MAGI & Retirement: Avoid Getting Nickel-and-Dimed By the IRS in Retirement
Determining a person's overall tax liability takes much more than simply identifying their income and applying the corresponding federal income tax rate. The Internal Revenue Code is an incredibly complex animal. Instead of directly increasing ordinary income tax rates, the system either adds new taxes or takes away tax benefits for taxpayers with higher income levels. These tax provisions tend to sneak up on clients—by slowly chipping away at the block of income they're entitled to keep in a "nickel-and-dime" fashion. Modified Adjusted Gross Income—or MAGI—is the key benchmark for determining whether many of these under-the-radar tax provisions will apply to increase overall tax liability. While critical to understanding anyone's tax picture, MAGI is also a concept that tends to be overlooked—especially by retirees and those nearing retirement who are often most impacted by the Code's nickel-and-dime approach.
What is Modified Adjusted Gross Income?
Unfortunately, Congress has not adopted a uniform formula for calculating MAGI. Instead, the definition of MAGI depends on the precise aspect of the Code that's involved.
At the most basic level, in calculating MAGI, taxpayers begin with their adjusted gross income (AGI), found on line 11 of their Form 1040. Starting with AGI, they'll add in some types of otherwise-available tax benefits or income that would otherwise be received tax-free.
MAGI and Retirement: Understanding the Impact
During their working years, many clients are unable to significantly reduce their MAGI—unless they elect to earn significantly less or tie up more in accounts with restricted access. Reducing taxable income via funding pre-tax accounts is always a smart idea—but for higher-income clients, might not be sufficient to fall below various MAGI-related thresholds.
Retirees and pre-retirees who have executed tax-smart retirement plans have more control over their taxable income. They may have already funded Roth accounts, giving access to income that won't increase MAGI—or can now execute strategic Roth conversions at reduced income tax rates to create that tax-free income stream.
Importantly, certain Code provisions that invoke MAGI standards only impact retirees and those nearing retirement. For example, MAGI determines how a Social Security beneficiary's benefits will be taxed and the amount a Medicare beneficiary will pay for premiums.
The Medicare IRMAA is a surcharge that's added to base-level Medicare Part B and Part D premiums for higher-income taxpayers. MAGI for IRMAA purposes is the taxpayer's adjusted gross income plus: (1) the taxable portion of their Social Security benefits, (2) tax-exempt interest, (3) interest from U.S. savings bonds used for qualifying education expenses, (4) nontaxable income from U.S. territories, and (5) any income earned abroad that was excluded from AGI.
In 2026, IRMAA impacts single taxpayers with income greater than $109,000 and joint filers who earn more than $218,000.
Taxpayers with between $25,000 and $34,000 in MAGI (or "combined income" for Social Security purposes) are taxed on up to 50% of their Social Security benefits (the thresholds are $32,000 and $44,000 for joint filers). When combined income exceeds $34,000 ($44,000 for joint returns), up to 85% of their benefits are taxed. Social Security recipients who claim early are also subject to an earnings test to determine how their benefits will be taxed.
Calculating MAGI for Social Security purposes is complicated. It requires adding back deductions that were previously taken from AGI—as well as adding back previously tax-exempt income.
The Net Investment Income Tax (NIIT) also impacts many retirees and pre-retirees—because they're most likely to have accumulated substantial investment income over the years. While NIIT doesn't directly apply to retirement distributions, it does apply to other types of passive income. The NIIT is a 3.8% tax that applies to the lesser of (1) total investment income or (2) MAGI above $200,000 ($250,000 for joint returns). The tax only applies once a taxpayer has investment income and MAGI that exceeds the $200,000/$250,000 thresholds.
OBBB Deductions and MAGI
The 2025 OBBB created several new provisions where MAGI is relevant. The OBBB increased the SALT cap to $40,000—but that increase starts to phase out once MAGI exceeds $500,000.
The new $6,000 senior deduction phases out once MAGI exceeds $75,000 ($150,000 for joint returns).
The qualified tip income and qualified overtime deductions are phased out when MAGI exceeds $150,000 ($300,000 for joint returns).
MAGI is calculated in the same manner for all of these OBBB deductions: AGI plus (1) foreign earned income, (2) foreign housing exclusion amounts and (3) income received by residents of Puerto Rico or American Samoa from sources within those territories.
Conclusion
MAGI is an important concept for all taxpayers. For retirees and near-retirees, the impact tends to be most significant. Understanding the concept and its various applications can be critical to minimizing tax liability and avoiding surprises. Your questions and comments are always welcome. Please post them at our blog, AdvisorFYI, or call the Panel of Experts.