There are several ways to reduce MAGI, or modified adjusted gross income, including increasing retirement contributions, deferring income and saving more for health care. But it helps to also understand that your MAGI 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 401(k) contributions.
AGI and MAGI: Relationship
Adjusted gross income refers to your gross income that is subject to taxation minus any adjustments you make to it based on specific permitted deductions. Typically, gross income includes your wages, business income, tips, unemployment benefits, annuities, dividends, capital gains and retirement distributions, among others.
Some of the permitted deductions you can make to your gross income to convert it into an AGI include:
- Retirement account contributions
- Alimony payments
- Student loan interest
- Educator expenses
- Permitted self-employment taxes
- Self-employment health insurance
- Tuition and fees deductions
- Charitable contributions
Usually, the AGI is either less than or equal to the gross income, depending on whether you can claim deductions or not. And your ability to use deductions or tax credit depends on its value.
On the other hand, the MAGI requires further adjustments to the AGI. And you make these adjustments by putting back in some deductions and tax-exempt interest or income. For example, if you have tax-exempt foreign income or Social Security benefits, you need to include them in your calculations.
It is critical to know what the number is to enable you to determine which tax credits you can claim in your tax return because it offers more comprehensive information to the IRS. Also, it enables you to itemize deductions on your taxes, determines access to health insurance and affects your ability to contribute to retirement.
It is also worth noting that your MAGI number changes depending on the benefits you apply for. So, if you need to be eligible for particular government programs, you have to decide what deductions and tax-exempt income to add back to the adjusted gross income number. At the same time, you need to know the ways to reduce MAGI to get maximum benefits.
Ways to Reduce MAGI
Below are some of the ways to reduce MAGI. Most tend to affect the AGI on which the MAGI is based.
1. Increase Your Contributions
You may want to consider increasing your contributions to an IRA to reduce your MAGI so you can access a bigger health insurance premium subsidy. And you may also want to encourage your spouse to do the same. However, the account must be a traditional IRA because contributions you make to it are tax-deductible. If you choose this account, you can contribute up to $6,000 or $7,000 if you are 50 years and older.
Also, you should consider contributing to other retirement accounts that are funded by pre-tax funds. These include the 401(k) or the Solo version, SIMPLE IRA and SEP IRA. Your ability to contribute to these accounts depends on your employer’s retirement plan or what option you have as a self-employed individual. But generally, self-employed people have access to a higher contribution threshold.
In addition, consider increasing your charitable contributions to your favorite causes. By doing so, you may claim up to 60 percent of your AGI if you make cash contributions and 100 percent if you give qualified contributions. However, corporations can deduct up to 25 percent from their taxable income if they make qualified charitable contributions.
2. Save Up for Your Health
Did you know that the majority of Americans file for bankruptcy due to medical issues? It’s no wonder that people tend to worry a lot about their health coverage. So, to safeguard your financial future while reducing your MAGI to access more ACA health subsidies, you may want to save up for your health.
You could opt for either a health savings account (HSA), flexible spending account (FSA) or an HSA-qualified high deductible health plan (HDHP). And if you are self-employed, you can deduct your health insurance premiums.
With an HDHP, you can save up to $7,000 as an individual, or $14,000 for a family, to cater to out-of-pocket expenses. And if you have that account, you can also use an HSA that enables you to contribute up to $3,600 for self-only coverage or $7,200 family coverage.
Also, if you are employed, you could save an additional $2,750 per year with each employer. And your spouse can do the same.
If you are self-employed, you can deduct 100 percent of your health insurance premiums to cater for your medical costs provided you have business income and no other coverage. Alternatively, you could deduct medical expenses if they exceed 10 percent of your AGI.
3. Reduce Your Taxable Income
Another alternative is to reduce your income.
If you are self-employed, you can reduce your income by deferring some of the payments you receive from clients or deducting more business expenses. And if you are an investor, you can make moves to create capital losses to offset up to $3,000 of ordinary income. Also, you could choose to reduce the taxable retirement distributions you take in a particular year if your MAGI is too high.
Anything that reduces your AGI will likely reduce your MAGI. So, when considering ways to reduce MAGI, remember that.
- Forbes: What Is Adjusted Gross Income (AGI)?
- IRS: Adjusted Gross Income
- American Express: What Is Modified Adjusted Gross Income?
- HealthInsurance.Org: Since a lower income results in a larger subsidy, is there anything I can do to reduce my income under ACA rules?
- IRS: Retirement Topics - IRA Contribution Limits
- IRS: Temporary Suspension of Limits on Charitable Contributions
- CNBC: This is the real reason most Americans file for bankruptcy
- HealthCare.Gov: Health Savings Account (HSA)
- HealthCare.Gov: Using a Flexible Spending Account (FSA)
- HealthCare.Gov: High Deductible Health Plan (HDHP)
- NOLO: The Self-Employed Health Insurance Deduction: A Valuable Personal Deduction
- Kiplinger: Most-Overlooked Tax Breaks and Deductions for the Self-Employed
- Fidelity: How to cut investment taxes
I hold a BS in Computer Science and have been a freelance writer since 2011. When I am not writing, I enjoy reading, watching cooking and lifestyle shows, and fantasizing about world travels.