Differences in MAGI Calculations For Your Taxes

A lot depends on your MAGI.

It's the number that the IRS uses to determine your eligibility for certain things, namely:

  • Passive activity losses / the "Small Landlord" exemption
  • Deductibility of traditional IRA contributions
  • Obamacare / ACA Credits

But don't be trapped: there are different ways you must calculate MAGI depending on what you're trying to do. I almost got confused on this myself, and had to do some digging in the actual law to make sure I was right.

Unlike AGI, which can be found on line 37 of the 1040, MAGI isn't a line on your tax return. MAGI isn't any one number.

Your Obamacare MAGI may be different from your Passive Activity Losses MAGI or tIRA Deductibility MAGI.

What is MAGI?

MAGI stands for "Modified Adjusted Gross Income". When you're figuring out eligibility for something, sometimes the IRS likes to use AGI, which is your total income minus certain specific deductions.

Sometimes that's not fair to use the AGI and the IRS wants you to add some of the specific deductions back in.

A google search for "How to Calculate MAGI" turns up a TurboTax page saying that MAGI is AGI plus lots of the above the line deductions added back in, such as 1/2 of Self Employment Taxes, student loan interest, and a whole slew of other things,

This may be true for passive activity losses, but it's misleading to people who want to understand their MAGI as it pertains to Obamacare.

Then there's how to calcuate MAGI for Roth IRA purposes, which you can find in a nice little worksheet here.

MAGI for the ACA / Obamacare is Really Special

There are lots of people who think that traditional IRA contributions don't come off your MAGI for Obamacare.

They are wrong. They're thinking of the MAGI rules when it comes to other stuff, like passive activity losses and tIRA deductibility. Ignore them- or better yet, show them the law!

Looking at the ACA itself, as in, the actual law, §1.26B1(e)(2) says pretty clearly that MAGI is ONLY:

  • Your adjusted gross income (AGI) on your federal tax return
  • +Excluded foreign income
  • +Nontaxable Social Security benefits (including tier 1 railroad retirement benefits)
  • +Tax-exempt interest

It is easy to get confused about the multiple ways to calculate MAGI.

For someone trying to reduce their tax and health insurance burden under the ACA, deducting 1/2 of self employment tax, student loan interest, and IRA contributions from your income can be a powerful tool.

No comments:

Post a Comment