Four different types of income
Modified adjusted gross income is used to determine eligibility for some of the most common tax benefits in the United States, but it is one of four important income figures taxpayers should be aware of. In order of the (typically) largest number to the smallest:
- Gross income: Your gross income includes all of the money you make in a given year. For example, if your only source of income is your job, and you were paid a salary of $100,000, that is your gross income.
- Modified adjusted gross income (MAGI): This is an income metric that starts with your adjusted gross income, or AGI (more on that in a bit), and adds certain deductions back in.
- Adjusted gross income (AGI): This is calculated by starting with your gross income and subtracting certain adjustments, such as contributions to tax-deferred retirement accounts, student loan interest, half of the self-employment tax, health savings account (HSA) contributions, and a few others. For many people, AGI and MAGI are the same number.
- Taxable income: This is your AGI minus all of your tax deductions. In short, your taxable income is the number you actually pay income tax on and is usually significantly lower than your AGI and gross income.
Why is MAGI important?
MAGI is important because it determines your eligibility for certain tax benefits. The ability to deduct traditional IRA contributions and to contribute to a Roth IRA depends on your MAGI, as does the ability to use the valuable Child Tax Credit. It is also used to determine eligibility for the American Opportunity Credit and Lifetime Learning Credit for education expenses, as well as for the Premium Tax Credit for Americans who get their health insurance from the marketplace.
It can also be used to determine if you have to pay certain taxes, particularly the net investment income tax (NIIT), which is a 3.8% tax added to the investment income of certain high-income households.
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