Introduction

Thanks to the Patient Protection and Affordable Care Act (ACA), Premium tax credits are available through the Health Insurance Marketplace. As a result of the reforms introduced by the American Rescue Plan, the maximum out-of-pocket cost for health insurance premiums will be capped at 8.5 percent of a family's annual income. You may be eligible for a premium tax credit if your premium is more significant than 8.5% of your household income. In this context, "household income" refers to a specific measure of financial well-being: the "modified adjusted gross income" of a family (MAGI). The question then becomes how to calculate your MAGI. Here, we'll define MAGI and show you how to determine your own.

Why is MAGI Important?

As a rule of thumb, the lower your MAGI, the greater the likelihood you will be eligible for certain tax breaks and governmental programs. Knowing your MAGI is critical if you want to claim tax credits like the American Opportunity (education) tax credit, the Lifetime Learning Credit, and the Child Tax Credit. If you and your spouse are enrolled in a workplace retirement plan, you may be eligible to deduct payments to a traditional IRA. How much, if any, money can you put into a Roth IRA? Learn if you qualify for government health programs like Medicaid and how much you can save by purchasing insurance through the new health insurance exchanges. Individual health insurance contributions are a percentage of MAGI rather than AGI and are calculated based on how near you are to the federal poverty level (FPL) (AGI).

How Do I Find My Adjusted Gross Income?

You can expect a moderate degree of congruence between your AGI and MAGI. Your AGI is your yearly income before tax deductions and other adjustments. 5 Your income tax is calculated based on your AGI, which is your annual taxable income. To calculate your AGI, you must complete two tasks. First, it incorporates all the money you bring in, whether through a job, a business, investments, retirement, alimony, a rental, or a farm. The term "adjust" is then used to describe what happens to the total income. Add back the amount you would have paid in taxes if you hadn't claimed deductions for these costs. The contributions you make to a health savings account (HSA), the costs of your health insurance policy if you're self-employed, the money you put away in a retirement account (IRA), and the Interest you pay on student loans are all examples of allowable tax breaks.

Calculate Your AGI

Your AGI matters because it represents your taxable income before adjustments are made for standard or itemized deductions, exemptions, or credits.

16 It specifies the parameters under which you can claim various tax breaks. The amount of the Child Tax Credit you're eligible for, for instance, is determined in part by your AGI. Adjusted gross income (AGI) is the amount of money left over after specific tax deductions have been subtracted from your gross income.

Certain out-of-pocket costs incurred by professional musicians, military personnel on active duty, and government employees who are compensated on a salary basis, Spending on teachers, Taxes on earnings from self-employment, Self-employed health insurance premiums, Pretax dollars put up in a health savings account (HSA), All costs associated with a move for active-duty military personnel, Savings penalties, Funding Your Retirement (including IRAs and self-employed retirement plan contributions), Interest on a student loan.

Your question: "How do I figure out my MAGI?" means you want to know how to figure out your AGI.

Step 1: Calculate Your Gross Income

The most basic measure of financial success is gross income (GI). Your gross income is the sum of all your earnings before taxes are taken out.

Step 2: Calculate Your AGI

After obtaining gross revenue, adjustments are made to arrive at adjusted gross income by deducting certain expenses.

Step 3. Calculate Your MAGI

It's time to compute your MAGI now that you know your AGI. Credits and deductions from the IRS, such as those for premiums, are reduced or eliminated when income rises. The IRS calculates your MAGI by recalculating your AGI with these adjustments.

MAGI Effects On Your Taxes

Deduction eligibility is often calculated about your MAGI. The deductibility of payments to an IRA or other individual retirement plan is a prime example. In addition, if your MAGI in 2021 were $85,000 or more (or $170,000 if you were married and filing jointly), you would not be eligible to deduct your student loan interest.

Conclusion

The amount of tax you owe the Internal Revenue Service is primarily based on your MAGI. It starts with your gross income and subtracts applicable exemptions, allowances, and qualifications. Foreign income, eligible school expenses, passive losses, and other factors can cause a difference between your AGI and MAGI.