MAGI Versus AGI – What is the Difference?

Adjusted gross income (AGI) and modified adjusted gross income (MAGI) are two important parts of a tax return, but many people don’t understand the key differences between the two. Our recent podcast covers the difference between MAGI and AGI because it’s crucial to IRMAA.

IRMAA, if you missed it, is a surcharge for your Medicare and something that is tied to your MAGI.

A higher income means a higher surcharge, and if you’ve worked hard to secure your retirement, paying more than you need to for your Part B and D benefits may not be in your budget.

Let’s assume that when you look at your 2023 benefits, the government will look at your 2021 income. Part B premiums would be $164 in 2023 if you did not exceed $97,000 single or $194,000 filing jointly in 2021.

Premiums can go up to:

  • $395 for Part B per person
  • $76 for Part D per person

Of course, you’ll need to make a significant amount of money to reach the figures above. These figures are the maximum premium you’ll have to pay per person, but there are tiered premiums for each income bracket over a certain MAGI.

Want to learn more about IRMAA surcharges? Read our blog post on this very topic. 

What is an AGI?

Adjusted gross income starts with your gross income from all sources:

  • Income
  • Rentals
  • Part of your Social Security
  • 401(k) distributions
  • Pensions 

When you add all these figures up, you’ll have your gross income. Your adjusted gross income will take this sum and then adjust it based on numerous adjustments.

So, let’s assume that you have $100,000 in gross income. You would then start deducting adjustments, such as:

  • Charitable contributions
  • Education expenses
  • HSA contributions
  • Self-employed health insurance
  • Alimony
  • Tuition fees

All these adjustments will be calculated and deducted from the $100,000. Let’s assume that you have $20,000 in adjustments. Then we would simply perform the following calculation: $100,000 – $20,000 = $80,000.

Your AGI would be $80,000, but we need to then calculate your modified AGI to learn what you’ll pay in premiums for Medicare.

AGI dictates what tax bracket you are in.

What is MAGI?

MAGI adds certain things back to your AGI. For example, let’s assume that your AGI is $80,000. You’ll then add things back, such as:

  • Student loan interest
  • Educator expenses
  • Passive losses or income
  • IRA contributions
  • Foreign earned income exclusions
  • Loss of rental income

So, you may add these figures up and come to $10,000. Based on this example, your MAGI would then be $80,000 + $10,000 = $90,000.

However, if you have a basic and simple retirement, it’s not uncommon for your AGI and MAGI to be the same. 

Planning is very important to help keep these IRMMA surcharges down.

Let’s look at an example:

  • Single person
  • You can earn up to $97,000 and pay $164.90 for Part B premiums
  • You earn $97,001, and now you’ll pay a surcharge of $65 for Part B and $12.20 for Part D per month

Planning ahead of time to stay below the $97,001 threshold will save you $77.20 a month as a single person. Couples have a threshold rise. For example, you can earn $194,000 as a couple and not pay any additional premiums.

The next premium tier for couples is $246,000. If you hit this level, your Part B surcharge rises from $64 to $164 on Part B, on top of your normal premiums. 

Of course, there are some exceptions and ways to find a reprieve on these expenses, but most people will need to engage in looking forward tax planning to avoid these IRMAA surcharges. You can sit down with your tax planner or financial planner and really hammer out these numbers to see if you can reduce your Medicare surcharges.

However, these surcharges were based on your MAGI two years ago, so it’s not something you can go back and correct for 2023 at this point in time.

Managing your money properly to keep your AGI and MAGI low is crucial to keeping your costs low. We will be covering 2023 IRMAA figures shortly after the New Year to provide some insight into what costs you can expect to incur in the coming year.Click here for access to our free course: 3 Keys to Secure Your Retirement Master Class.