What does modified adjusted gross income mean
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To determine your adjusted gross income, you must first calculate your gross income. This is the total of all the money you made during the calender year. Some sources of qualified income are tips, business income, alimony you receive, unemployment benefits, taxable Social Security benefits, income on rental property, royalties, money distributed from retirement accounts, taxable refunds, taxable interest, dividends and capital gains from securities you sold at a profit. Some income is not factored into gross income. These include money from public assistance and income on tax exempt local and state bonds. Add everything up and you have your gross income.
To find your adjusted gross income, subtract qualified adjustments from your gross income. Qualified adjustments include moving expenses, alimony you pay to others, early withdraw penalties on savings accounts, educator expenses, 50 percent of self-employment tax, health insurance premiums for the self employed, interest on student loans, qualified tuition and fees paid by students, and qualified Individual Retirement Accounts contributions. Standard deductions and itemized deductions that are calculated on a Schedule A are considered later on IRS tax forms so should not be subtracted from the gross income at this time.
Adjusted gross income is sometimes called net income. This is because AGI is
the net amount of income that is taxed after tax credits and payments are factored in. The first page of the IRS forms 1040 and 1040A are devoted to calculated adjusted gross income. It is the number on line 37 of the 1040 and line 21 of the 1040A at the bottom of page one. The adjusted gross income is then transferred to the top of page two on both forms.
Adjusted gross income should not be confused with modified adjusted gross income. MAGI is similar to AGI, but certain things are not factored in. These include passive income and losses, interest on student loans, student tuition and fees, taxable Social Security, self-employment tax and Individual Retirement Accounts. Because of this, MAGI is usually higher than AGI, but lower than your gross income.
Modified adjusted gross income is important because it determines whether you are qualified to receive certain tax benefits. These include Social Security benefits, a tax deduction on traditional IRA contributions and whether you qualify to contribute to a Roth IRA. All of these things have limits based on adjusted gross income. If your MAGI is too high, you don't qualify. Adjusted gross income is used to calculate the taxes you pay after tax credits and payments are factored in.Source: ehow.com