, capital gains, interest income, royalties, rental income, and retirement distributions. Adjusted Gross Income is a modification of Gross Income; it will allow for deductions from your Gross Income to be taken into account to arrive at the figure for calculating income tax. Generally speaking, AGI is more useful than gross income for personal tax purposes.

Calculate AGI

To reach your AGI, you need to add up all of your income for the year and then subtract any allowed adjustments, such as self-employment retirement or individual retirement account (IRA) contributions, alimony, and student loan interest. You can also use the 50% self-employment tax, self-employment health insurance premiums, and qualifying tuition to reach AGI.

The impact of AGI on taxation

Your AGI directly affects your eligibility for many of the deductions and credits available on your tax return. Earned Income Credit and Child/Dependent Care Credit are both subject to AGI calculations. Similarly, tax deductions including mortgage insurance premiums, medical deduction allowances, and total itemized deductions are based on your AGI.

You might want to think of AGI as “giving” the IRS tax deductions, and MAGI as “taking” those deductions.

Adjusted Gross Income

Adjusted gross income is an important intermediate step in determining how much of a person’s gross income is taxable. MAGI modifies adjusted gross income by adding back certain items, such as foreign income, tax-exempt interest, and exclusions from Social Security benefits.  

Calculate magi

To calculate MAGI, taxpayers add certain adjustments to their total AGI to determine if they can take full advantage of the tax benefits, according to the IRS. Fees or deductions related to tuition, loss of rental property, 50% self-employment tax paid and student loan interest are common adjustments that are added back to MAGI. At certain income levels, the IRS began phasing out deductions for items such as IRA contributions, education-related expenses, and rental property losses.  

How the Three Doctors Affect Your Taxes

Most notably, the IRS uses MAGI numbers to determine how much of an individual’s IRA contributions are deductible and whether an individual is eligible for a premium credit. The higher the MAGI, the less you can deduct from your IRA contributions. The IRA deduction can even go to zero if the MAGI is too high. If this happens, you can still contribute to the IRA plan, but you won’t be able to deduct any taxes for the following year. 

By aamritri

Leave a Reply

Your email address will not be published.

Related Posts