Year-End Tax Planning Made Simple: Manage Your MAGI
As 2024 comes to a close, now is the perfect time to focus on an often-overlooked aspect of tax planning: Modified Adjusted Gross Income (MAGI). Managing your MAGI strategically can help you reduce taxes, avoid unnecessary costs, and keep more money in your pocket.
If this sounds complicated, don’t worry—we’re here to make it simple!
What is MAGI, and Why Does It Matter?
Your Modified Adjusted Gross Income (MAGI) starts with your Adjusted Gross Income (AGI) and adds back certain deductions or excluded income. The IRS uses MAGI to determine your eligibility for tax benefits and whether you’ll face extra charges like higher Medicare premiums.
Example: Imagine your AGI is $90,000. If you add $5,000 in tax-exempt interest, your MAGI becomes $95,000. Crossing a MAGI threshold could result in higher costs, such as surcharges on Medicare premiums.
By managing your MAGI, you can avoid unexpected expenses and make the most of tax-saving opportunities.
How MAGI Affects Your Finances
Here are key areas where MAGI plays a role and strategies to keep your finances on track:
1. Medicare Premiums
Your Medicare premiums are based on your MAGI from two years prior. Higher MAGI means you may face surcharges, called the Income-Related Monthly Adjustment Amount (IRMAA).
Pro Tip: If a taxable event (like selling investments or withdrawing from a retirement account) puts you over a MAGI threshold, you may face higher premiums. Strategies like offsetting gains with losses or making Qualified Charitable Distributions (QCDs) can help.
2. Qualified Charitable Distributions (QCDs)
If you’re 70½ or older, QCDs are a great way to reduce your taxable income. You can donate up to $105,000 annually from your IRA to a qualifying charity. This amount won’t count toward your taxable income and can satisfy Required Minimum Distributions (RMDs).
Example: Jane, age 73, donates $10,000 via a QCD. This keeps her MAGI lower, avoiding a Medicare surcharge and reducing her tax bill.
3. Required Minimum Distributions (RMDs)
Starting at age 73, you must take annual distributions from retirement accounts like IRAs or 401(k)s. These withdrawals increase your MAGI, which can lead to higher taxes or Medicare premiums.
Plan Wisely:
Take RMDs by December 31 to avoid IRS penalties.
Combine RMDs from multiple IRAs into one withdrawal if needed.
4. Capital Gains and Investment Strategies
Selling investments? Your realized gains are factored into your MAGI, potentially increasing your tax bracket or Medicare premiums.
Tax-Loss Harvesting:Offset gains by selling losing investments. Even if you have no gains, you can deduct up to $3,000 of losses from your taxable income.
Example:Mark has $5,000 in investment gains but offsets them with $4,000 in losses. His net gain is $1,000, keeping his MAGI below a critical threshold.
5. Social Security Taxes
Your MAGI affects how much of your Social Security benefits are taxable. For some retirees, up to 85% of benefits can be taxed.
Example: Susan earns $20,000 from a part-time job, $10,000 in capital gains, and $15,000 in Social Security benefits. Her MAGI pushes her into a bracket where 50% of her Social Security income is taxable.
Year-End Tax Planning Tips
Now is the time to take action. Key strategies include:
Maximizing contributions to tax-deferred accounts like 401(k)s or IRAs.
Timing large financial transactions to avoid pushing your MAGI over critical thresholds.
Reviewing your portfolio for tax-loss harvesting opportunities.
Don’t Forget: Major tax law changes are set to expire in 2025, which could impact deductions, income tax brackets, and more.
Need Help Managing Your MAGI?
Tax planning can be tricky, but you don’t have to go it alone. At Unifirst Financial & Tax Consultants, we specialize in helping clients reduce taxes, plan for retirement, and make the most of their financial opportunities.
Contact us today for a year-end tax review! Visit www.planwithvince.com to schedule your consultation. Let’s ensure you’re ready to start 2025 with a strong financial plan.
Sources:
Kiplinger. (n.d.). Managing your MAGI: Tax strategies for year-end planning. From https://www.kiplinger.com/taxes/managing-your-magi-tax-strategies.
