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Our income tax rules are complex, and one of the key items on your tax return is a set of figures called Adjusted Gross Income, often called AGI, or Modified AGI, often called MAGI.
These numbers determine what tax rates you pay, what deductions and credits you’re eligible for, and other tax-related benefits.
Some of the key tax items impacted by AGI and MAGI are your eligibility for:
There are various credit and deductions available for parents and students in college. For example, the American Opportunity Credit is a tax credit worth up to $2,500 for each child. However, the full credit is only available if your MAGI is below a certain amount (For 2024 that is $160,000 for married filers, and $80,000 for individual filers).
Other credits and deductions available include the lifetime learning tax credit, the deduction of student loan interest, and the ability to cash out savings bonds tax free for education expenses.
For much more detail on taking full advantage of the tax credits and deductions available see our webinar here: The Best Way to Pay for College This Fall
If you retire and lose employer health insurance before you are age 65 and eligible for Medicare, you may end up purchasing a policy on Healthcare.gov.
There are very valuable tax credits available to offset the cost of these policies for those with income below certain levels. The specific tax credits available to you depend on your income and your state of residence, but will be clearly noted when you fill out your application:
While 401k and other workplace retirement plans have much higher contribution limits, being able to save additional money in an IRA or Roth IRA can be incredibly beneficial.
However, the ability to contribute to these accounts is dependent on your MAGI, and your access to a workplace retirement plan.
If your income is near the limit to make a Roth IRA contribution, there can be great benefit in lowering your MAGI in order to allow for additional contributions.
Also note, even for very high income households, there may be a way to get additional savings into a Roth IRA. See our article on Backdoor Roth Contributions here.
IRMAA, or the income related monthly adjustment amount, is a monthly surcharged added to your Medicare Part B and D premiums if your income is above certain thresholds.
This is a huge topic for retirees and we have written extensively on the topic here:
How to Calculate MAGI for IRMAA
Three common steps you might take to adjust your AGI/MAGI are:
Delaying Social Security until age 70 not only guarantees you a higher monthly benefit for the rest of your life, it also can be a smart tax move!
For a recent retiree, delaying Social Security can keep your AGI lower early in retirement. This provides great opportunity for additional Roth conversions, recognizing capital gains at a 0% tax rate, and potentially reducing health insurance premiums.
Having a tax-efficient withdrawal strategy is a cornerstone to a successful financial plan. Understanding how withdrawals from different types of retirement accounts impact your MAGI and AGI is critical to avoiding the added tax rates and surcharges noted above.
We give some detailed examples of how we help clients create these plans in a webinar here: Creating a Tax-Efficient Retirement Withdrawal Plan
If you are still employed, 401(k)s, 403(b)s, and other retirement plans can provide the opportunity to contribute tens of thousands of dollars and reduce your AGI and MAGI.
If you have investments within a taxable brokerage account, you have the ability to sell investments that have declined in value and receive a tax deduction.
We go through the pros and cons of Tax Loss Harvesting here.
Tax planning is just one of the services we offer to our clients. Whether you are still working, or well into retirement, monitoring your MAGI and AGI can open up opportunities for numerous tax deductions and credits.
We create a tax report each year for our clients to highlight where they fall in the tax brackets, and what credits or deductions that are available to them. Here’s a sample of a tax report:
Please reach out for an in-depth tax analysis if you have further questions about lowering your MAGI.