AGI

What is modified adjusted gross income? The answer is somewhat tricky. IRS and other agencies use modified AGI or MAGI to determine your eligibility for certain benefits, or to figure whether you are subject to surtaxes or surcharges. For example, it’s used in figuring income thresholds for popular tax credits, such as the child credit, American Opportunity Tax Credit, and the adoption credit. It determines whether you are hit with the 3.8% tax on net investment income and whether you can deduct student loan interest. For purposes of Medicare, it dictates whether you owe monthly premium surcharges for Medicare Parts B and D. And it determines whether you are eligible to claim the following new tax deductions in the OBBB: The up-to-$40,000 state and local tax deduction on Schedule A. The deductions for qualified tips, overtime pay, and interest paid on vehicle loans. Plus, the up-to-$6,000 deduction for each senior who is age 65 or older. (Note the higher SALT deduction is only for itemizers. The other four OBBB write-offs, which itemizers or filers taking standard deductions can claim, are “below the line,” meaning they are subtracted from AGI to arrive at taxable income. In our last Letter, we erroneously said that these four write-offs were above-the-line deductions.)

The definition of MAGI varies depending on its intended use. For Medicare premium surcharges, MAGI is AGI plus tax-exempt interest income. For the net investment income tax, MAGI is AGI plus tax-free foreign earned income. For the five new deductions in the OBBB, the AOTC, and the child credit, MAGI is AGI plus any foreign earned income exclusion, foreign housing exclusion, and any amounts excluded from gross income because they were received from sources in Puerto Rico or American Samoa. For excluding I or EE savings bond interest used for education, another definition takes more items into account.