Author Topic: AGI/MAGI/taxable income?  (Read 5369 times)

ultros1234

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AGI/MAGI/taxable income?
« on: September 21, 2014, 10:32:49 PM »
Hey mustachians --

I'm trying to figure out whether DW and I can contribute to a tax-deductible TIRA this year. I need to know our AGI. I've got some fancy calculators that get me accurately from our gross income to our taxable income, but I forgot that AGI is not the same as taxable income. I need help figuring out exactly how to calculate AGI.

Here's how I'm wrapping my brain around it:

Gross income > MAGI > AGI > taxable income

Gross - X = MAGI
MAGI - Y = AGI
AGI - Z = taxable income

Where X, Y, and Z are SOME STUFF.

Question: Do each of these things fall into category X, Y, or Z? I know they all reduce my taxable income, but I don't know in which category. So hard to find a clear answer online.
  • Pre-tax salary deduction for employee's share of pension
  • Pre-tax salary deduction for retiree healthcare costs
  • Pre-tax salary deduction for medical, dental, disability insurance
  • Pre-tax salary deduction for transit expenses
  • Pre-tax healthcare flexible spending account contribution
  • Pre-tax contributions to 457(b), 403(b), or 401(k)
  • State and local income tax deduction

The following things I'm pretty sure are in category Y:
  • Student loan interest deduction

The following things I'm pretty sure are in category Z:
  • Itemized deductions
  • Personal exemptions

And finally, what about the TIRA contribution itself? Does the IRS check whether you're eligible to deduct the TIRA before or after deducting the contribution? Meta.

Just for reference, we're married filing jointly and both covered by retirement plans at work, which means our TIRA deductiblity begins to phase out at $96k AGI and is totally phased out at $116k. Our gross income is around $152k in 2014, but taxable income will be $78-83k depending on whether we can deduct a TIRA contribution. That's why pegging the AGI marker is important.

TIRA deductibility guidelines at IRS:
http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/2014--IRA-Contribution-and-Deduction-Limits---Effect-of-Modified-AGI-on-Deductible-Contributions-If-You-ARE-Covered-by-a-Retirement-Plan-at-Work

seattlecyclone

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Re: AGI/MAGI/taxable income?
« Reply #1 on: September 22, 2014, 12:59:50 PM »
Do you have your last tax return handy? AGI is the number on the bottom of the first page of Form 1040. Basically all income is included in this (including salary, interest, dividends, capital gains/losses, business earnings/expenses). There are a few deductions on the bottom half of the first page of Form 1040 that count against your AGI. Any pre-tax deductions from your paycheck are also excluded from AGI.

Deductions that don't reduce your AGI include the standard deduction, personal exemptions, any itemized deductions from Schedule A.

To calculate your MAGI for traditional IRA contributions, you take the AGI and add back a few things listed here.

Cheddar Stacker

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Re: AGI/MAGI/taxable income?
« Reply #2 on: September 22, 2014, 02:24:56 PM »
Anything pre-tax is X.

State and Local Income tax deduction is Z.

Student loan interest deduction is Z because it's added back to arrive at your MAGI for the T.IRA deduction.

Itemized deductions and exemptions are Z.

MDM

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Re: AGI/MAGI/taxable income?
« Reply #3 on: September 22, 2014, 03:35:14 PM »
seattlecyclone summarized it well.  I think Cheddar Stacker has at least one typo...?

Note that your wage income for Form1040 purposes (line 7, from your W-2) does not include any pre-tax (401k; company medical insurance; etc.) deductions.  Some people would call line 7 "gross" income, others would call it "net" income.  To avoid ambiguity (e.g. in Reader Case Studies) it's best to start with whatever your employer starts with, then list all deductions (401k, fed income tax, state income tax, SS, Medicare, ...) separately.

Cheddar Stacker

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Re: AGI/MAGI/taxable income?
« Reply #4 on: September 22, 2014, 03:46:32 PM »
I agree seattlecyclone summarized it well. But what's my typo? I don't see it.

MDM

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Re: AGI/MAGI/taxable income?
« Reply #5 on: September 22, 2014, 04:21:02 PM »
Anything pre-tax is X. 
Depends whether one is looking at form W-2, or Form 1040, etc. and thus what "gross" is.  If looking at Form 1040, anything pre-tax is "irrelevant". 

Quote
State and Local Income tax deduction is Z.
Only if, together with other Schedule A amounts, they add up to more than the standard deduction.

Quote
Student loan interest deduction is Z because it's added back to arrive at your MAGI for the T.IRA deduction.
That would make it "Y" by the OP's definition.

Quote
Itemized deductions and exemptions are Z.
Exemption, yes.  "Itemized or standard" (whichever is larger) deduction, yes.

ultros1234

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Re: AGI/MAGI/taxable income?
« Reply #6 on: September 22, 2014, 04:29:27 PM »
Thanks folks, this is helpful. I'm still unclear on the last piece, though: the TIRA contribution itself.

I estimate that my MAGI will be 112,800 without making a TIRA contribution. That falls in the "partially deductible" range. So two questions:
  • How do I figure out how much of the contribution is deductible?
  • Does that deductible contribution amount then lower my MAGI and increase how much I can deduct? If so, this actually becomes a calculus problem. Thanks IRS.

MDM

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Re: AGI/MAGI/taxable income?
« Reply #7 on: September 22, 2014, 04:54:11 PM »
From seattlecyclone's link to the IRS:
Quote
Form 1040.   If you file Form 1040, refigure the amount on the page 1 “adjusted gross income” line without taking into account any of the following amounts.
IRA deduction.
In other words, your MAGI is independent of your "deductible" IRA contribution. 
E.g. assume AGI = $100,000 (all from form 1040 line 7) and with no IRA deduction.  Then MAGI = AGI = $100,000.
Then if IRA contribution = $5,500, AGI = $94,500 but MAGI still equals $100,000.

To figure how much is deductible, see http://www.irs.gov/publications/p590/ch01.html#en_US_2013_publink1000230533.
It's approximately a linear decrease from $5,500 at $95K MAGI, down to $0 at $115,000, but they do some funny rounding to get the exact number.

seattlecyclone

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Re: AGI/MAGI/taxable income?
« Reply #8 on: September 22, 2014, 04:59:45 PM »
The IRA deduction reduces your AGI, but this deduction is on the list of things that you add back to AGI to determine your MAGI. The effect of this is that IRA contributions do not affect your MAGI at all. No calculus needed here!* You will need to calculate your MAGI to determine where you fall in the phase-out range, and that will determine how much you can deduct.

*Imagine how complicated doing your taxes would be if you had to solve some integrals to calculate your tax burden!

Cheddar Stacker

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Re: AGI/MAGI/taxable income?
« Reply #9 on: September 22, 2014, 07:03:50 PM »
Anything pre-tax is X. 
Depends whether one is looking at form W-2, or Form 1040, etc. and thus what "gross" is.  If looking at Form 1040, anything pre-tax is "irrelevant". 

But by his definition, gross - x = magi it still holds true. The relevance/applicability does not matter. He asked whether it was X, Y or Z. If it's anything, it's X.

Quote
State and Local Income tax deduction is Z.
Only if, together with other Schedule A amounts, they add up to more than the standard deduction.

Splitting hairs here. You're right, but again, he didn't ask whether it was applicable, just X, Y or Z. If it's anything, it's Z.

Quote
Student loan interest deduction is Z because it's added back to arrive at your MAGI for the T.IRA deduction.
That would make it "Y" by the OP's definition.

You got me on this one, I fucked up, but I think Y is wrong as well. I meant to say X. It's Y but then it reverts back to X since it's added back to get to MAGI.

Quote
Itemized deductions and exemptions are Z.
Exemption, yes.  "Itemized or standard" (whichever is larger) deduction, yes.

Splitting hairs here. You're right, but again, he didn't ask whether it was applicable, just X, Y or Z. If it's anything, it's Z.


Sorry for the mistake. I think we have it straight now. Yes?

MDM

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Re: AGI/MAGI/taxable income?
« Reply #10 on: September 22, 2014, 09:49:43 PM »
I think we have it straight now. Yes?
Pretty much.

As the OP here implies, having "gross", "adjusted gross", and "modified adjusted gross" is confusing enough without having a clear definition of "gross" itself.  I didn't see the unedited OP in this thread, but your question #1 (and a great question it is) has to be asked all too frequently in case studies.

Some points probably are hair-splitting if everyone comes to the discussion with identical assumptions.  Some wild arguments are caused by differing assumptions, however, so ensuring everyone understands "the same" can be worth the extra effort - that's really all I was after.

Paraphrasing seattlecyclone, "The IRA student loan interest deduction reduces your AGI, but this deduction is on the list of things that you add back to AGI to determine your MAGI."  That seems to fit the OP's "MAGI - Y = AGI" (aka "AGI + Y = MAGI").

Cheddar Stacker

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Re: AGI/MAGI/taxable income?
« Reply #11 on: September 22, 2014, 10:10:43 PM »
Got it. Well explained. Thanks MDM.

ultros1234

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Re: AGI/MAGI/taxable income?
« Reply #12 on: September 22, 2014, 10:24:07 PM »
Thanks everyone! It's clear to me now.

And the result of all these fancy calculations? My wife and I can deduct $600 apiece of TIRA contributions. :(

Cheddar Stacker

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Re: AGI/MAGI/taxable income?
« Reply #13 on: September 22, 2014, 10:30:50 PM »
There were a handful of recent threads discussing ways to reduce agi/magi. Might be worth a search on the forum.

ultros1234

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Re: AGI/MAGI/taxable income?
« Reply #14 on: September 22, 2014, 10:42:42 PM »
Thanks Cheddar Stacker. We aren't currently contributing to my wife's 401(k), because it's a terrible plan with high fees, but it's the last tax-advantaged account open to us and we're still in the 25% bracket, so that's what we'll do. The silver lining, though, is that contributions to the 401(k) reduce MAGI, so then it opens up a bit more deductible room for the IRA.