Your modified adjusted gross income determines your ability to claim many tax deductions. If your modified adjusted gross income is too high, you may not be able to deduct IRA and 401k contributions. You can decrease your modified adjusted gross income by delaying income, increasing deductions and funding an HSA plan.
Modified Adjusted Gross Income Overview
To calculate modified gross income, you must start with your adjusted gross income. Your adjusted gross income is gross income less deductions approved by the Internal Revenue Service. The most common deductions for adjusted gross income are alimony payments, IRA, 401k, and HSA contributions, tuition and fees, student loan interest and self-employment taxes. Modified adjusted gross income is the total when you add back some of these deductions. The deductions added back to arrive at modified adjusted gross income include student loan interest, tuition and fees, self-employment taxes, IRA contributions and passive income.
Increase HSA Contributions
Contributions to employee-sponsored plans, like IRAs and 401ks, are added back when calculating modified adjusted gross income. However, health savings account deductions are not. To decrease your modified adjusted gross income, fund your health savings account more than you normally would. The year you want to decrease your modified adjusted gross income is a good year to schedule any dental, vision or medical procedures that you've been putting off. If you can estimate your out-of-pocket costs for these procedures, you can ensure you use up the balance in your health savings account.
Another way to lower modified adjusted gross income is to increase tax deductions. Charitable contributions, state and local taxes, loan origination fees, unreimbursed business expenses and mortgage interest expense are not added back to modified adjust gross income. If you've been considering a large donation to your church or a university, this is a good year to do it. Likewise, buying a home means huge real estate tax and mortgage interest expense deductions.
Decrease or Delay Income
Fewer sources of income usually means a lower modified adjusted gross income. If you can delay receiving income from an investment or business for a few months, you may be able to claim a lower modified adjusted gross income for the current tax year. Increasing capital losses is another way of decreasing income. If you have some stocks you've been holding onto that have decreased in value, selling them this year will lower your modified adjusted gross income.
- Fairmark: Modified Adjusted Gross Income
- TurboTax: What is the Difference Between AGI and MAGI on Your Taxes?
- IRS.gov: Exhibit 2.2 - Modified Adjusted Gross Income Computation
- HealthCare.gov. "What to Include as Income." Accessed Oct. 31, 2020.
- Internal Revenue Service. "Adjusted Gross Income." Accessed Oct. 31, 2020.
- internal Revenue Service. "Adjustments to Income." Accessed Oct. 31, 2020.
- Internal Revenue Service. "Do I Qualify for the EITC?" Accessed Oct. 31, 2020.
- Internal Revenue Service. "Income Ranges for Determining IRA Eligibility Change for 2021." Accessed Oct. 31, 2020.
Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.