Medicare’s Modified Adjusted Gross Income (MAGI) is a calculation used to determine the premiums paid by beneficiaries for Medicare Parts B and D. MAGI is a modified version of Adjusted Gross Income (AGI), which is calculated on tax returns filed with the Internal Revenue Service (IRS). While similar in some ways, MAGI differs from AGI in a number of important ways that can affect Medicare premiums. To understand the differences between MAGI and AGI, it is first important to understand how each is calculated.
Calculation of AGI – AGI is calculated by subtracting certain deductions from an individual’s total income, such as contributions to a retirement account, student loan interest, and alimony payments.
Calculation of MAGI – MAGI adds certain deductions back in, such as tax-exempt interest income and foreign earned income exclusions.
Here are 10 examples of how MAGI differs from AGI:
1) Tax-exempt interest income: Interest earned on tax-exempt bonds is not included in AGI, but it is added back in for MAGI purposes.
2) Foreign earned income exclusion: Individuals who live and work abroad may be eligible to exclude a certain amount of their income from taxation. This exclusion is not included in AGI, but it is added back in for MAGI purposes.
3) Social Security benefits: Social Security benefits are not included in AGI, but they are added back in for MAGI purposes.
4) Capital gains: Capital gains are included in AGI, but they may not be included in MAGI depending on the individual’s income level.
5) Roth IRA distributions: Distributions from Roth IRAs are not included in AGI, but they may be included in MAGI depending on the individual’s income level.
6) Income from rental properties: Income from rental properties is included in AGI, but it may not be included in MAGI depending on the individual’s income level.
7) Deductions for self-employment taxes: Deductions for self-employment taxes are included in AGI, but they may not be included in MAGI depending on the individual’s income level.
8) Alimony payments: Alimony payments are deducted from AGI, but they are added back in for MAGI purposes.
9) Traditional IRA contributions: Contributions to traditional IRAs are deducted from AGI, but they may be added back in for MAGI purposes depending on the individual’s income level.
10) Student loan interest deduction: The deduction for student loan interest is included in AGI, but it may not be included in MAGI depending on the individual’s income level.
MAGI is used to determine the income-related monthly adjustment amount (IRMAA), which is an additional premium paid by beneficiaries for Medicare Parts B and D. The IRMAA applies to beneficiaries whose MAGI exceeds certain limits.
For 2023, individuals, the MAGI threshold is $97,000, and for married couples filing jointly, the MAGI threshold is $194,000. Beneficiaries who exceed these limits must pay a surcharge on top of their regular Part B and/or Part D premiums.
In conclusion, while MAGI and AGI are similar in some ways, they differ in a number of important ways that can affect Medicare premiums. MAGI is used to determine the IRMAA, which is an additional premium paid by beneficiaries whose income exceeds certain limits. By understanding how MAGI is calculated and how it differs from AGI, beneficiaries can better plan for their Medicare premiums and avoid any unexpected surcharges.
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