Modified Adjusted Gross Income

IRA owners need to know their modified adjusted gross income for various purposes:

• Traditional IRA. Participation in a retirement plan maintained by your employer doesn’t affect the amount you can contribute to a traditional IRA — but may affect the amount you can deduct when you make a contribution. Your deduction is reduced or eliminated if your modified AGI exceeds certain levels.
• Roth IRA. The rules are different for Roth IRAs. Here, participation in an employer plan doesn’t affect your deduction — you get no deduction in any event. But your contribution is reduced or eliminated if your modified AGI exceeds certain levels.

Finding your modified AGI is a two-step process. First find your adjusted gross income, then apply the modifications.

Adjusted gross income

Adjusted gross income (“AGI”) represents your total income reduced by certain deductions known as “adjustments,” but before you take your itemized deduction or standard deduction, and before you take the deduction for qualified business income or personal exemptions. (The 2017 tax law reduced the deduction for personal exemptions to zero for years 2018 through 2025.)

Adjusted gross income is clearly labeled on Form 1040, currently appearing on line 11.

Q: Are capital gains included in AGI?

A: 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.

Estimating AGI

To estimate your adjusted gross income for a year that’s not yet completed, it’s usually best to begin with your adjusted gross income from the preceding year’s tax return and estimate any changes from there.

Q: What if I contribute to a Roth IRA, and later find out that my modified AGI is too large?

A: You should be able to avoid penalties if you take appropriate action, which may involve a recharacterization in which you move the contribution (as adjusted for earnings) to a traditional IRA, or a corrective distribution in which you withdraw the contribution. See Excess Contributions to Roth IRAs for details.

Modifications

To arrive at your modified AGI, start with your adjusted gross income and then add back the following items:

• 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.
• Any exclusion or deduction you claimed for foreign housing.
• Any interest income from series EE bonds that you were able to exclude because you paid qualified higher education expenses.
• Any employer-paid adoption expense you excluded.

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.

Exclude Conversion Income

There’s an additional modification that’s made only when you’re determining modified AGI for purposes of the Roth IRA. In this case you exclude any income you report as a result of converting a traditional IRA to a Roth IRA. Without his favorable rule, the income reported on the conversion could prevent you from making additional Roth IRA contributions.

Example: You’re single and have a traditional IRA worth $120,000 with no basis. Before you decide to make a conversion your AGI and your modified AGI are both equal to $80,000. If you convert this IRA to a Roth IRA your AGI will increase to $200,000. But the conversion doesn’t count as part of your modified AGI, so you can still make contributions to your Roth IRA.