Finding your adjusted gross income (AGI) is easy. You calculate it on the front of your 1040, then write it in at the bottom of the page. Finding your modified AGI (MAGI), however, is tougher because it doesn't get its own space on your tax forms. Instead, you have to sit down and adjust your adjusted gross income to get the MAGI figure you need.
To figure your adjusted gross income (AGI), you start with your gross income. That includes your pay as an employee, self-employment income, alimony, dividends and taxable interest — all before you subtract any deductions or exemptions. To adjust gross income, you subtract various amounts identified on your 1040. Some of the deductions are for money placed in tax-exempt accounts, such as an IRA or a health-savings account. Other deductions include interest on your student loans, and a part of any self-employment tax you pay.
A high modified AGI affects contributions to both traditional and Roth IRAs. With traditional IRAs, MAGI limits how much you can contribute tax free; with a Roth, it limits how much you can contribute at all. You modify AGI by adding back some of your adjustments such as any deductions you claimed for IRA contributions or student loan interest. If you excluded foreign earned income from your gross income, add that too. As of 2012, you can't contribute to a Roth if you file a joint return and your MAGI is $183,000 or more.
Social Security MAGI
The Social Security Administration also uses your MAGI, but it calculates it differently. You can actually put together this version with information on your 1040: Take your AGI and add any tax-exempt interest you wrote down on line 8b. If you receive Social Security benefits and your MAGI is high enough, your benefits become taxable. If you receive Medicare, you have to pay higher premiums when you make a higher MAGI.
When you modify your AGI, you don't add in tax-exempt contributions you make to workplace retirement plans such as a 401(k). If your MAGI is high enough to affect your Roth or traditional IRA contributions, your workplace plan may help. As 401(k) contributions aren't included in taxable income, putting more money into the plan may lower your modified AGI so that there's no IRA limitation. As of 2012, you can put up to $17,000 into your 401(k).
- Roth IRA Limits for a Non-Working Spouse
- How to Verify Your Income Against the Contribution Limits to an IRA
- Can I Still Contribute to an IRA if I Have a 401(k) Plan at Work?
- Does a 401(k) Contribution Reduce Taxable Income?
- Can I Continue to Contribute to My IRA When I Convert to a Roth IRA?
- How to Calculate Taxes on a Non-Deductible IRA Contribution
- How do I Calculate & Convert an IRA to a Roth IRA?
- How to Build a Roth IRA