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Understanding Gross Income and MAGI with Examples

Understanding gross monthly income and MAGI

Individuals’ gross income, also known as gross pay on a paycheck, is their total pay from their employer before taxes or other deductions. This includes all sources of income and is not limited to cash income; it also covers property or services received. Gross annual income is the total amount of money an individual earns in one year before taxes and includes earnings from all sources. Your gross income value will be used for calculating your Modified Adjusted Gross Income.

Your MAGI (Modified Adjusted Gross Income) is your adjusted gross income (AGI) after certain allowable deductions and any tax penalties are deducted. The figures are the same for many taxpayers. Furthermore, your MAGI value can be used to determine your eligibility for government healthcare programs such as the subsidized insurance plans available through the Marketplace health insurance.

Whenever you apply for a Marketplace health plan, one of the most important factors insurance companies consider in your application is your Modified Adjusted Gross Income. Therefore, the health insurers use your gross income and MAGI to determine your eligibility for government subsidies or premium tax credits. Read on to learn more about gross monthly income, MAGI, how it works, and how to calculate it. 

What is Gross Monthly Income?

Let’s start with a definition of gross monthly income. It is the sum of your gross monthly earnings or gross pay from your employer before tax or any other deductions are taken out by the company, plus any other sources of income you may have. 

This can even include income generated from various sources, such as investments, a business, or other activities. If you rent out a room in your apartment, for example, your rental revenue will be taken from your gross monthly income.

Deep Diving into Gross Income Definition

The gross monthly income is the figure that is usually mentioned in the offer letter when you start a new job. Note that your gross monthly salary includes any commissions, bonuses, or overtime pay you receive from your employer. Moreover, certain types of earnings may be excluded from the definition of gross monthly salary, depending on the tax laws in the country where you work. For example, if your employer provides you with life insurance or a death benefit, that income will not be counted as a gross monthly income and will be tax-free. 

Furthermore, it’s worth noting that the gross monthly salary is not the same as the net monthly income. This is the amount of money you can actually take home after paying all the necessary taxes and other deductions. As a result, even if your gross monthly salary is USD 5000, your net monthly income could be as low as USD 3000.

What is Included in Your Gross Monthly Income?

Assume you work as a software engineer, but also sell your paintings on the internet, the profit generated from the sale prices will be considered part of your gross monthly income. Therefore, it is critical to understand what is included in the broad term gross monthly income.

In most cases, the following factors come into play when calculating gross monthly income: 

Business Income: Any revenues generated by your company are considered your “business income.” For example, suppose you have a spare bedroom in your apartment; you could rent it as bed and breakfast. In such a case, the rental earnings are your business income.

Earnings from a second or third job: If you work part-time for any company, all of your earnings from that job will be added to your monthly gross income.

Overtime earnings: Overtime salary or overtime pay refers to any additional compensation you receive from your employer for working beyond your regular working hours. It is also considered as a part of your gross monthly income.

Commission: If you work in a sales position at a tech company, any commission you receive for making a sale will be factored into your paycheck. 

Investments: If you put money into financial products, incomes such as interests, dividends or capital gains, etc., are considered your investment income. 

Bonus: If you receive additional compensation from your company based on your achievements or meeting any other condition, this is counted as a bonus.

What is the Difference Between an Individual Gross Monthly Wage and a Household Gross Wage?

Individual gross monthly income refers to the total monthly earnings of an individual (e.g., your entire monthly wage). An individual’s gross monthly salary differs from the household gross monthly income. Household gross monthly salary refers to the total monthly earnings of all household members (e.g., the sum of the total earnings of all the members that live within the same family). To calculate it, add the monthly earnings of all family members to get the total sum.

Estimating your gross monthly income is the first step in assessing your financial health. Health insurance companies will use your gross income along with MAGI to determine your eligibility for Obamacare subsidies. Knowing your gross monthly income can also help you identify the different tax deductions you may qualify for. For example, investments in a specific type of mutual funds are exempted from tax deductions. 

How to Calculate the Gross Monthly Income?

You might often think, “What is my gross monthly income?” primarily if your contractor does not provide a detailed breakup. Whether you get paid on a monthly salary or an hourly basis, you can use this guide as a gross monthly income calculator to determine your gross monthly income effectively: 

Salary: 

If you are compensated on a monthly salary, divide your current earnings by 12 to calculate your gross monthly salary. 

For example, Jacob makes USD 55,000 per year as a software developer. His gross earnings will be USD 55,000/12, approximately 4583 dollars.

Hourly:

In this situation, you first need to calculate your annual earnings. For example, Emma earns USD 55 per hour as a software engineer and works 20 hours per week.

To determine her annual earnings, we need to calculate her weekly income. 

The weekly earnings will be payout per hour x total number of hours worked. That works out as USD 1100. Now multiply the total weeks in the year by the weekly income to get the annual income.

USD 1100 x 52 weeks = USD 57,200.

Therefore, Emma makes USD 57,200 per year. 

For evaluating the gross monthly income, we divided the annual income by 12. 

57,200/ 12 = 4766

Therefore, Emma earns about USD 4766 per month as a developer.

Multiple Projects

Example # 1

Linda is a freelance computer programmer. She is currently working on three different projects, each with a different payout rate. The first project pays her an hourly rate of USD 50, and she spends around 10 hours per week on this job. The second project pays USD 60 per hour and requires her to work 6 hours per week. Also, her third project pays her $40 per hour and instructs her to work three hours per week. To calculate Linda’s gross monthly income, we should first determine her weekly income from each project.

A project’s weekly income: Hourly wage x number of hours spent on a project.

  • The first project’s weekly income is 50 x 10 = 500 dollars.
  • The second project generates a weekly income of 60 x 6 = 360 dollars.
  • The third project generates a weekly income of 40 x 3 = 120 dollars.

A project’s annual revenue is calculated as follows: Weekly earnings multiplied by the number of weeks in a year.

  • The first project’s annual income is 500 x 52 = 26,000 dollars.
  • The second project generates an annual income of 360 x 52 = 18720 dollars.
  • The third project generates an annual income of 120 x 52=6240 dollars.
  • Her total annual income will be 50,960, which is obtained by adding 26,000 + 18720 + 6240.

Her gross monthly income is 50,960/12 = USD 4246.66

Example # 2

John earns a gross monthly salary of USD 6000 as an office manager. He also works on freelance coding projects to supplement his income. Furthermore, he is currently paid USD 100 per project and works 5 hours per week. Let’s figure out his monthly gross earnings:

Weekly earnings from the freelance job: Hourly wage multiplied by the number of hours spent on a project

100 x 5 = 500

Annual income from a freelance assignment = Weekly income x number of weeks in a year.

500 x 52 = 26,000

Annual income as an office manager= Monthly income x 12

5000 x 12 = 60,000.

Total annual income = Annual income from freelance assignments + yearly income from the employer 

60,000 + 26,000 = 86,000.

His gross monthly salary will be the total annual wages divided by 12.

86,000/12 = 7166.66 USD

Example # 3

Sophia earns a salary of USD 60,000 per year. She’s also started a part-time job that pays her $100 per week.

She needs to divide her annual salary by 12 to calculate her gross monthly salary.

60,000/12 = 5000 dollars per month

Now, she needs to multiply her weekly pay by 52 to get her annual income from the side hustle.

100 x 52 = USD 5200

By combining these figures, she can calculate her gross monthly wages.

USD 5000 + USD 5200 = 10,200 USD

Example # 4

Tina works for a company that pays her by the hour. She makes USD 40 per hour and works 35 hours per week. Tina also teaches English online and earns 70 dollars per class. She conducts four classes per month.

Let’s multiply USD 40 by 35 to get her gross monthly salary from the job, which gives us USD 1400. Her annual salary will be USD 1400 multiple by 52, which equals 72,800 USD.

Again, multiply USD 70 by 4 to calculate her gross wages from English classes, which gives us USD 280. Her annual project income will be USD 280 multiplied by 12 for a total of USD 3360.

Her annual total income will be the sum of her job income and the income from her English classes: 72,800 USD + 3360 USD = 76,160 USD

Finally, dividing this number by 12 gives her a gross monthly income of USD 6346.66.

What does Modified Adjusted Gross Income Mean?

You might be wondering, “What is Modified Adjusted Gross Income?” 

In the simplest terms, your Modified Adjusted Gross Income (MAGI) is your AGI plus a few items like exempted or excluded income and certain deductions. Therefore, the IRS uses your MAGI to determine your eligibility for credits, tax deductions, or retirement plans. MAGI varies depending on the tax benefit received. 

Modified Adjusted Gross Income – A look at the numbers

The first step in calculating your Modified AGI is determining your Gross Income, followed by your AGI. We’ll go over them now.

Gross income: Gross monthly income is the total amount of money you earn, including wages, tips, investment income, pensions, and rents.

Adjusted gross income: It is your gross income after certain allowable deductions have been made, but it excludes standard and itemized deductions, as well as any exemptions. 

So, what exactly is MAGI, and how do you calculate it? What amounts should you add to your AGI? It depends — different tax benefits require different definitions of MAGI. There are, however, some recurring themes.

For example:

Most calculations add excludable foreign earned income, but not all add excludable savings bond interest or excludable adoption benefits. When calculating MAGI for a specific tax benefit, you should be aware of the definition of MAGI for that benefit.

How to calculate Modified Adjusted Gross Income?

Do you want to know how to figure out your Modified Adjusted Gross Income (MAGI)? We’ll talk about that now.

Let’s look at a few expected tax benefits and how they’re calculated using modified adjusted gross income. You can typically determine what goes into it by looking at the form instructions. 

Traditional IRA Deductibility: MAGI is calculated by adding AGI to the following deductions: 

  • Student loan interest
  • Foreign earned proceeds and housing exclusions
  • Foreign housing deduction
  • Excluded employer adoption benefits
  • Excluded savings bond interest
  • For 2017 and earlier, the local production activities deduction and tuition and fees deduction paid before 2021.

Roth IRA Eligibility: MAGI is the same as the conventional IRA formula above, plus any standard IRA deductions reduced by income from a Roth IRA conversion or a Roth rollover from a qualified plan.

Premium Tax Credit: MAGI value is calculated by adding AGI plus foreign earned income, tax-free interest, and Social Security benefits tax-free portion.

Net Investment Income Tax: MAGI is computed by adding AGI by the foreign itemized deductions exclusion and certain adjustments for international investments. Visit your state agency website to get more information about Form 8960 and the Net Investment Income Tax. 

Education Credits: MAGI is determined by combining AGI with foreign earnings, housing exclusions, foreign housing deduction, and income from a bona fide resident of Puerto Rico or American Samoa.

Child Tax Credit: MAGI is calculated by adding AGI plus foreign earnings, housing exclusions, foreign housing deduction, excluded income from Puerto Rico, and excluded income for bona fide residents of American Samoa. 

Once you understand the relevant MAGI for a particular tax benefit, you will be able to determine if you can take partial or full advantage of it. 

Conclusion

Knowing your gross income and MAGI can help you shop for a health plan on the Affordable Care Act (ACA) Marketplace or your state exchange. Furthermore, these sites will ask for your MAGI and household size, after which they will calculate any tax credits that you might be eligible for. You’ll learn everything you need to know about your income and how it affects your health insurance premiums by following the steps outlined in this article. Visit our website Insurance Shopping for more details and information. 

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