Think fast: what’s your modified adjusted gross income?
Time’s up. Good thing there wasn’t a jackpot riding on your answer, because, like most people, you probably haven’t the foggiest idea of your MAGI — or even know what it is.
It’s hard enough to know your gross income. But to adjust it, and then modify the adjustment? And to modify in various ways? Gee whiz!
To cut to the chase, modified adjusted gross income is a figure used to determine whether a taxpayer qualifies for variety of tax benefits: opening a Roth IRA, getting a tax deduction on a traditional IRA, using the Hope Scholarship Tax Credit, Lifetime Learning Tax Credit, Student Loan Interest Deduction or Tuition and Fees Deduction.
For a married person to get a full income tax deduction on contributions to a traditional IRA, for instance, the couple can have a MAGI of no more than $166,000, assuming the account holder’s spouse has a retirement plan at work but the account holder does not. In the tax world, nothing is easy.
The idea of MAGI is to add back some of the deductions that made adjusted gross income smaller than gross income. AGI includes deductions for IRA contributions, for example, so it would not make sense to use AGI to determine whether one qualifies to deduct the IRA contribution.
The problem is you often have to know your MAGI before you can make a decision, such as whether to fund a traditional IRA or Roth. But you need data from the full tax year, ending Dec. 31, before you can figure MAGI. That means you have to do your 2009 tax return before you can know the MAGI used to make decisions for 2009.
Fortunately, many of those decisions, like funding an IRA, don’t have to be made until April 15, 2010.