Preserve Tax Breaks by Monitoring MAGI

tax magiThe qualifying threshold for a number of common tax credits and breaks often depends on the filer’s modified adjusted gross income, or MAGI. Since these thresholds are subject to change from year to year, it’s important to closely monitor your MAGI to ensure you don’t unexpectedly surpass a particular threshold and thereby forfeit a critical tax benefit you had counted on receiving.

The easiest way to determine which tax breaks you’re in danger of losing is to review your 2013 return and note the areas where your MAGI was near the qualifying threshold or had already entered the pro-rated zone. Most taxpayers would do well to focus on the following credits and benefits:

Retirement Plans

MAGI limits affect taxpayers making contributions to retirement plans such as traditional IRAs and Roth IRAs. For the 2014 tax year, contributions to traditional IRAs are fully deductible if your MAGI is less than $60,000 (or $96,000 for joint filers); partially deductible for MAGI between $60,000 and $70,000 (or $96,000 and $116,000 for a joint return); and is completely phased out for MAGI greater than $70,000 (or $116,000).

Maximum annual contributions to Roth IRAs are also governed by MAGI. For 2014, taxpayers with a MAGI less than $114,000 (or $181,000 for joint filers) may make the full $5,500 Roth contribution; however, only a partial contribution is allowed for MAGI in the $114,000 to $129,000 range ($181,000 to $191,000 for joint returns).

American Opportunity Credit

This credit allows you to reduce your tax liability on a dollar-for-dollar basis for qualifying education expenses such as tuition and course materials. Taxpayers with a MAGI of less than $80,000 (or $160,000 if filing jointly) can claim up to $2,500 per student per tax year, while those earning up to $90,000 (or $180,000 for joint filers) may receive a ratably reduced credit. Taxpayers with a MAGI in excess of $90,000 are not eligible for this credit.

Other areas that warrant MAGI monitoring include the alternative minimum tax exclusion; social security benefits from taxable income; personal itemized deductions; the Lifetime Learning Credit; above-the-line education-related deductions; and the federal “saver’s” credit for retirement plans.

These are just a few of the more common categories in which modified adjust gross income limitations are a concern. For a more comprehensive analysis about how MAGI thresholds may impact your 2014 tax liability, please schedule a consultation with one of our professional tax planners today.