Modified Adjusted Gross Income
Key Takeaways:
Modified Adjusted Gross Income determines Medicare premiums (IRMAA).
MAGI (Modified Adjusted Gross Income) isn’t a line on your tax return.
If you exceed the IRMAA threshold by $1, you’ll pay higher premiums.
Medicare uses your modified adjusted gross income (MAGI) from two years prior.
Roth conversions, RMDs, and capital gains can impact MAGI.
Modified Adjusted Gross Income – Links
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Modified Adjusted Gross Income – Transcript
We referred several times in our last video to a term called modified adjusted gross income. A lot of people refer to it as a shortcut with MAGI. You can find that video right here.
We want to walk through, briefly, in 2025, what makes up modified adjusted gross income; and why that matters as you are retiring — or if you’re already retired.
The first thing you need to know about modified adjusted gross income is that MAGI, is not found as a line on your tax return.
It’s not there.
And so this is one of the things that gets added back in when Congress makes these tax bills.
They use a different base to calculate whether you are subject to paying more, or not.
So let’s talk about how to calculate your modified adjusted gross income. Especially when it comes to finding out if you have to pay increased premiums for Medicare.
Start with your adjusted gross income on your 2024 tax return.
That is line 11. Just start right there.
Then, to calculate whether you are subject to additional costs for Medicare, you have to add back in a couple of things.
You have to add back in tax exempt interest. This is interest on municipal bonds, whether it was earned or accrued through the end of the calendar year.
Then you have to add back in if you earned any interest on savings bonds used to pay for any higher education costs.
You also have to add back any earned income that a US citizen, living abroad had been… any of that income that was previously excluded.
So if you decided you wanted to move to Ireland… for whatever reason… and you still earned income in the United States and that was excluded, guess what?
Gets added back in.
You also have to add back in the amount of social security income that you were not previously taxed on as well.
The bottom line is you come up with this modified adjusted gross income number.
That number is used to determine whether the “income related monthly adjustment amount, or IRMAA” for your Medicare Part B premiums.
And this number is a cliff.
Meaning, if you go over the threshold by even $1, you are going to be subject to this new premium level that you’re going to have to pay.
It’s not progressive at all. It’s a cliff.
You go over by a dollar, you’re going to pay.
There’s a two year gap, on your Medicare Part B premiums and your modified adjusted gross income.
What I’m trying to say is your 2025 Medicare premiums will be based on your modified adjusted gross income from 2023, two years back. So your 2026 premium for Medicare will be based on your modified adjusted gross income that you showed in 2024, two years.
So when you’re planning for retirement… or you’re planning some events over the coming year… what are some of the things that can trigger this income related monthly adjustment amount, or IRMAA?
Obviously it’s not just money that you earn in retirement. Let me give you a few examples.
Suppose you have a large capital gain that you realized in a year. For example, you sell your primary residence and your taxable gain is more than the excluded amount.
Incidentally, a little bit off topic, but…
These gains – you can exclude up to $250,000 in gains for a single homeowner.
If you are filing a joint return, you can each declare $250,000 – or you can exclude $500,000 of gains on a sale of a primary residence if you’ve lived in that home for the last couple of years.
Now, that number was put in place in 1997, so over 25 years ago.
Not indexed for inflation.
So what can trigger this “IRMAA” or “income related monthly adjustment amount”?
A large capital gain like selling your primary residence.
Maybe you decided that this year you’re going to be “Tommy Day Trader” and you’re going to sell investments and realize a large capital gain. That could also throw your modified adjusted gross income over the threshold where you’re subject to this “income related monthly adjustment amount,” or “IRMAA.”
Let’s talk about retirement accounts.
Of course if you’re 65, you’re collecting Medicare, but you’re still working… you can, or you should… at least talk to your financial planner about maybe making contributions to the workplace retirement plan.
Because that will overall drop your income.
But suppose you’re not working.
And suppose you’re actually at the point where you’re collecting your required minimum distributions, your RMDs.
If these distributions from your retirement account are large enough, that could trigger this “IRMA,” “income related monthly adjustment amount.”
You know, maybe you decide that you wanna do a Roth conversion.
And you want to take some of the money that’s in your retirement account.
You want to pay the tax on it and then roll that money into a Roth IRA.
It gets a little tricky.
You want to be aware of that threshold. Because it is a cliff. Maybe you convert right up to the amount without going over. It’s something that you really should consider.
But don’t let the tax tail “wag the dog!”
You know, this may be something that you say, “you know what? I’m going to put up with these premiums for an extra year, but it’s going to be worth it for me!”
This is something you really should be discussing on a case-by-case basis with your financial planner. These numbers get reassessed every single year. It’s based on the modified adjusted gross income.
Now, if your advisor is just swinging stocks and mutual funds and not talking about these types of topics that might impact you and your future… maybe you need a new advisor.
