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As a small enterprise proprietor, taxes can really feel like an infinite maze of types, calculations, and laws. And probably the most complicated components is one thing referred to as modified adjusted gross revenue — or MAGI.
If you happen to don’t calculate MAGI correctly, you might miss out on tax deductions and credit that prevent main cash. You’ll additionally should be acquainted with the idea to reply staff’ questions and provides them the knowledge they want round tax season.
The excellent news is that understanding MAGI doesn’t should be sophisticated. We’ll break down every part it is advisable to learn about modified adjusted gross revenue, so you possibly can really feel assured you’re submitting appropriately and leveraging tax financial savings — and be able to reply any questions out of your workforce.
What’s MAGI?
Modified adjusted gross revenue is a vital Inner Income Service (IRS) tax calculation that determines your eligibility for sure deductions, credit, contributions, and extra.
Let’s begin by taking a look at adjusted gross revenue (AGI) earlier than attending to the “modified” half.
AGI is your complete taxable revenue minus above-the-line deductions, like pupil mortgage curiosity you’ve paid or your well being financial savings account (HSA) deductions.
Your modified adjusted gross revenue is your AGI with sure objects added again in. To show AGI into MAGI, it is advisable to add in sure forms of revenue you beforehand deducted, like tax-exempt revenue from curiosity or muni bonds, excluded contributions to a person retirement account (IRA), and excluded overseas earned revenue.
MAGI provides the IRS a transparent image of the particular revenue out there to you in a given yr earlier than sure deductions or exemptions are utilized. They use this quantity to resolve on correct thresholds for various tax credit and advantages.
For many individuals, MAGI is identical as AGI, however that’s not all the time the case so it’s necessary to be sure to’re calculating MAGI appropriately.
Why is MAGI necessary for small enterprise house owners?
As a small enterprise proprietor, paying shut consideration to your MAGI state of affairs is important.
If you happen to’re a sole proprietor or pass-through entity with out company taxation, your enterprise revenue passes straight to your private tax return, which implies thresholds for deductions based mostly on pupil loans and retirement contributions are linked to your private MAGI determine.
For instance, your MAGI can be utilized to find out what proportion of your retirement contribution is tax-deductible.
When you’ve got a office retirement plan, like a 401(ok), you possibly can solely declare sure deductions in your contributions to a standard particular person retirement account, based mostly in your MAGI.
Right here’s what that appears like for a single particular person (or head-of-household filer) in 2023.
- MAGI of $68,000 or much less: You may deduct the total quantity of your IRA contributions
- MAGI between $68,000–$78,000: You may deduct a decreased quantity.
- MAGI of $78,000 or extra: You may’t deduct IRA contributions.
If you happen to don’t precisely calculate your MAGI, you might find yourself over-contributing to IRAs or claiming credit and deductions you don’t qualify for, which might land you with fines and curiosity fees.
Other than IRA contributions, AGI and MAGI have an effect on different elements, together with:
- Whether or not you possibly can declare pupil mortgage curiosity deductions
- Whether or not you’re topic to web funding revenue tax (NIIT)
- Eligibility for sure youngster tax credit and adoption credit
- Eligibility for healthcare deductions and/or income-based help applications like Medicare, in addition to premiums for Medicare Half B and prescribed drugs
Small enterprise house owners want to pay attention to MAGI to make knowledgeable selections, plan their taxes, and ensure they’re claiming the correct deductions and advantages.
Whereas employers aren’t answerable for calculating MAGI for workers, understanding the idea can assist you reply your workforce’s questions and supply them with the correct data to make their very own calculations. You’ll doubtless want to present your individuals information of gross wages paid, medical insurance contributions, retirement plan contributions, and reimbursed enterprise bills.
That’s the place a full-service payroll software can prevent time whereas retaining you compliant with labor legal guidelines. Homebase calculates payroll straight based mostly on timesheets and sends the right cost information to staff, your state, and the IRS. You should use Homebase to mechanically course of tax filings and subject 1099s and W-2s so that you and your individuals have every part it is advisable to file with ease.
The right way to calculate MAGI, step-by-step
Use these three steps to make MAGI calculations easy — and be sure to don’t miss something.
1. Calculate your adjusted gross revenue
Bear in mind, your AGI is your complete taxable revenue minus above-the-line deductions. So first it is advisable to know your complete revenue.
This contains income sources like:
- Internet enterprise revenue
- Capital beneficial properties
- Taxable portfolio revenue (curiosity, dividends, and so forth)
- Rental actual property revenue
- Royalties
- Some other taxable revenue
Add all of those as much as decide your complete taxable revenue for the yr.
Then, subtract any above-the-line deductions like:
- Half of self-employment taxes paid
- Well being financial savings account contributions
- Retirement account contributions
- Pupil mortgage curiosity paid
- Alimony funds
What’s left is your adjusted gross revenue or AGI.
2. Add again sure excluded revenue to your AGI
In your MAGI, you need to add again in sure revenue that was excluded out of your AGI.
This contains:
- Overseas earned revenue
- Overseas housing
- Tax-exempt curiosity on state and municipal bonds
- IRA contributions
Add again any of these things that apply to you to get your MAGI.
3. Test your MAGI in opposition to present thresholds
When you’ve calculated your MAGI for the tax yr, cross-reference the quantity in opposition to the present thresholds to see the way it impacts your deductions, credit, contribution limits, and exemptions. These differ relying on whether or not you’re a single filer or file collectively with a partner, in addition to different elements, so that you’ll want to take a look at how the laws apply in your specific case.
Pay specific consideration to the latest steerage on:
- MAGI thresholds for Medicare and different well being program eligibility
In case your MAGI falls inside the eligibility vary for sure credit and deductions, you should definitely declare them. In case your revenue exceeds the MAGI limits set, be sure to take away any related contributions — or lower them to the allowed quantity — earlier than submitting, so that you keep away from penalties.
Staying on prime of modified adjusted gross revenue
Understanding how MAGI works and the best way to calculate it empowers small enterprise house owners to file their very own taxes and supply related data to their staff.
However digging by spreadsheets and manually calculating payroll is a irritating, time-consuming course of.
Homebase affords a whole, easy-to-use software for small companies to automate payroll, observe time, comply with HR greatest practices and labor legal guidelines — and extra.
With Homebase, you’ll have clear information of your personal revenue particulars and be capable of present your individuals with all the knowledge they should calculate MAGI and file their taxes. Homebase automates tax reporting and generates the W-2/1099 types you want for each staff and contractors.
What’s extra, you should utilize the Homebase time clock to construct out correct timesheets and combine the information straight into payroll, avoiding handbook errors in transferring figures.
Homebase’s payroll, compliance, and operational options can assist your small enterprise deal with calculations with confidence.
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