Taxable Income

Here and elsewhere in this guide, you will 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 personal exemptions, your standard or itemized deduction, and any other deductions you are eligible for. But not everything hinges 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. At the bottom of the first page of Form 1040, you will find your adjusted gross income, or AGI. Depending on how large your AGI is, the value of your itemized deductions and personal exemptions may be reduced, and you might find your eligibility for various tax credits is affected, such as the credit for daycare expenses.

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 and whether you can make regular annual contributions to a Roth IRA.

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

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