If you’re like most taxpayers, you want to take advantage of every tax deduction and tax credit on your income taxes. Sorting through all those credits and deductions can be confusing. Most tax deductions are based on either your adjusted gross income or your modified AGI. Your 401(k) contributions are deducted from your pay before taxes, so they are not included in your modified AGI.
TL;DR (Too Long; Didn't Read)
Your modified adjusted gross income does not include your 401(k) contributions.
Calculating Your AGI
Your AGI is the basis for most tax deductions and credits. To calculate your AGI, you add up all your sources of income and subtract allowable deductions. These deductions include unreimbursed business expenses, mortgage insurance premiums, charitable contributions, medical expenses, retirement plan contributions like your 401(k) and student loan interest. Typically, the lower your AGI, the more deductions and credits you can take on your income taxes.
Calculating Your Modified AGI
You can find your modified AGI by starting with your AGI and then adding back some of the deductions. Deductions that you add back in include the interest you’ve paid on your student loans, passive income and passive losses, IRA contributions, qualified tuition expenses and rental losses.
For most people, your modified AGI and AGI are close in number, if not identical. Your modified AGI is used to determine how much of your IRA contributions you can deduct and how much student loan interest you can deduct.
Effects of 401(k) Contributions
Your 401(k) contributions effectively reduce both your AGI and your modified AGI. The IRS has set limits on how much you can contribute, though. The contribution limit for 2018 is $18,500. If you’re age 50 or older, you can make additional contributions. For 2018, the catch-up contribution limit is $6,000, so you could contribute up to $24,500 to your 401(k).
For the current 2019 tax year, the contribution limit to a 401(k) is $19,000. The catch-up contribution remains at $6,000.
Effects of IRA Contributions
The main reason most people calculate their modified AGI is to determine how much they can deduct for their individual retirement account contributions. For the 2019 tax year, you can contribute up to $6,000 per year to an IRA. If you’re age 50 or older, you can contribute an additional $1,000.
If you and your spouse are not covered by an employer-sponsored retirement plan, then you may deduct your IRA contributions in full. If you or your spouse is covered by an employer-sponsored retirement plan, such as a 401(k), then your deduction for IRA contributions may be limited.
If you are covered by an employer-sponsored retirement plan, in order to deduct all of your contributions your modified AGI must be $64,000 or less if you’re single and $103,000 or less if you’re married and file together. If your modified AGI is between $64,000 and $74,000 if you’re single or between $103,000 and $123,000 if you’re married and file together, you can take a partial deduction of your IRA contributions. If you are not covered by an employer-sponsored retirement plan but your spouse is, your deduction may be limited.
- IRS: Retirement Topics – IRA Contribution Limits
- IRS: 2018 IRA Contribution and Deduction Limits
- IRS: Retirement Topics – 401(k) and Profit-Sharing Plan Contribution Limits
- Intuit Turbotax: What Is the Difference Between AGI and MAGI on Your Taxes?
- Investopedia: Adjusted Gross Income – AGI
- Investopedia: Do 401k Contributions Reduce AGI and/or MAGI?
Melinda Hill Sineriz is a freelance writer with over a decade of experience. Her work has appeared on Pocket Sense and Sapling. She specializes in business, personal finance, and career writing. She has worked in insurance sales and financial planning, helping families to manage their money and prepare for the future. Learn more about her and her work at thatmelinda.com.