How to Compute Modified Adjusted Gross Income

Critical to deciding if a ROTH conversion can be done

Modified Adjusted Gross Income (MAGI) does not appear anywhere on the individual tax return. Yet it is critical to compute this amount because until 2010, the MAGI must be $100,000 or less in order to complete a ROTH conversion. After 2009, if current law is not changed, there will be no MAGI limit, and all taxpayers, regardless of gross income, will be able to convert traditional IRAs to ROTH IRAs, securing the benefits therefrom.

The Starting Point

Adjusted Gross Income (AGI) as of the end of the year of conversion is the starting point and it will appear on the tax return after the tax return for the year of conversion is completed. It will be found at the bottom of page 1 on the Form 1040 Individual Income Tax Return. Since the conversion transaction must be completed before the end of the year in question, it will be necessary to estimate AGI before the year ends. It is not an easy task. It is made difficult by such year-end transactions as employer bonuses, mutual fund distributions, dividends, interest, and similar income items that in many cases occur on the last day of the year. Nevertheless, estimates must be made in order to assure that desired conversions do not need to be recharacterized later.

Additions to AGI

The following items must be added to AGI in order to arrive at MAGI:

•  The traditional IRA deduction
•  Tuition and fees deduction
•  Student loan interest deduction
•  Foreign earned income and housing exclusions
•  The qualified savings bond interest exclusion
•  The employer-provided adoption expense exclusion

Subtractions from AGI

The following items must be deducted from AGI in order to arrive at MAGI:

•  Required minimum distributions from IRAs for the year of conversion
•  The amount of ROTH IRA conversion for the current year

Note that required minimum distributions from qualified retirement plans, such as 401(k)s, 403(b)s, 457s, etc. are not subtracted from AGI.

ROTH IRA Phase-Out Limits for Contributions

In computing MAGI for purposes of whether a contribution may be made to a ROTH IRA for any particular year, required minimum distributions from IRAs are not deducted in computing MAGI for the purpose of determining eligibility to make a ROTH IRA contribution.

The following MAGI limits apply to contributions for 2008:

Married filing joint or qualified widow/widower       
        $159,000 to $169,000
Single, head-of-household, or married filing separately and the spouses did not live with each other at any time during the year              
        $101,000 to $116,000
Married filing separate and spouses did live with each other at least one day in the year
           $0      to   $10,000

Within the range given above, an eligible ROTH IRA contribution phases out $1 for every $2 of the range.

Example: John Doe, age 62, has 2008 AGI of $179,000 after an ROTH conversion of $25,000. His MAGI is $154,000 and John can make a ROTH IRA contribution for 2008.

Note that in the case of making a ROTH IRA contribution, there is no need to make pre-yearend estimates of AGI. ROTH IRA contributions for the current year, 2008 in the example, can be made on or before April 15 of the following year, April 15, 2009 in the example.