MAGI calculation in TurboTax is not correct for 2019

[tweak]

I have entered the preliminary data for my 2019 taxes (TurboTax Home and Business, Windows).

The MAGI (modified adjusted gross income) calculation from TurboTax is incorrect. TurboTax reports my MAGI as equivalent to my AGI. I have some self-employment income, and TurboTax is not adding back the 1/2 self-employment tax deduction to my AGI when calculating the MAGI, per the IRS rules. This error is visible on the "IRA Worksheet" form.

This matters because TurboTax is overstating the amount I can deduct from a traditional IRA contribution. (I am in the phaseout range.)

Please correct the MAGI calculation and post a software update.

[dmertz · Accepted solution]

TurboTax is calculating correctly.  For the purpose of determining the phaseout of the deduction for a traditional IRA contribution there is not to be any add-back of the deductible portion of SE taxes.  See Worksheet 1-1 of IRS Pub 590-A:  https://www.irs.gov/pub/irs-pdf/p590a.pdf

[rjs]

There are about a dozen different definitions of MAGI, depending on what it is being used for. You might be looking at a definition that is for some other purpose.

[tweak]

Thank you for your quick response.

The IRS document you posted appears to be for 2018.

I am looking at this article:

- https://turbotax.intuit.com/tax-tips/irs-tax-return/what-is-the-difference-between-agi-and-magi-on-y...

- Which does say to add back 1/2 self-employment deduction to AGI when calculating MAGI.

I am still confused. Some other IRS documents do not mention the self-employment tax deduction in relation to MAGI.

[DoninGA · Accepted solution]

IRS Publication 590-A (2019) draft, Worksheet 1-1, page 15 - https://www.irs.gov/pub/irs-dft/p590a--dft.pdf#page=15

[tweak]

Thanks, DoninGA and everyone else.

I see on the draft 2019 IRS doc you posted that the 1/2 self-employment tax reduction, for the purpose of traditional IRA deductions, is NOT figured into MAGI. 

- https://www.irs.gov/pub/irs-dft/p590a--dft.pdf#page=15

I also did not realize their are multiple MAGI calculations for different purposes.

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As a follow-up question, has MAGI for calculating traditional IRA deduction limits always excluded the 1/2 self-employment tax? Or is this a recent change in the tax law?

I very much appreciate all of your helpful replies!

- tweak

[rjs · Accepted solution]

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@tweak wrote:

I am looking at this article:

- https://turbotax.intuit.com/tax-tips/irs-tax-return/what-is-the-difference-between-agi-and-magi-on-y...

- Which does say to add back 1/2 self-employment deduction to AGI when calculating MAGI.

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That article is wrong. We complained to TurboTax about it last year, but they haven't corrected it. I'll bring it up again. And that article is not "IRS rules." It's written by someone at TurboTax, not the IRS.

As I said, there is not one definition of MAGI that applies to all situations. There are different definitions for different purposes.

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@tweak wrote:

The IRS document you posted appears to be for 2018.

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The IRS has not yet published the 2019 edition of Publication 590-A, but the rules for calculating MAGI for this purpose have not changed. You can download a draft version of the 2019 edition from the following link.

DRAFT Publication 590-A

[tweak]

Thanks, rjs. 

And thanks, dmertz.

Much appreciated!

- tweak

[tweak · Accepted solution]

Editorial note:

Dear Congress,

If you really want to enact a meaningful Tax Reform bill, then please get rid of the ambiguous definitions of terms such as MAGI and make them simple, easy to understand, and uniform. Why are there a dozen possible definitions for this term?

[dmertz]

The tax code does not use the term "MAGI" or "modified AGI," so Congress has nothing to do with this.  For a particular purpose, the tax code simply specifies that actual method.  § 219 is the section of the tax code that covers the deduction for a traditional IRA contribution.  For the purpose of the phaseout of this deduction, § 219(g)(3)(A) says:

(A)Adjusted gross income  Adjusted gross income of any taxpayer shall be determined—

(i)after application of sections 86 and 469, and
(ii)without regard to sections 135, 137, 221, 222, and 911 or the deduction allowable under this section.

For any particular purpose, the modifications to AGI depend on the particular purpose, so there can be no one set of modifications, contrary to what is implied by the misleading TurboTax article.

[rjs]

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@tweak wrote:

Dear Congress,

If you really want to enact a meaningful Tax Reform bill, then please get rid of the ambiguous definitions of terms such as MAGI and make them simple, easy to understand, and uniform.

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About 15 years ago some people in Congress decided that it was confusing to have different definitions of a qualifying child for different purposes. There were different definitions for claiming a child as a dependent, filing as head of household, the earned income credit, and so on. So with great fanfare they passed a new law establishing a "Uniform Definition of a Child," UDC for short. But uniformity didn't even survive the legislative process. The Uniform Definition of a Child still had variations for different purposes, and still does today. So don't get your hopes up.

[rusty1992]

Just did my 2022 Tax Return in TurboTax Premier.  I need to project MAGI for Medicare Part B IRRMA cost projection.  I notice TurboTax's "MAGI Worksheet" did not include any of our Social Security Income in the MAGI calculation (Which generated a MAGI far less than our AGI.)   Yet, the IRS and other reference I can find, all say 'the untaxed portion of SS payments (15%) must be 'added back in",  or other sources say 50% of SS payments should be included in MAGI calculation.  

Thus, I'm confused.  I've asked a financial planner and all they will say is they can't speak for Turbo Tax (as of course they want you to not do your taxes yourself)  

So, is Turbo Tax calculated MAGI correctly?  or not? 

[rjs]

@rusty1992 

MAGI is calculated differently for different purposes. There are about a dozen different ways to calculate MAGI, depending on what it's being used for. TurboTax does not calculate MAGI for IRMAA because it is not used on a tax return. Any MAGI calculations in TurboTax are for other purposes, and are calculated differently.

MAGI for IRMAA is simply AGI plus tax-exempt interest. On your 2020, 2021, or 2022 tax return, the MAGI for IRMAA is Form 1040 line 11 plus line 2a. But your IRMAA is based on your MAGI from two or three years ago. For example, your IRMAA for 2023 will usually be based on your 2021 tax return, or possibly your 2020 tax return.

[rusty1992]

Thank you.  Yes, the MAGI that TT calculated was for passive gain on rental property.    So-  AGI plus tax-exempt interest (which I have none) = my AGI.    My AGI includes 85% of my Social Security Payment , and thus I better plan for that in the future, for IRMMA planning.

I am aware of the IRMMA rate setting based on MAGI from 2 years prior tax reporting.  I got my 2022 and 2023 Part B cost reduced - using the  Medicare Income-Related Monthly Adjustment Amount-Life-changing Event (SSA-44) (PDF)  form, and got both 2022 and 2023 IRMMA based on our 2022 income, and not 2020 and 2021 as would normally be the case. 

For folks reading this, IRMMA adjustment process does work, if you can claim one of the qualified reasons.

But as I start doing IRA to Roth conversions, MAGI needs to be planned precisely (which is why I need to know for sure how MAGI for Medicare Part B is calculated)

[rusty1992]

One more question on MAGI computation for Medicare Part B IRRMA.  If I'm correct, and MAGI = AGI + 'non-taxed interest', would the gain earned on a Roth IRA (if cashed out) be considered 'non-taxed interest' for MAGI calculation?

I understand that Roth basis and gain are not taxable? but I hope that Roth gain isn't considered 'non-taxed interest' for this purpose.