Adjusted Gross Income and Modified Adjusted Gross Income

By MoneyBlueBook

In the world of taxes and financial planning, the terms adjusted gross income (AGI) and modified adjusted gross income (modified AGI or MAGI) are particularly significant. They are frequently used to calculate and determine the extent of certain benefits and deductions. AGI in particular is used to determine qualification to take certain itemized deductions and used to calculate taxable income. It is also the key determinative factor to rebate payment under the 2008 economic stimulus tax package. Qualification for the stimulus payment is not based on salary or after-tax take home income, but rather on the taxpayer's total adjusted gross income, which is a terminology encompassing a broader range of income sources.

The term modified adjusted gross income is particularly important as well. It is used to determine qualification to take certain tax adjustments like the child tax credit and eligibility for certain education expense credits. Overwhelmingly though, the MAGI's significance is most commonly associated with tax deferred investment retirement accounts (IRA's). It is a key income factor in determining Roth IRA contribution limits and phaseouts, as well as qualification for IRA to Roth conversions. The higher the MAGI, the more the Roth IRA contribution limit is reduced and ultimately phased out. The MAGI term is often overlooked because the amount calculated in MAGI is often similar or even the same as the adjusted gross income for most ordinary tax situations.

For clarification, here are the income and deductions that comprise both the AGI and the MAGI:

1) Adjusted Gross Income (AGI) - is comprised of