A caution: Since the definition of MAGI as applicable to individual phase-outs varies, you might have to choose between conflicting opportunities. For instance, if you have a child in college this semester, the American Opportunity Credit and the Lifetime Learning Credit may be on your mind. Both benefits are education-related, yet the qualifying requirements differ – including the MAGI threshold.
- Education benefits. The American Opportunity Credit is a partially refundable, dollar-for-dollar reduction of your tax bill, with a maximum of $2,500 per student. This year the credit starts to shrink when your MAGI reaches $160,000 and you’re married filing jointly ($80,000 when you’re single). It disappears completely when your MAGI is greater than $180,000 for joint returns, and $90,000 when your filing status is single. For 2014, the Lifetime Learning Credit begins to phase out at $108,000 when you’re married filing a joint return and $54,000 when you’re single. Once your MAGI reaches $128,000 (married) or $64,000 (single), the credit is no longer available. Other education benefits, such as the above-the-line tuition and fees deduction, also have MAGI limitations. If you qualify, you can claim the maximum annual limit of $4,000 when you’re married filing jointly and your MAGI does not exceed $130,000 ($65,000 if you’re single). The deduction phases out completely when your income reaches $160,000 ($80,000 for singles).
- Retirement plans. Phase-outs affect retirement planning too. The deduction for contributions to your traditional IRA is limited when you are eligible to participate in your employer’s plan and your MAGI exceeds $96,000 ($60,000 when you’re single). And while Roth IRA contributions are not tax-deductible, the amount you can contribute for 2014 begins to phase out when your MAGI reaches $181,000 ($114,000 if you file single). In addition, the federal “saver’s” credit for making contributions to retirement plans phases out when your 2014 modified adjusted gross income is more than $60,000 and your filing status is married filing jointly ($30,000 for singles).
- Other phase-outs. Finally, the exclusion of social security benefits from taxable income also has a phase-out calculated on the amount of your MAGI over the base amount of $32,000 when you’re married and $25,000 when you’re single. Other phase-outs affecting your 2014 federal tax return reduce personal exemptions, itemized deductions, and the alternative minimum tax exclusion.