What is Modified Adjusted Gross Income?
The IRS uses your modified adjusted gross income (MAGI) to determine whether you qualify for certain tax deductions, credits, and benefits. If you’re reading this website, then the most important application is for determining whether you qualify for full, partial, or no benefit for contributions to a traditional or Roth IRA. Your MAGI also determines limits on the Child Tax Credit (CTC) and Credit for Other Dependents (ODC). Note that confusingly, the IRS uses a different calculation https://www.irs.gov/publications/p972 for MAGI for these latter credits than it does for IRA contributions, even though it refers to both as MAGI (!).
You can read more about MAGI and how it impacts your contribution amounts here.
Calculate your MAGI for the purposes of contributing to an IRA by following these steps (more details here):
1. Take your adjusted gross income (AGI).
2. Add back student loan interest deduction.
3. Add back domestic production activities deduction (DPAD).
4. Add back foreign earned income exclusion and/or housing exclusion.
5. Add back foreign housing deduction.
6. Add back excludable savings bond interest.
Tada! This is your MAGI for IRA contribution purposes.
Depending on what your MAGI is, the amount that you can directly contribute to a Roth IRA might be reduced. However, if you do a Backdoor Roth, then this pesky issue goes out the window.