In figuring MAGI, do you add to your AGI, your contributions to SIMPLE IRA?

Submitted by Kevin Vasilik on Sat, 2013-01-12 18:57

As we know Modified adjusted gross income (MAGI)determines eligibility for tax benefits and also when you will be subject to certain taxes such as the new Investment tax from the health care reform law (PPACA).

Calculation of MAGI starts with your AGI and then adds back certain items including Deductions for IRA’s. Contributions to “Employer-Sponsored plans” like 401k’s do not get added back to AGI.

Therefore it would seem that “SIMPLE IRA’s” fall into the category of “Employer Sponsored Plans” and deductions into SIMPLE IRA’s, even though they are “IRA’s” do not get added back to AGI in the calculation of MAGI.

However I can not find the IRA guidance to directly confirm this and whether the SIMPLE IRA contribution is added back to the AGI in calculating MAGI.

Additionally, if an individual is a Sole Proprietor and has either a SEP IRA or SIMPLE IRA, the same questions arise.

It might be that if you are the Employee of a company that Sponsors a SIMPLE IRA and you contribute to that SIMPLE PLAN, you dod not have to add your contributions back to the AGI in calculating the MAGI. However, what about, for example Owners of of an S-Corp that make contributions to a SIMPLE IRA that is sponsored through their company? And what about Self-Employed contributions to SEP & SIMPLE IRA’s? do these get added back to the AGI in calculating the MAGI?

Let me know if you’ve encounterd this and what the regulation is on this matter.

Thank you.

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Permalink Submitted by Alan - IRA critic on Sat, 2013-01-12 21:16

You actually have two questions here, since MAGI has a different definition for purposes of the new medicare tax on investment income under the ACA than the definition for deducting a TIRA contribution.
For the new investment income tax, MAGI is simply line 37 AGI plus any foreign income exclusion, which is the only add back for this definition of MAGI
But for TIRA purposes of deducting TIRA contributions for participants of employer plans, the TIRA deduction is added back to AGI with several other deductions, but NOT the deduction for contributions to a SEP or SIMPLE IRA. Pub 590 does not clearly define “IRA deduction”, but if you look at the worksheet on p 14, note that MAGI does not take into account the deduction on line 32 (TIRA deduction), but does not list line 28 (SEP ore SIMPLE deduction). So now add back for SEP and SIMPLE deductions showing on line 28.
This is also confirmed by the Fairmark page attached. See modifications and note that is more clearly indicates that only a traditional IRA deduction is added back: http://www.fairmark.com/rothira/modagi.htm