Taxable Income

IN THIS GUIDE, YOU’LL see references to your “income” or your “taxable income.” But these are messy notions.

As a rule, you can think of your taxable income as your income after deducting your standard or itemized deduction and any other deductions you’re eligible for. But not everything depends on your taxable income. For instance, various taxes and tax breaks hinge on your “adjusted gross income,” “modified adjusted gross income” and “combined income.”

Consider some examples. On Form 1040, you will find your adjusted gross income, or AGI. Depending on how large your AGI is, you might find your eligibility for various tax credits is affected, such as the credit for daycare expenses and the earned income tax credit.

Your modified adjusted gross income, or MAGI, is your AGI with certain adjustments added back. Among other things, MAGI is used to determine whether your traditional IRA contributions are tax-deductible, whether you can make regular annual contributions to a Roth IRA, and whether you can claim the American Opportunity and Lifetime Learning education tax credits. To make it even more confusing, how AGI is modified can vary, depending on which tax break is at issue.

Finally, combined income is a concept used to determine whether your Social Security benefits are taxable. Combined income is your AGI, plus interest from municipal bonds and half of your Social Security benefit.

Next: Five Federal Taxes

Previous: Income Tax Basics

Articles: What Gets Taxed and Working the Numbers