Tax season is coming up and for many, it can be just a bit stressful. One reason why families procrastinate with filing their taxes is that they seem intimidating.
A big part of that worry is confusion with the terminology. How many times do you talk about vested benefits or accelerated depreciation in your day to day life?
However, one way families can empower themselves and start having some big wins with their money is by making sure they correctly handle their finances including taxes.
Becoming more familiar with tax terms means you’re better able to review and make sure you’re getting the most out of tax benefits.
Some especially key terms involve your income. One of them is your modified adjusted gross income (MAGI). Let’s dig in and see how understanding your MAGI can help with your taxes!
What Exactly is Modified Adjusted Gross Income (MAGI)?
As you probably guessed by the name, your MAGI is based on your adjusted gross income. Your adjusted gross income is an individual’s total gross income minus specific deductions.
These deductions include IRA contributions, alimony payments, health savings account contributions, and student loan interest.
If you’re self-employed, your health insurance payments and retirement plan contributions could be used as well.
To go down to another level, your adjusted gross income is based on your gross income.
Basically, your gross income is all income received for the year such as your paychecks from work, income from any business you own, dividends and capital gains from your investments, and your retirement distributions.
To calculate your modified adjusted gross income, you take your AGI and add back any deductions (Part II “Adjustments to Income”) like your student loan interest, IRA contributions, and qualified tuition expenses.
Depending on your situation, most will find their AGI is identical to their MAGI or very close to each other.
Hopefully, that demystifies how your MAGI and AGI income are calculated, but you may be wondering, why is my MAGI such a big deal with taxes?
Why Your Modified Adjusted Gross Income Matters
The reason why your modified adjusted gross income is important is because the IRS uses this amount to see if you qualify for specific tax benefits.
A major one is your Individual Retirement Account (IRA). It can determine if you can contribute to a Roth IRA and if you can deduct any of your contributions to a traditional IRA.
Saving up for retirement is a major goal for many so make sure you’re on top of this!
Make Filing Taxes Even Easier
Hopefully, you have a better understanding of how your income is viewed by the IRS.
If you’re still feeling overwhelmed, no worries. TurboTax will ask you simple questions about you and give you the tax deductions and credits you are eligible for based on your entries. If you have questions, you can connect live via a one-way video to a TurboTax Live CPA or tax expert with an average 12 years experience to get your tax questions answered.
TurboTax Live CPAs and Enrolled Agents are available in Spanish and English, year round and can even review, sign, and file your tax return or you can even fully hand your taxes over to them. All from the comfort of your home.
This upcoming tax season be prepared and ready to file your taxes quicker and get your refund sooner!