For Americans living abroad, understanding Adjusted Gross Income (AGI) and Modified Adjusted Gross Income (MAGI) is crucial for tax planning. These figures influence tax bracket calculations, eligibility for deductions, and whether certain tax credits can be claimed. Since many expats use the Foreign Earned Income Exclusion (FEIE), their MAGI is often higher than their AGI, which can affect their ability to qualify for tax benefits.
This article explains the differences between AGI and MAGI, why they matter for expats, and how they impact tax credits, deductions, and retirement contributions.
What is Adjusted Gross Income (AGI)?
AGI is your total income minus certain adjustments (above-the-line deductions). It is used to determine taxable income before applying standard deductions and tax credits.
How is AGI Calculated?
AGI is calculated using the following formula:
Total income – Above-the-line deductions = AGI
Total income includes:
- Wages, salaries, and bonuses
- Self-employment income
- Rental income
- Interest, dividends, and capital gains
- Foreign-earned income
Above-the-line deductions may include:
- Student loan interest deduction
- Contributions to a Traditional IRA
- Self-employment tax deduction
- Health Savings Account (HSA) contributions
- Certain moving expenses for military members
After these deductions, the result is AGI, which is reported on Form 1040, Line 11.
Why does AGI matter?
AGI is a crucial figure because it determines an individual’s taxable income and tax bracket, directly impacting how much they owe in federal taxes. Since the US tax system is progressive, a lower AGI can place taxpayers in a lower tax bracket, reducing their overall tax burden.
Additionally, AGI affects eligibility for various deductions and tax credits, such as the student loan interest deduction, deductions for contributions to a Traditional IRA, and certain education-related tax credits. Many of these benefits phase out at higher income levels, so a lower AGI can help taxpayers qualify for valuable deductions and reduce their tax liability.
Furthermore, AGI serves as the starting point for calculating Modified Adjusted Gross Income (MAGI), which determines eligibility for additional tax benefits like Roth IRA contributions and ACA health insurance subsidies. Because of its impact on multiple areas of taxation, AGI is one of the most important figures to understand when preparing a US tax return.
What is Modified Adjusted Gross Income (MAGI)?
MAGI is AGI with certain deductions and exclusions added back. The IRS uses MAGI instead of AGI to determine eligibility for various tax benefits.
How is MAGI Calculated?
MAGI is determined as follows:
AGI + Certain Add-Backs = MAGI
Common add-backs for expats include:
- Foreign Earned Income Exclusion (FEIE) ($126,500 for the 2024 tax year)
- Foreign Housing Exclusion
- Tax-exempt interest (e.g., municipal bond interest)
- Excluded Social Security benefits
- Employer-paid adoption benefits
Since many expats use the FEIE, their MAGI is often much higher than their AGI, which can disqualify them from certain tax credits.
Why does MAGI matter?
MAGI plays a key role in determining eligibility for various tax credits and deductions, making it an important figure for expats and other taxpayers. One of its biggest implications is the phase-out of the Foreign Earned Income Exclusion (FEIE), which allows US expats to exclude up to $126,500 of foreign-earned income in their 2024 tax return. Since the IRS adds back the excluded income when calculating MAGI, expats may find themselves ineligible for other tax benefits despite having a low taxable income.
MAGI also affects eligibility for the Premium Tax Credit, which provides subsidies for ACA healthcare coverage. A high MAGI can reduce or eliminate these subsidies, making health insurance more expensive for expats returning to the US MAGI also determines whether a taxpayer can contribute to a Roth IRA, as contributions phase out at higher income levels.
Finally, MAGI impacts education-related tax benefits, such as the American Opportunity Credit and the Lifetime Learning Credit, both of which are subject to income limits. Because many tax benefits depend on MAGI rather than AGI, understanding how it is calculated is crucial for tax planning, especially for expats who rely on the FEIE.
Key Differences Between AGI and MAGI for US Expats
| Factor | AGI (Adjusted Gross Income) | MAGI (Modified Adjusted Gross Income) |
| Definition | Total worldwide income minus IRS-allowed deductions. | AGI plus certain add-backs (e.g., FEIE, tax-exempt income). |
| Used for | Determining taxable income and tax bracket. | Determining eligibility for tax credits and deductions. |
| Foreign Earned Income Exclusion (FEIE) Impact | Excluding foreign income lowers AGI. | FEIE is added back, increasing MAGI. |
| Effect on Expats | Helps lower taxable income when using FEIE. | Can disqualify expats from tax credits due to a higher MAGI. |
The biggest takeaway for expats is that AGI is reduced when claiming the FEIE, but MAGI is increased by adding the FEIE back. This means some tax credits may be out of reach for expats with high excluded foreign earnings.
How AGI and MAGI Affect Expats’ Taxes
Foreign Earned Income Exclusion (FEIE)
Expats can exclude up to $126,500 (2024 limit) of foreign-earned income under the FEIE, significantly reducing AGI.
- AGI Impact: FEIE lowers AGI, reducing taxable income.
- MAGI Impact: FEIE is added back, increasing MAGI.
Example:
- An expat earns $140,000 and excludes $126,500 under the FEIE.
- AGI = $13,500 (after applying the FEIE).
- MAGI = $140,000 (since the $126,500 is added back).
A higher MAGI may disqualify them from credits like the Premium Tax Credit or Roth IRA contributions.
Roth IRA Contribution Limits for Expats
To contribute to a Roth IRA, your MAGI must stay below:
- Single filers (2024 limit): Phase-out starts at $146,000, with contributions eliminated at $161,000.
- Married filing jointly: Phase-out starts at $230,000, with contributions eliminated at $240,000.
Because the FEIE raises MAGI, many expats cannot contribute to a Roth IRA.
Alternative: Using the Foreign Tax Credit instead of FEIE keeps MAGI lower, allowing Roth IRA contributions.
Premium Tax Credit (ACA Health Insurance Subsidy)
Expats returning to the US and applying for ACA Marketplace insurance must qualify based on MAGI.
- AGI Impact: The FEIE lowers AGI.
- MAGI Impact: The FEIE is added back, increasing MAGI and possibly disqualifying the expat from ACA subsidies.
Solution: Using the Foreign Tax Credit instead of FEIE keeps MAGI lower and may increase ACA subsidy eligibility.
Child Tax Credit (CTC) & Earned Income Tax Credit (EITC)
Expats with children may qualify for the Child Tax Credit (CTC), but a higher MAGI can reduce eligibility.
- The Child Tax Credit phases out for MAGI above:
- $400,000 (married filing jointly)
- $200,000 (single filers)
- The Earned Income Tax Credit (EITC) is not available to expats using the FEIE.
Tax Strategies for US Expats
For expats, choosing between the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC) can significantly impact their tax situation.
- If reducing taxable income is the goal, the FEIE is beneficial.
- If qualifying for tax credits is important, the FTC is often the better choice.
Since tax laws and eligibility rules can be complex, working with a US expat tax professional can help optimize tax strategies.
For Americans living abroad, understanding Adjusted Gross Income (AGI) and Modified Adjusted Gross Income (MAGI) is crucial for tax planning. These figures influence tax bracket calculations, eligibility for deductions, and whether certain tax credits can be claimed. Since many expats use the Foreign Earned Income Exclusion (FEIE), their MAGI is often higher than their AGI, which can affect their ability to qualify for tax benefits.
This article explains the differences between AGI and MAGI, why they matter for expats, and how they impact tax credits, deductions, and retirement contributions.
What is Adjusted Gross Income (AGI)?
AGI is your total income minus certain adjustments (above-the-line deductions). It is used to determine taxable income before applying standard deductions and tax credits.
How is AGI Calculated?
AGI is calculated using the following formula:
Total income – Above-the-line deductions = AGI
Total income includes:
- Wages, salaries, and bonuses
- Self-employment income
- Rental income
- Interest, dividends, and capital gains
- Foreign-earned income
Above-the-line deductions may include:
- Student loan interest deduction
- Contributions to a Traditional IRA
- Self-employment tax deduction
- Health Savings Account (HSA) contributions
- Certain moving expenses for military members
After these deductions, the result is AGI, which is reported on Form 1040, Line 11.
Why does AGI matter?
AGI is a crucial figure because it determines an individual’s taxable income and tax bracket, directly impacting how much they owe in federal taxes. Since the US tax system is progressive, a lower AGI can place taxpayers in a lower tax bracket, reducing their overall tax burden.
Additionally, AGI affects eligibility for various deductions and tax credits, such as the student loan interest deduction, deductions for contributions to a Traditional IRA, and certain education-related tax credits. Many of these benefits phase out at higher income levels, so a lower AGI can help taxpayers qualify for valuable deductions and reduce their tax liability.
Furthermore, AGI serves as the starting point for calculating Modified Adjusted Gross Income (MAGI), which determines eligibility for additional tax benefits like Roth IRA contributions and ACA health insurance subsidies. Because of its impact on multiple areas of taxation, AGI is one of the most important figures to understand when preparing a US tax return.
What is Modified Adjusted Gross Income (MAGI)?
MAGI is AGI with certain deductions and exclusions added back. The IRS uses MAGI instead of AGI to determine eligibility for various tax benefits.
How is MAGI Calculated?
MAGI is determined as follows:
AGI + Certain Add-Backs = MAGI
Common add-backs for expats include:
- Foreign Earned Income Exclusion (FEIE) ($126,500 for the 2024 tax year)
- Foreign Housing Exclusion
- Tax-exempt interest (e.g., municipal bond interest)
- Excluded Social Security benefits
- Employer-paid adoption benefits
Since many expats use the FEIE, their MAGI is often much higher than their AGI, which can disqualify them from certain tax credits.
Why does MAGI matter?
MAGI plays a key role in determining eligibility for various tax credits and deductions, making it an important figure for expats and other taxpayers. One of its biggest implications is the phase-out of the Foreign Earned Income Exclusion (FEIE), which allows US expats to exclude up to $126,500 of foreign-earned income in their 2024 tax return. Since the IRS adds back the excluded income when calculating MAGI, expats may find themselves ineligible for other tax benefits despite having a low taxable income.
MAGI also affects eligibility for the Premium Tax Credit, which provides subsidies for ACA healthcare coverage. A high MAGI can reduce or eliminate these subsidies, making health insurance more expensive for expats returning to the US MAGI also determines whether a taxpayer can contribute to a Roth IRA, as contributions phase out at higher income levels.
Finally, MAGI impacts education-related tax benefits, such as the American Opportunity Credit and the Lifetime Learning Credit, both of which are subject to income limits. Because many tax benefits depend on MAGI rather than AGI, understanding how it is calculated is crucial for tax planning, especially for expats who rely on the FEIE.
Key Differences Between AGI and MAGI for US Expats
| Factor | AGI (Adjusted Gross Income) | MAGI (Modified Adjusted Gross Income) |
| Definition | Total worldwide income minus IRS-allowed deductions. | AGI plus certain add-backs (e.g., FEIE, tax-exempt income). |
| Used for | Determining taxable income and tax bracket. | Determining eligibility for tax credits and deductions. |
| Foreign Earned Income Exclusion (FEIE) Impact | Excluding foreign income lowers AGI. | FEIE is added back, increasing MAGI. |
| Effect on Expats | Helps lower taxable income when using FEIE. | Can disqualify expats from tax credits due to a higher MAGI. |
The biggest takeaway for expats is that AGI is reduced when claiming the FEIE, but MAGI is increased by adding the FEIE back. This means some tax credits may be out of reach for expats with high excluded foreign earnings.
How AGI and MAGI Affect Expats’ Taxes
Foreign Earned Income Exclusion (FEIE)
Expats can exclude up to $126,500 (2024 limit) of foreign-earned income under the FEIE, significantly reducing AGI.
- AGI Impact: FEIE lowers AGI, reducing taxable income.
- MAGI Impact: FEIE is added back, increasing MAGI.
Example:
- An expat earns $140,000 and excludes $126,500 under the FEIE.
- AGI = $13,500 (after applying the FEIE).
- MAGI = $140,000 (since the $126,500 is added back).
A higher MAGI may disqualify them from credits like the Premium Tax Credit or Roth IRA contributions.
Roth IRA Contribution Limits for Expats
To contribute to a Roth IRA, your MAGI must stay below:
- Single filers (2024 limit): Phase-out starts at $146,000, with contributions eliminated at $161,000.
- Married filing jointly: Phase-out starts at $230,000, with contributions eliminated at $240,000.
Because the FEIE raises MAGI, many expats cannot contribute to a Roth IRA.
Alternative: Using the Foreign Tax Credit instead of FEIE keeps MAGI lower, allowing Roth IRA contributions.
Premium Tax Credit (ACA Health Insurance Subsidy)
Expats returning to the US and applying for ACA Marketplace insurance must qualify based on MAGI.
- AGI Impact: The FEIE lowers AGI.
- MAGI Impact: The FEIE is added back, increasing MAGI and possibly disqualifying the expat from ACA subsidies.
Solution: Using the Foreign Tax Credit instead of FEIE keeps MAGI lower and may increase ACA subsidy eligibility.
Child Tax Credit (CTC) & Earned Income Tax Credit (EITC)
Expats with children may qualify for the Child Tax Credit (CTC), but a higher MAGI can reduce eligibility.
- The Child Tax Credit phases out for MAGI above:
- $400,000 (married filing jointly)
- $200,000 (single filers)
- The Earned Income Tax Credit (EITC) is not available to expats using the FEIE.
Tax Strategies for US Expats
For expats, choosing between the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC) can significantly impact their tax situation.
- If reducing taxable income is the goal, the FEIE is beneficial.
- If qualifying for tax credits is important, the FTC is often the better choice.
Since tax laws and eligibility rules can be complex, working with a US expat tax professional can help optimize tax strategies.
