Gross Income, Adjusted Gross Income (AGI) and Modified Adjusted Gross Income (MAGI)
"Gross Income, Adjusted Gross Income (AGI) and Modified Adjusted Gross Income (MAGI)" submitted by SchoolGrantsfor Editorial Team and last updated on Monday 9th January 2012
Gross Income is your total revenue (including non-job-related income) before federal and state taxes, credits, exclusions, deductions, allowances and other withholdings are deducted. Gross income is the net sum of the wages, salaries, tips, taxable interest, ordinary dividends, taxable refunds, credits, or offsets of state and local income taxes, alimony received, business income or loss, capital gains or losses, other gains or losses, taxable IRA distributions, taxable pensions and annuities, rental real estate, royalties, farm income or losses, unemployment compensation, taxable social security benefits, and other income. All of these income sources add up to the ‘total income’ amount on line 22 of your W4.
A common error is to report total income tax equal to the Adjusted Gross Income (AGI). Generally speaking, total income tax should be less than the AGI. This happens most often when you report the amount of taxable income (AGI) in the answer to the question about tax liability. This is such a common error that there are standard rejects for such FAFSAs (rejects 3 and 12).
The gross amount of the income is reduced by the exemptions and deductions allowed from Form W-4 and the withholding tax is figured on the remainder.
You will receive a Form 1042-S from the withholding agent (usually the payer of your grant) showing the gross amount of your scholarship or fellowship grant less the withholding allowance amount, the tax rate, and the amount of tax withheld. Use this form to file your annual U.S. income tax return.
You have to list all monthly income earned to date and what you project to earn the remaining months including gross unemployment benefits received by both student and spouse during the 12 months (Copies of most recent months check stubs or pay statements showing gross income). Report gross earnings and attach documentation of income earned to date for financial aid eligibility.
Student aid that is taxable is not necessarily taxed, at least not to the extent it is included in gross income on income tax returns. Taxpayers can offset some portion of taxable income with their personal exemption and their standard deduction or itemized deductions. Financial experts estimate that borrowers who spend more than 10 percent of their gross income on repaying student loans carry a significant debt burden.
Student aid that is taxable is not necessarily taxed, at least not to the extent it is included in gross income on income tax returns. Taxpayers can offset some portion of taxable income with their personal exemption and their standard deduction or itemized deductions. Such as:
- Scholarships and fellowships gross income for income tax
- Tuition reductions for employees of educational institutions gross income
- Veterans gross income for income tax
- Loans and Interest Payments gross income for income tax purposes
- Work-Study Awards gross income for federal income tax purposes
- Employer Tuition Reimbursements adjusted gross income
If you choose Income-Based Repayment (IBR) Plan, as agreed upon by you and your lender, your loan payment will be based on a percentage of your gross monthly income—between 4 and 25 percent. The resulting payment must at least cover the interest due each month and the payment term cannot exceed 15 years. Each year, as your income increases or decreases, so do your payments. Income sensitive plan allows monthly payments to vary from year to year, depending on your gross monthly income.
Adjusted Gross Income (AGI):
Your gross income, less certain allowed business related deductions. These deductions include alimony payments, contributions to a Keogh retirement plan, and, in some cases, contributions to IRAs. On your IRS tax return, Adjusted Gross Income (AGI) is the amount of money you make per year, after standard adjustments. A common error is to report total income tax equal to the Adjusted Gross Income (AGI). Generally speaking, total income tax should be less than the AGI. This happens most often when you report the amount of taxable income (AGI) in the answer to the question about tax liability. This is such a common error that there are standard rejects for such FAFSAs (rejects 3 and 12).
Adjusted gross income (AGI) is a United States tax term for an amount used in the calculation of an individual's income tax liability. AGI is gross income minus adjustments to income. AGI is calculated by taking an individual's gross income (including wages, salaries or other employment, retirement income, taxable refunds, credits, or offsets of state and local income taxes, interest and dividends, long and short term business capital gains and losses, income from retirement accounts, pensions and annuities, alimony paid to you, Rental real estate, royalties, partnerships, S corporations, trusts, etc. income, royalty income, farm income, unemployment compensation, social security benefits and certain other kinds of income) and subtracting the income tax code's enumerated deductions (including contributions to deductible retirement accounts, unreimbursed business expenses, medical expenses, alimony and deductible retirement plan contributions, alimony paid by you), but not including standard and itemized deductions. AGI is an important benchmark determining certain other allowed benefits.
If you work more than one job and each job has a different rate of pay, we use the highest paying job first when determining the total gross income to use in the calculation of your student contribution. The sum of these deductions adds up to line 36 of your 1040. To get your adjusted gross income, you subtract line 36 from line 22. Your adjusted gross income is what’s left, and it goes in line 37.
Add-on Expenses (to Cost of Attendance)
Costs that are not typically included in the cost of attendance. The federal government allows certain expenses to be added into the financial aid budget. For more information about add-on expenses, talk to your financial aid counselor.
The following deductions make up lines 23-35 of the first page of your 1040:
educator expenses, individual business expenses, health savings account (HSA), moving expenses, one-half of self employment tax, self-employed SEP, SIMPLE, and qualified plans, self-employed health insurance deduction, penalty on early withdrawal of savings, alimony paid, the IRA deduction, student loan interest deduction, tuition and fees deduction, domestic production activities deduction, Archer MSA deduction.
If there’s one number that drives more financial aid information, it’s the adjusted gross income on your IRS 1040 form. This number is the effective income you make per year, and since the FAFSA is the government’s way of determining financial need, your adjusted gross income greatly affects how much financial aid you are eligible for.
For example, let us say you work at one firm for 6 weeks and make $2,500 a week gross and you work at another firm for 8 weeks and make $3,000 a week gross. This is a total of 14 weeks worked. We only will use 12 weeks in the calculation of your contribution from income. The amount of earnings would use would be constructed as follows:
- 8 weeks times $3,000 or $24,000; plus
- 4 weeks times $2,500 or $10,000; equals
- 12 weeks or a total gross of $34,000
Are capital gains included in AGI?
Yes. For example, if you have a $20,000 capital gain, it will increase your AGI (and your modified AGI) by $20,000. This is true even for long-term capital gains that are subject to special tax rates. Here is: Adjusted gross income (AGI) Calculator
AGI is used by the Internal Revenue Service to determine a taxpayer's eligibility for certain tax benefits. It is in the taxpayer's best interest to get their adjusted gross income as low as possible. Lower AGI qualifies the taxpayer for more tax benefits and ultimately results in a smaller tax bill. If your income (e.g., change in job) or personal circumstances (e.g., change in marital status) did not change from last year, IRS suggest you refer to your 2008 federal income tax return to get a quick estimate of your 2009 AGI. AGI is the number you write at the bottom of page 1 of your 1040 form, and then copy again to the top of page 2. AGI is the last number on the first page of the Form 1040, the standard U.S. income tax return form for individuals.
The Actual Facts about Adjusted Gross Income (AGI)
For most families, it's income that matters the most, with the EFC rising sharply as a family moves up the middle-class ladder. As the table shows, a family of four with an income of $140,000 claiming the standard deduction will pay about $22,000 in federal tax in 2008 and will be expected to contribute (under the federal formula) at least $28,000 per year toward the cost of college in 2009. That is a combined total of $50,000 per year, or 36% of the family's adjusted gross income. Read full details: Click here
President Obama federal budget for the fiscal year starting October 1, 2010 (FY2011)
President Obama Proposes Capping Student Loan Payments at 10% of Discretionary Income. The changes to help middle class families will be proposed as part of the President’s federal budget for the fiscal year starting October 1, 2010 (FY2011). It is possible that the changes to income-based repayment could be implemented sooner by adding them to the Student Aid and Fiscal Responsibility Act, which passed the House of Representatives in 2009 but is still pending in the Senate. However, The improved version of income-based repayment will be available for new borrowers of federal student loans starting July 1, 2014. Existing borrowers will not benefit, as the changes are not retroactive. Read Full Story: Click here
Modified Adjusted Gross Income (MAGI)
Modified Adjusted Gross Income is a measure used by the IRS to determine if a taxpayer is eligible to use certain deductions, credits, or retirement plans. The starting point to determine MAGI is adjusted gross income (AGI), which is total income minus certain deductions.
Generally, Modified Adjusted Gross Income (MAGI) is the sum of your adjusted gross income plus any tax exempt interest income you may have. Some examples of income are: wages, salaries, tips, taxable interest, certain dividends, business income, capital gains, and unemployment compensation, as well as annuities, Social Security benefits and some pensions.
AGI is modified by adding back in any deductions for passive activity losses, tuition, fees, student loan interest paid, IRAs, half of self-employment tax, employer-paid adoption expenses, and domestic production activities. Pre-tax contributions to a 401(k) or 403(b) are not affected, as those contributions are excluded from W-2 (box 1) income.
Additionally, MAGI is raised by including interest earned from U.S. Savings Bonds that were used for higher education expenses, foreign earned income, and foreign housing reimbursements (which usually qualify as exclusions or deductions from AGI). Your Adjusted Gross Income (AGI) can be found on line 38 of your Form 1040; line 22 of your Form 1040A; or line 36 of your Form 1040NR.
To arrive at your modified AGI, start with your adjusted gross income and then add back the following items items that must be added to your Adjusted Gross Income (AGI) to calculate your Modified Adjusted Gross Income (MAGI), ie. AGI without:
- Any deduction you claimed for a regular contribution to a traditional IRA.
- Any deduction you claim for student loan interest or qualified tuition and related expenses.
- Any income you excluded because of the foreign earned income exclusion on Form 2555.
- Any exclusion or deduction you claimed for foreign housing taken on Form 2555.
- Any amount claimed as domestic production activities deduction.
- Any interest income from series EE bonds that you were able to exclude because you paid qualified higher education expenses on Form 8815.
- Adoption benefits from an employer excluded on Form 8839.
- Any passive loss or passive income, or
- Any rental losses (whether or not allowed by IRC § 469(c)(7)), or
- IRA, taxable social security or
- One-half of self-employment tax (IRC § 469(i)(3)(E)) or
- Any overall loss from a PTP (publicly traded partnership)
Note that you are not required to add back any contribution you made to an employer plan such as a 401k plan. If you are running up against the limit for modified AGI, one way to reduce that number is to make deductible contributions to an employer plan.
For example, suppose you're single, have a gross income of $51,000, and you're eligible to take a deduction for your IRA contribution of $4,000. Your AGI, when all deductions are taken, turns out to be $45,500. You then add the $4,000 back to find your MAGI of $49,500. Because your MAGI is less than the ceiling for deducting your full IRA contribution for your filing status, you can take the full deduction.
Most limitations on deductions or credits are determined based on either AGI or modified adjusted gross income (MAGI). MAGI is AGI modified by certain amounts specific to the given limitation.
Adjusted gross income should not be confused with modified adjusted gross income. MAGI is similar to AGI, but certain things are not factored in. These include passive income and losses, interest on student loans, student tuition and fees, taxable social security, self employment tax and Individual Retirement Accounts. Because of this, MAGI is usually higher than AGI, but lower than your gross income.
More Details: http://www.irs.gov/publications/p590/ch02.html