Modified Adjusted Gross Income (MAGI): What US Expats Should Know

Most Americans know basic tax concepts and terminology, like income, credits, deductions, and exclusions. Phrases like modified adjusted gross income (MAGI), on the other hand, aren’t always as well-known.

If you’re not familiar with MAGI, it can benefit you to read up on the concept. After all, understanding your MAGI can help you reduce your overall taxable income, qualify for certain tax benefits, and determine eligibility for government health plans.

Want to know exactly what MAGI is, how to calculate it, and why understanding it can help you optimize your tax strategy? Read on for the answers to all of these questions and more.

Understanding MAGI: The basic concepts

Before diving into what MAGI is, it can be helpful to discuss a few other key terms. Gross income refers to your total worldwide income from all sources — wages, bonuses, interest, dividends, rental income, and more — before taxes and other deductions. Adjusted gross income (AGI), on the other hand, is your total income minus certain deductions.

Adjusted gross income (AGI)

To calculate your AGI, you’ll take your gross income and make certain adjustments to it. On a practical level, this means subtracting certain above-the-line deductions. A couple of notable adjustments for expats in particular include the Foreign Earned Income Exclusion (FEIE) and the Foreign Housing Exclusion (FHE).

The FEIE helps eligible Americans exclude a portion of their income from taxation: $120,000 for tax year 2023, and $126,500 for 2024. The FHE, on the other hand, allows eligible expats to exclude a portion of their foreign housing expenses from taxation. By excluding income under the FEIE or FHE from your gross income, expats can dramatically lower their AGI.

And that’s good news, because the lower your AGI, the more likely you are to qualify for certain tax credits and deductions. This includes:

• The Child Tax Credit (CTC)
• Educational credits like the Lifetime Learning Credit (LLC) & the American Opportunity Credit (AOC)
• Medical & dental expense deductions

The Internal Revenue Service (IRS) also uses AGI to determine whether you’re subject to the Alternative Minimum Tax (AMT) and how much you owe in monthly student loan repayments under certain income-based plans.

And critically, AGI is a key figure in calculating your overall taxable income for federal (and often, state) tax purposes. To arrive at your taxable income, you’ll subtract the standard deduction or itemized deductions from your AGI.

After calculating your tax liability on that amount, you can then apply any relevant tax credits to reduce your overall tax burden.

Modified adjusted gross income (MAGI)

MAGI may sound similar to AGI, but there are important distinctions between the two. Chiefly, MAGI requires you to “add back” certain items of income excluded and expenses deducted from your AGI.

For many taxpayers based in the US, AGI and MAGI don’t vary much (if at all). But for expats who have taken advantage of the FEIE or FHE, the difference can be dramatic. 

This, in turn, affects whether you:

• Must pay the Net Investment Income Tax (NIIT)
• Qualify for certain tax breaks, such as:
  • The Premium Tax Credit (PTC)
  • The Child Tax Credit (CTC)
    • Note: While AGI is the primary factor that determines CTC eligibility, MAGI may affect phase-out limits
  • Educational credits
  • The adoption credit
  • Tuition & fees deductions
  • Student loan interest deductions
  • Traditional IRA contribution deductions
• Can contribute to a Roth IRA/HSA — and if so, how much
• Can claim passive activity losses

Calculating MAGI: Step-by-step guide

To calculate your MAGI, you’ll need to:

1. Calculate your gross income: Add up all of your different sources of income for the year, including:
   • Earned income
     • Wages & salaries
     • Bonuses
     • Commissions
     • Business profits
     • Self-employment
   • Unearned income
     • Interest from savings accounts, bonds, Certificates of Deposit (CDs), etc.
     • Dividends from stocks & mutual funds
     • Capital gains from the sale of assets like stocks, real estate, cryptocurrency, etc.
     • Rental income
     • Retirement account distributions
     • Social Security income
   • Note: Gifts and inheritances, life insurance proceeds, and certain employee benefits (e.g. health insurance) are usually not included in gross income calculations.
2. Make adjustments to arrive at your AGI: Subtract relevant adjustments such as:
   • Income excluded under the FEIE or FHE
   • Contributions toward certain retirement accounts
     • Note: Contributions toward foreign retirement plans may not be eligible for deduction
   • HSA contributions
   • 50% of self-employment tax
   • Self-employed health insurance deduction
   • Alimony payments
   • Student loan interest (up to $2,500 for single filers earning $90,000 per year or less)
   • Educator expenses (up to $300)
   • Early withdrawal penalties on retirement accounts
3. Factor in add-backs to arrive at your MAGI: To your AGI, add:
   • Certain items of income
     • Income excluded under the FEIE or FHE
     • Tax-exempt interest income
   • Certain deductions & expenses
     • Tuition & fees deduction
     • Non-taxable Social Security payments
     • Student loan interest
     • 50% of self-employment tax
     • Passive income or loss
     • Traditional IRA contributions
     • Rental losses

Some websites offer AGI calculators and MAGI calculators to simplify the process. That said, the surest way to arrive at an accurate answer is to work with a certified tax professional.

Reporting MAGI: Forms & documentation

There is no designated place on your tax form to report MAGI. However, having a MAGI over a certain threshold may require you to file Form 8960 and pay the Net Investment Income Tax (NIIT): 

Filing Status	Threshold
Single or head of household	$200,000
Married filing jointly or qualifying surviving spouse	$250,000
Married filing separately	$125,000

On the other hand, if your MAGI qualifies you for a tax break, you may need to file an additional form/schedule to claim them: 

• Child Tax Credit (CTC): Schedule 8812
• Premium Tax Credit (PTC): Form 8962
• American Opportunity Tax Credit (AOTC) & Lifetime Learning Credit (LLC): Form 8863
• Qualified adoption expenses: Form 8839
• Tuition & fees deduction: Form 8917
• Student loan interest deduction: Schedule 1 (Form 1040)
• Retirement contributions: Schedule 1 (Form 1040)
• Passive activity losses: Form 8582

Strategies to optimize MAGI for US expats

In some cases, US expats may be able to optimize their MAGI to fall below the NIIT or qualify for tax breaks. Among these strategies include:

• Timing your income: If you’re approaching the thresholds for the NIIT or certain tax breaks, consider deferring certain items of income. You might, for example, wait until the start of the next year to sell off a vacation home, bill clients, or withdraw from a brokerage or retirement account.
• Maximizing above-the-line deductions: Making the right deductions — and maximizing the benefit when you do — can sometimes decrease your AGI and subsequently, your MAGI. These may include:
  • Certain retirement contributions
  • 50% of self-employment taxes
  • Self-employed health insurance
  • HSA contributions
  • Student loan interest
  • Educator expenses
  • Tuition & fees
  • Early withdrawal penalty
  • Moving expenses for active military
    • Note: Claiming certain tax credits could require you to add these items back to your MAGI.
• Selectively applying the FEIE/FHE: In certain situations, it may be beneficial to apply the FEIE or FHE to some items of income but not others. While this could potentially increase your overall taxable income, it could also help prevent you from crossing MAGI thresholds.

• Managing investment income: Tax-loss harvesting may help offset investment gains that would otherwise be included in your MAGI. You might also choose to increase or re-allocate some of your investments into tax-exempt investments like municipal bonds to earn investment income without adding to your MAGI.
• Considering a Roth IRA conversion: Roth IRA distributions are not included in your MAGI since you’ve already paid taxes on them. As such, you may choose to convert traditional IRA funds to a Roth IRA in a low-income year. That way, you can make tax-free withdrawals in retirement.

Before employing any of these strategies, however, it’s critical to consult a licensed tax professional. Only a professional tax advisor will be able to advise which strategies are right for you based on your unique situation.