Advanced Underwriting Consultants

Question of the Day – October 4

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: What is modified adjusted gross income (MAGI), and why is it important?

Answer: MAGI is used in many important decisions regarding IRAs.  For example, any taxpayer may make a traditional IRA contribution, but if the taxpayer (or spouse) is covered by an employer retirement plan, the deductibility of the contribution phases out at certain levels of MAGI.  Further, a taxpayer may be ineligible to make Roth IRA contributions if MAGI is too high.

Here are a few tips about MAGI, which are related to questions we often get asked.

  • MAGI is not reduced by deductible traditional IRA contributions
  • Capital gains are included in MAGI
  • MAGI can be reduced by contributing to 401(k) or 403(b) plans

Here’s a quick way to calculate MAGI using Form 1040.  Take the last number on the bottom of the first page of the return, “adjusted gross income,” and recalculate it by adding back in the following amounts:

  • IRA deduction
  • Student loan interest deduction
  • Exclusion of qualified savings bond interest shown on form 8815.
  • Tuition and fees deduction
  • Domestic production activities deduction
  • Foreign earned income exclusion
  • Foreign housing exclusion or deduction
  • Exclusion of employer-provided adoption benefits shown on Form 8839.

In addition, two special rules apply to Roth IRAs:  If the taxpayer does a Roth conversion during the tax year, the income reported as a result of the conversion is not included in MAGI for Roth IRA purposes.  Likewise, if the participant had to take a distribution from a traditional IRA in order to meet the RMD rules, the amount equal to the RMD is not included in MAGI for Roth purposes.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.