You may be familiar with the term “AGI” or Adjusted Gross Income. It is what’s used to calculate what taxes you owe. You derive your AGI from your gross income minus your “above-the-line” deductions, such as student loan interest and IRA contributions. While straightforward, this number should be taken with a grain of salt. The reason being, there are hidden add-ins to your AGI that increase your Modified AGI (MAGI). Let’s focus on that, as these add-ins can impact your eligibility for specific tax benefits or programs.
Throughout your return you will be adding in any applicable items like municipal bond interest, student loan interest, passive income, foreign earned income, losses on rental properties, and traditional IRA contributions, among other things. These add-ins are scattered throughout your returns, and the ultimate total is what is referred to as Modified AGI. So, those municipal bonds you’ve inherited from last year, for example, could be limiting the total tax break you were expecting.
Another way that MAGI could have an effect on you is if you wanted to contribute to a Roth IRA. There is a tiered bracket built into the internal revenue code that will let you contribute your after-tax dollars into your Roth IRA. These values change every year, but for inheritors, the values will most likely result in reduced or eliminated contribution options.
Inheritors can minimize their MAGI in several ways:
Harvesting Capital Losses:
- This involves using any capital losses to offset a portion of capital gains in taxable income
- Losses can be carried forward indefinitely until they are offset by future profits
Utilizing Education Savings and Payments:
- Setting up a 529 plan: Allows contributions up to the annual gift tax exclusion limit for future educational expenses
- Making direct contributions to educational institutions: Also allows contributions up to the gift tax exclusion limit
- Both options help lower total taxable income without increasing MAGI
Clients of The Wealth Conservancy are always welcome to reach out to their advisor to consult on any potential areas of interest, especially if they’re concerned that they’re not being as tax efficient with their passive income, wanting to utilize their money to maximize their and their loved one’s lives.
If you’re interested in learning more about how The Wealth Conservancy can help with the complex aspects of an inheritance, please give us a call at 303.444.1919 or submit a consultation request to speak confidentially about your specific circumstances.