3

I am not able to resolve the following circular dependency. In order to get Adjusted Gross Income (AGI) one needs to subtract an "IRA Deduction" from Gross Income. Modified AGI must then be computed as a function of AGI, in order to determine the IRA Deduction. What am I missing here?

Note: I am referring to this article: https://www.thebalance.com/how-to-calculate-your-modified-adjusted-gross-income-4047216. Virtually every article one can find online introduces this circular dependency. I realize that I could dig through the official forms, but I was hoping some expert on here could directly point me to what I am misunderstanding.

  • I'm assuming that this is a US question, as IRA is a US term. If not, please enter the correct country. – Brythan Apr 22 '18 at 1:17
  • 1
    Where do you see that AGI is needed to compute the IRA deduction? AGI isn’t mentioned in the IRA Deduction Worksheet in the Form 1040 instructions. – prl Apr 22 '18 at 1:19
  • @prl, How much IRA deduction I can take seems to depend on MAGI, which itself depends on AGI. – braaterAfrikaaner Apr 22 '18 at 1:38
  • “Seems to” based on what? I gave a reference (the reference) that says that it’s not. Can you share yours? – prl Apr 22 '18 at 1:52
  • 1
    It boils down to; You can't use the IRA deduction and a few other deductions to qualify for the IRA deduction. So you have to add those back in to see if you qualify. The confusing part is how do you determine at the beginning of the year if you will be eligible since you have no clue how much you will end up making. I usually just wait till next year and contribute to the previous year after estimating my taxes. – kweinert Apr 22 '18 at 15:00
2

According to the link you posted, the Modified Adjusted Gross Income (MAGI) is equal to the AGI plus some things that you subtracted, like Individual Retirement Account (IRA) contributions. So you actually don't need to calculate your AGI to get the MAGI. However, if you already know your AGI, you can calculate the MAGI from it.

So you have at least two options:

  1. Use the Internal Revenue Service instructions to calculate the MAGI, which do not rely on calculating the AGI first.

  2. Calculate the AGI without the IRA contribution (or pretend that your IRA contribution is 0). Then use that to calculate the MAGI (again, assuming that your IRA contribution is 0). Once you use the MAGI to determine your IRA contribution, subtract it from your original AGI value to get the real AGI value. The MAGI won't change.

Either way tends to result in you doing a number of the AGI calculations twice. The first one does this because it does many of the same calculations to get the MAGI as the AGI. The second actually does calculate the AGI twice. Although if you're careful, you can just adjust the first value to get the real value.

  • 1
    I see, so really all of these online articles I read are slightly misleading in that they suggest you compute AGI before MAGI, when in reality, one necessarily has to compute MAGI first because this is what determines your IRA Deduction, which you need to know before you can compute (the real, final) AGI. Is that about correct now? – braaterAfrikaaner Apr 22 '18 at 14:24

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.