March 17, 2021
Your adjusted gross income (AGI) isn’t just some line on your tax return. It’s a vital piece of information that will pop up over and over again. Let’s take a look at how your AGI affects your financial life.
Before we get into how this data point impacts your finances, we should define it. Adjusted gross income (AGI) is your gross income less Internal Revenue Service (IRS) approved adjustments. Your gross income is the total amount of money you earned in a year. Adjustments include, but aren’t limited to:
Your taxable income determines your tax liability. Taxable income is your AGI minus the standard deduction or the deductions you’ve itemized.
You may see the term Modified Adjusted Gross Income (MAGI) come up. MAGI is your AGI with certain adjustments factored back in. Unless your personal finances are complicated, your AGI and MAGI will likely be about the same amount.
Both of these figures play a significant role in money-related matters.
Your AGI and MAGI can affect your finances at five key points:
Let’s take a look at each.
To mitigate the company’s risk, a mortgage lender needs to be sure that you can comfortably - and consistently - make your mortgage payments. The lender will multiply your AGI by a number (determined by underwriting guidelines) to calculate how much house you can reasonably afford. For example: if the lender uses a multiplier of three and your AGI is $50,000, you’d be eligible to borrow up to $150,000.
When you apply for a line of credit or loan now, the lender will likely look at your paystubs to verify your income. However, we predict that financial institutions will soon start using your AGI to make these lending decisions - just like they do when you apply for a mortgage. That’s because your AGI provides a more robust view of your financial standing than a paystub or credit check would on its own.
Each type of retirement plan has its rules for participation. Your MAGI comes into play if you want to contribute to a Roth IRA. To be eligible to contribute to a Roth IRA in 2021, your MAGI must be under $140,000 as a single filer and under $208,000 if married filing jointly.
If you’re self-employed or between jobs and need to shop for coverage from the health insurance marketplace, your MAGI matters. Your MAGI determines whether or not you’re eligible for Medicaid, the Children’s Health Insurance Program (CHIP), or a health insurance plan subsidy. If your MAGI exceeds 400% of the federal poverty level, you’re ineligible to receive a subsidy.
Pro Tip: You can see what assistance you may qualify for by using this calculator.
We’ve already discussed how your AGI is used to determine your federal taxable income. But, did you know that many states use the figure to calculate your state income tax bill? Your AGI also affects your eligibility for certain tax deductions. In general, the lower your AGI, the more opportunities you’ll have to lessen your tax liability.
Pro Tip: If your AGI is under $72,000, you can use the IRS Free File system to file your taxes at no cost.
It can be a hassle to access this data and provide it to a third party. ModernTax, a sophisticated application programming interface (API), makes the process a snap for taxpayers. When your financial institution uses the ModernTax API to connect directly to the IRS database, your required information is pulled automatically. You won’t have to spend time finding and uploading paperwork anymore!
As you can see, both your adjusted gross income and modified adjusted gross income play a big role in your financial life. It’s important to know your numbers when you buy a home, apply for credit, save for retirement, buy a health insurance plan on the exchange, and file your taxes. Please note: This article only provides general information. We encourage you to speak with a qualified tax or financial professional for guidance specific to your situation.