Ep. 189 – MAGI Versus AGI – What is the Difference?

Do you know the difference between Adjusted Gross Income and Modified Adjusted Gross Income? Are you aware of how they affect your tax bracket and Medicare charges?

Understanding the difference between AGI and MAGI and having conversations about them with your financial advisor will help you manage your taxes and IRMAA efficiently. The “looking forward tax planning” strategy is about helping you save money.  

In this episode of the Secure Your Retirement podcast, we discuss the difference between AGI (Adjusted Gross Income) and (Modified Adjusted Gross Income) and why you need to know it. Listen in to learn about examples of numbers, how they change, and how you can prepare prior.

In this episode, find out:

  • How the Modified Adjusted Gross Income can affect your IRMAA surcharges.  
  • Understanding how we look and arrive at Adjusted Gross Income (AGI).
  • The things added to arrive at the Modified Adjusted Gross Income (MAGI).
  • Understanding the tax code will make you efficient in the different tax things you can do.
  • How smart tax planning can save you Medicare premium surcharges.
  • Think and prepare for AGI & MAGI to avoid the negative effects if you’re at Medicare age.

Tweetable Quotes:

  • “Your Adjusted Gross Income (AGI) ultimately is what is going to determine where you fall as far as the tax bracket goes.”– Murs Tariq
  • “You might be able to have some forward thinking and start to think about this and have that conversation with your financial advisor or CPA.”– Radon 


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Here’s the full transcript:

Radon Stancil:Welcome everyone to our Secure Your Retirement Podcast. Today Murs and I are going to talk about the exciting world of taxes and really how our income is calculated when it comes to taxes. And there’s an important reason why and we’re going to get to that. But we’re going to talk about two terminologies. One of those is what’s called our AGI or adjusted gross income. And then our MAGI, which is a modified adjusted gross income. Why are we going to talk about this? Well, we had a podcast not too long ago talking about IRMAA. And IRMAA is a calculation that gets done to determine how much premium someone will pay on their Medicare benefits, some of their part B and part D benefits within Medicare. And so it can be quite the difference, this modified adjusted gross income. Let me just kind of remind you of some of the things we talked about in that particular episode.  
 So let’s just assume that you look at your income and when you look at your income, and I’m going to be running through these for the 2023 tax year, kind of how we have to look at it. Remember, your IRMAA or your modified adjusted gross income is really two years prior. So for 2023, what’s going to be looked at is your 2021 taxes or your income in 2021. So your part B premium is $164 provided that I did not exceed $194,000 a year for a couple, a person, two people filing jointly or $97,000 for someone single in, remember in 2021. Now I’m just going to show you the drastic difference. I can go up to having to spend $395 for my part B and $76 for my Part D combined per person, if my income goes up.  
 Now those incomes have to be rather high to get to that category. It has to be above $500,000 for a single person, $750,000 for a married filing jointly. But the key is all of these numbers are based on what’s called a modified adjusted gross income. Okay. A modified ingested gross income. And that’s going to set these different tiers and you can just, they go up. We walk through these all in that last episode and we’ll have to do another one now cause these are 2023 numbers. They’ve switched just a little bit. So soon we’ll be having a podcast come out, kind of go all through these IRMAA numbers for 2023.  
 I’m just letting you know understanding our modified adjusted gross income is extremely important because that’s what we’re looking at. Not your adjusted gross, but your modified adjusted gross income. So I’m going to segue here and what we’re going to do first, just so our brains are clear, when you look at your tax return and you look on that first page of your tax return and you go all the way to the bottom, that’s where you’re going to see your AGI, your adjusted gross income, and it could be whatever number it is. So Murs, can you explain to us, just so we got an understanding, how is it that we look at, and what is our adjusted gross income?  
Murs Tariq:Yeah. I know this is just our tax system and the way we have to know all these acronyms and everything can be just all over the place, but it is what it is. And so we have to live within that, right? So adjusted gross income is you start with your gross income, all the dollars that came into you in the various ways that they can come into you. Some examples could be business income, rental income, wages, like a W2 earnings, if you got any type of unemployment compensation. And something that is not always considered or we don’t think about is that part of your social security can be taxable. So that’ll go into your income as well. Dividends, interest, capital gains, IRA distributions, if you’re withdrawing on your 401K or your IRA. So you take all those numbers, pensions included as well, annuities, things like that.  
 You take all those numbers, basically all dollars that were fed into you throughout the calendar year and you add them up, then that is essentially your gross income. So you need that number first. Once you have that tallied up, now there’s things that we can do to make adjustments off of that to land what is our adjusted gross income? So now you take the adjustments and you’re subtracting them off of the total. So maybe your gross income is a $100,000 for the year. And now we start to work off of that. And things that come off of that now could be things like charitable contributions, any type of educator expenses. If you put money into a health savings account or if you had to pay for, say your self-employed and you had health insurance or if you’re paying alimony or tuition and there’s tuition and other fees associated with education that can be deducted.  
 And there’s other adjustments out there. But basically those are the major ones. So you take all those adjustments or things that you did with that income that qualify, and now you’ve landed at your adjusted gross income. So maybe your gross income was a 100,000 and maybe you had a certain amount of expenses. Maybe you took out, let’s see here, maybe you contributed to a health savings account, right? And maybe you max that out, maybe it was $7,000. So you’re just starting to trickle off of that a $100,000 amount and maybe you end up at 85 or 90, whatever that is, that ends up being your adjusted gross income. And then now once you have that number, then you get to figure out, well, what is my modified adjusted gross income? What’s nice to differentiate here is your adjusted gross income, the AGI is ultimately is what is going to determine where you fall as far as the tax bracket goes.  
 And we all know the tax system and it’s a scale based off of where your AGI lands is where that percentage is going to be. But now, like Radon was saying, for Medicare purposes, it’s really important to understand where your MAGI is going to land. And so we got to understand that. So what the MAGI is, is now, and I know it sounds confusing and a little backwards, but now we’re adding certain things back. Right. So our gross income was a $100,000. And then based off of adjustments, now we’re at 90,000 for our adjusted gross income. Now we’re going to be adding numbers back for this purpose of calculation and some of these things and this one, there’s a lot of different things that could go back into to consider for MAGI, but some of them could be if you had student loan interest that you paid throughout the year, you would actually add that back above your adjusted gross income.  
 If you had qualified tuition expenses or passive losses or passive income, you would add that back in. A big one, especially if you’re working and saving is IRA contributions. So if you contributed to an IRA and you’ve funded that $7,000 that you can or whatever the number ends up being for that tax year, you would add that back in. So steadily we’re kind of creeping back up. Depending on what boxes you check, you’re creeping back up above what your adjusted gross income is.  
 Another example would be foreign earned income exclusions or foreign housing exclusions, losses from rental property. And there’s a whole list of things that would be added back in because of how they do the modified adjusted gross income. But the moral of the story here is to, really understanding the difference between MAGI and AGI is going to help you understand certain tax strategies. And ultimately you start thinking about where do I want my income to be at in a given year, typically for those Medicare surcharges and the IRMAA that we’re talking about. But understanding the tax code in general is going to make you a little bit more efficient as far as thinking things through and looking forward as far as projecting out different things you can do from a tax perspective.  
Radon Stancil:Yeah. And ultimately, if you’re a person who has a pretty simple situation in retirement, it’s very likely that your AGI and your MAGI are the same. It really, there’s no difference between the two. But just like Murs said, we’re really just trying to do some planning. I’ll go back to the IRMAA. Okay. Let’s just use step one. So let’s say I’m a single person. Remember I told you I could make up the 97,000 and my premium for part B is going to be $164.90. If I make $97,000, $97,001, meaning I am $1 over that 100 or that 97, not 197, but 97, I now have a surcharge on my Part B of $65 a month, $12.20 cents on Part D. So if I think forward and I could just say, Hey, maybe I don’t want to have this thing occur, or that thing occur, or I don’t have that income get claimed in this year so that I would stay below 97,000, I could save myself $65 a month.  
 A couple, remember it was up to 194,000, $1 over 194,000, I now I’m going to have to pay this surcharge per person, by the way, on these surcharges, so. And then that goes from 194,000 to 246,000, so. And then my next surcharge after that goes from there to now from $65 surcharge, that’s an addition to my 164 by the way, it goes to $164 of a surcharge on part B and $31.50 cents on my Part D. So you can see how that just a little bit of thinking can save us quite a bit of money. Now, there are some instances which we covered in the past episode on IRMAA that I could get a reprieve on this if I had maybe my last year of working or something like that. And the government sometimes will help me out on that.  
 We’re not here to talk about that. We’re talking about the normal scenarios where maybe I could control what I’m going to get in income this year that I’m going to claim to keep myself within this category to keep my Medicare premiums at the lowest part. Right. So this is what we call looking forward tax planning. Quite honestly, if you’re sitting here listening to this, this episode’s coming out right here at the end of 2022, probably not much you’re going to be able to do for 2023 at this point. You’re just hearing it, you’re understanding it. But for 2024, you might be able to do some forward thinking and start to really think about this and maybe have that conversation with your financial advisor, have that conversation with your CPA and say, look, I need to understand what my adjusted gross income is going to be as well as my modified adjusted gross income so that I can make sure I manage this whole idea around IRMAA.  
 We hope this has at least given you the idea to think about it, right? We are not sitting here trying to be tax experts today. What we’re trying to do is just say, understand this terminology, AGI, MAGI, those two things we need to understand if we’re at Medicare age because it can really, really affect us in a negative way if we don’t think about that and be prepared for it. We hope this has been beneficial. As I told you, beginning of the year, we’re going to have a whole entire episode on just IRMAA again for the 2023 IRMAA update from 2022. And we’ll walk through all those different numbers and we’ll have a blog written on it. We have a blog written on this particular episode as well. You can go to our website pomwealth.net and look at the blog page and we’re glad to be able to help you in any way we possibly can.