Understanding Modified Adjusted Gross Income (MAGI)

by Investing School on October 21, 2011

Making contributions to an IRA can be complicated, but it is essential if you are going to retire while you are still able to enjoy the experience. Social Security may or may not be around when you reach this stage in life, but money you put away yourself should be. Your Modified Adjusted Gross Income (MAGI) is what determines what portion of your IRA contribution is tax deductible.

From the perspective of your tax load, your taxable income is your Adjusted Gross Income. Numerous factors go into calculating the AGI: wages, rental income, dividends and more are all taken into account. Some of your deductions are based upon this number. Your MAGI is different and most important when you are looking at what to contribute annually to any retirement accounts you hold.

The MAGI, however, can reduce the deductible amount of your IRA contribution to zero. This doesn’t mean that you can’t contribute to your IRA if you find yourself in this position; it is just that you might end up paying taxes on that contribution. The calculation of how much tax you are required to pay is similar or identical to that made for AGI.
Which things are added to your AGI when determining your IRA’s taxable status? If you take deductions for foreign housing, student loans, higher education or you receive foreign income expect to see an effect your MAGI. On the other hand, even if you have to pay taxes on money you put into your IRA, it is wise to make as large a contribution as you can.

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