November 28, 2010 12:00 am

What Is MAGI and Why Does It Matter?

Modified adjusted gross income (MAGI) is a term used in the tax law for various purposes. It may be the benchmark that allows you to claim certain tax breaks or bars you from others. It is also used for Medicare purposes even though this is beyond the scope of federal income taxes.

What Is MAGI

MAGI is essentially adjusted gross income (AGI) increased by otherwise excludable foreign earned income and, sometimes, other items. To figure your MAGI, start with your salary, bank interest, net capital gains, and other nonexcludable items of income. Then subtract above-the-line deductions, which include contributions to traditional IRAs and health savings accounts, alimony payments, and certain other deductions that can be claimed without itemizing.

Why Is MAGI Important for Tax Purposes?

MAGI is used to determine phaseouts of certain deductions and credits and for some other tax purposes.

Deductions impacted by MAGI. Usually, your MAGI for the current year determines whether you qualify for a full or partial deduction of the following items:

  • $25,000 rental loss deduction
  • IRA contribution deduction
  • Student loan interest deduction
  • Tuition and fees deduction (assuming this deduction is extended for 2010)

Tax credits impacted by MAGI. Again, your current-year MAGI affects your ability to claim a full or partial tax credit:

  • Adoption credit
  • American opportunity credit
  • Child tax credit
  • Homebuyer credit
  • Lifetime learning credit
  • Making work pay credit
  • Retirement savers credit

Other tax items affected by MAGI. Various items of income and the ability to make nondeductible contributions to certain types of savings plans depend on MAGI:

  • COBRA assistance taxability
  • Contributions to Coverdell education savings accounts
  • Interest exclusion on savings bonds used for higher education
  • Roth IRA contributions
  • Starting in 2013, the additional Medicare tax of 3.8% on unearned income

Note: There are numerous tax items based on AGI alone; no adjustments to AGI are required. These include, for example, itemized medical deductions, casualty and theft losses, and miscellaneous itemized deductions, the dependent care and earned income credits, and the prior-year estimated tax safe harbor.

Why Is MAGI Important for Medicare?

MAGI is now used to determine whether excess premiums must be paid for certain Medicare coverage.

Medicare Part B. Medicare beneficiaries with MAGI over a threshold amount pay an additional Part B premium. MAGI for the 2 years prior to the payment year is used for this purpose. For example, MAGI for 2009 is used to determine whether an additional premium is due for 2011. Single individuals with MAGI of $85,000 or less pay no additional premium; the threshold for those filing a joint return (whether one or both spouses are Medicare beneficiaries) is $170,000.

Medicare Part D. Starting in 2011, enrollees in Part D who have MAGI above set thresholds will pay an income-related monthly adjustment amount in addition to the basic Part D premium. The same thresholds for Part B apply to Part D. The regular premium will continue to be paid to the Part D plan; the income-related monthly adjustment amount will be paid to Medicare.

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