When the One Big Beautiful Bill Act (OBBBA) was passed in July 2025, it introduced many new deductions and credits, contingent on your income meeting certain thresholds.
When defining those thresholds, OBBBA uses the term “modified adjusted gross income (MAGI).” The problem is, many taxpayers are not familiar with MAGI, let alone how to calculate it to determine whether they would qualify for the new tax benefits.
Overall, understanding MAGI can help you:
- Evaluate your eligibility for specific OBBBA tax benefits, and
- Employ broader tax planning strategies around the OBBBA tax law changes, to reduce your tax burden in more substantial ways (as an example, see our post on tax planning around the timing of your charitable contributions).
Below, in part 1 of this post, we explain the income terms the IRS uses in its numerous calculations and how you can estimate your own MAGI and eligibility for tax benefits.
Later, in part 2 of this post, we explain the different MAGI thresholds for various OBBBA benefits, so you can calculate your own potential tax savings.
What is MAGI, and how is it calculated?
In general, MAGI is a measure of income that is meant to represent (approximately) the total income you earned during the year that is available to cover your various needs and purposes. This measure is then used to assess your eligibility for certain deductions and credits.
To calculate your MAGI, you can follow the steps below:
1. Calculate your gross income. This is your total income before any deductions or credits. Gross income includes wages, interest, rental income, pension income, etc.
2. Calculate your “Adjusted Gross Income (AGI).” This is your gross income:
a. Plus other amounts that provided some benefit to you (such as prizes, cancellation of debt, alimony, state tax refunds, etc.). You can find a list of these on Form 1040, Schedule 1, Part I.
b. Minus specific deductions (such as Individual Retirement Account (IRA) contributions, student loan interest, etc.). You can find a list of these on Form 1040, Schedule 1, Part II.
c. Minus specific “income exclusions.” These are amounts where some portion of the income is tax-exempt on your return, such as municipal bond interest or a percentage of your Social Security income. You can usually find these as the difference between the middle column and the right column on page 1 of your 1040.
3. Calculate your Modified Adjusted Gross Income (MAGI). This is your AGI with certain deductions or “income exclusions” reversed, to add them back into your income calculation. See below for further details.
Why does MAGI reverse some of my AGI deductions?
Although AGI is the most common income measure used to calculate eligibility for various tax benefits, Congress believed that AGI does not always give a complete picture of a taxpayer’s income. Consequently, Congress introduced “modified AGI” (MAGI).
MAGI generally adds back to AGI:
- Certain amounts that were deducted for AGI (during step 2b above), where the tax code offers the deduction to promote certain behaviors, but where the deduction distorts the assessment of your actual income. An example is a deduction for IRA contributions.
- Certain “income exclusions,” where you actually received the income, but it was excluded from AGI (during step 2c above) as “tax-exempt” in your overall income tax calculation. An example is municipal bond interest.
It is important to understand that you will still get the benefit of these deductions and exclusions for income tax purposes, but they are added back to calculate MAGI, which is then used to determine your eligibility for other tax credits and deductions.
What types of deductions are ignored (added back to AGI) in the calculation of MAGI?
Below are examples of common deductions and “income exclusions” that are included in the calculation of AGI (and, later, in the calculation of taxable income) but that may be added back to AGI to calculate your MAGI:
- Traditional IRA contributions
- Passive income or rental losses
- Non-taxable portion of Social Security benefits
- Tax-exempt interest (like municipal bonds)
- Employer-provided adoption benefits
- Income excluded via the “foreign earned income exclusion” on Form 2555, for those living outside the US
- Foreign housing expenses excluded or deducted on Form 2555, for those living outside the US
Be aware: There is more than one MAGI.
In MAGI calculations, the exact items added back to AGI will vary, as different tax credits and other tax perks will each specify their own add-back items in their eligibility calculations.
If you are looking for the specific MAGI add-backs for a specific tax credit or deduction, the IRS provides worksheets that will guide you through the calculation for that specific item. You can find these by going to the IRS website and looking up the forms and instructions for that item.
If my MAGI exceeds the threshold, can I still qualify for a partial benefit?
In most cases, OBBBA and other tax laws include a “phase-out range” for eligibility for any credits and deductions.
Typically, if you otherwise meet the standards to qualify for the benefit:
- If your MAGI is below the eligibility threshold for the benefit, you would be fully eligible.
- If your MAGI is above the threshold but still in the “phase-out” range, then you would be able to claim a partial benefit.
- If your MAGI is above the threshold and above the “phase-out” range (or if there is no phase-out range), then you would not be eligible for the benefit.
For each benefit, the phase-out range will be stated, and the range will depend on your filing status and other factors.
What OBBBA tax benefits might I qualify for based on my MAGI?
Many of the new OBBBA tax benefits that are available beginning in 2025 or 2026 use MAGI rather than AGI to determine eligibility.
Some of the OBBBA benefits that use MAGI as one factor in determining eligibility (and determining the amount of your benefit) include:
- An additional $6,000 tax deduction for qualified seniors
- An increase to the maximum deduction you can claim for state and local tax payments (a.k.a., the SALT cap)
- A new tax deduction for overtime pay
- A new tax deduction for tip income
- A new deduction for interest paid on car loans
- An increased child tax credit
To learn more about which new OBBBA benefits you may qualify for, based on your MAGI, see part 2 of this post.
Since 1983, The Wolf Group has been helping clients take advantage of new tax opportunities in order to minimize their overall tax liability. We also seek to educate clients on new developments so they can assess how changes in tax laws will affect them. If you have questions related to your specific situation—or about tax-planning strategies you can employ based on your MAGI—feel free to contact us.
Pursuant to Circular 230, promulgated by the Internal Revenue Service, any US tax advice contained in the body of this writing is not intended or written to be used, and cannot and should not be used, by any recipients as specific tax advice related to their facts and circumstances. Taxpayers should consult their local tax professional and/or attorney to obtain specific tax advice related to their facts and circumstances.
