By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.
The MAGI calculation starts with your adjusted gross income (AGI) and adds back a short list of items that a specific tax rule tells you to add back. There is no single MAGI: the Roth IRA, the Net Investment Income Tax, the Child Tax Credit and the new SALT cap phase-down each define it slightly differently. For a W-2 family in California or Washington with no foreign income, MAGI for most of these tests is simply the AGI on your Form 1040, and the formula is the same for 2025 and 2026 returns (only the dollar thresholds change).
The original version of this page listed add-backs such as “retirement contributions” and quoted income limits that were wrong. This version corrects them and shows what the numbers look like for a household earning around $900,000.
The MAGI formula, test by test
Each rule that uses MAGI writes its own definition. The ones that matter to a high-income W-2 family:
- Roth IRA eligibility. Start with AGI. Subtract any income from converting a traditional IRA or plan balance to a Roth. Add back a deductible traditional IRA contribution, the student loan interest deduction, the foreign earned income and housing exclusions, excluded savings bond interest and excluded employer adoption benefits (IRS Publication 590-A).
- Net Investment Income Tax (NIIT). AGI plus any foreign earned income exclusion, net of the related deductions (IRS NIIT Q&A).
- Child Tax Credit. AGI plus income excluded as foreign earned income or as Puerto Rico or American Samoa income (Schedule 8812).
- SALT deduction cap phase-down. AGI plus foreign-excluded income, under the rule added by the 2025 tax law (P.L. 119-21, section 70120).
Two things are not on any of these lists. Pre-tax 401(k) deferrals are not added back, because they never enter AGI in the first place. And the 0.9% Additional Medicare Tax is not a MAGI test at all: it applies to Medicare wages over $250,000 for a married couple filing jointly (IRS). If you want to find AGI on your own return, see which line of Form 1040 to use.
2026 MAGI thresholds a $750,000+ household runs into
| Rule (2026) | MAGI threshold, married filing jointly | What happens above it |
|---|---|---|
| Roth IRA contribution | Phase-out $242,000 to $252,000 | No direct Roth IRA contribution; the backdoor Roth becomes the route |
| Traditional IRA deduction (both spouses covered by a workplace plan) | Phase-out $129,000 to $149,000 | Contribution allowed but not deductible |
| Net Investment Income Tax | $250,000 (not indexed) | 3.8% on the lesser of net investment income or MAGI over $250,000 |
| Child Tax Credit ($2,200 per child) | $400,000 (not indexed) | Credit falls $50 per $1,000 (or part) over; gone for two children at $488,000 |
| SALT deduction cap ($40,400) | $505,000 | Cap falls by 30% of MAGI over; reaches the $10,000 floor at about $606,333 |
Sources: IRS Notice 2025-67 (IRA limits), Rev. Proc. 2025-32 (Child Tax Credit amount), IRS Child Tax Credit page, IRS NIIT page and P.L. 119-21 (SALT). For 2025 returns, the SALT cap was $40,000 with a $500,000 phase-down start.
Worked example: a $900,000 San Jose household
Assumptions (illustrative): married filing jointly, two children aged 4 and 7. One spouse works in tech with $310,000 salary and $290,000 of RSUs vesting in 2026. The other is a physician on a $300,000 salary. Total pay: $900,000. Through payroll they put $24,500 each into pre-tax 401(k)s ($49,000), $8,750 into a family HSA and $7,500 into a dependent care FSA. Their taxable brokerage account produces $25,000 of dividends and interest and $35,000 of net long-term gains.
- W-2 wages (box 1): $900,000 minus $49,000 minus $8,750 minus $7,500 = $834,750. The RSU vest is already inside this number, taxed as wages at the share price on vest date.
- Add investment income: $834,750 + $60,000 = $894,750 AGI. They have no above-the-line deductions.
- Roth IRA MAGI: $894,750. Far above $252,000, so no direct Roth IRA contribution. Converting a nondeductible IRA contribution (the backdoor Roth) does not raise this MAGI, because conversion income is subtracted.
- NIIT: MAGI is $644,750 over $250,000, but net investment income is only $60,000. The tax is 3.8% of the smaller number: $2,280.
- Child Tax Credit: $494,750 over $400,000 cuts the credit by $24,750, more than the $4,400 available. Credit: $0.
- SALT cap: 30% of ($894,750 minus $505,000) is $116,925, so the cap falls to the $10,000 floor.
The takeaway for this family: at $895,000 of MAGI they are past every phase-out in the table. Cutting $20,000 of wages out of MAGI (for example, with a larger deferred compensation election) changes none of these results. Only a cut in investment income itself would lower the NIIT. The planning question is not “how do we get under a line” but “which accounts do we fill”: the backdoor Roth, the mega backdoor Roth if the 401(k) plan allows it, and the HSA.
When MAGI planning does pay: a lower-income year
Now suppose the physician takes six months of leave in 2027 and the RSU grant has mostly vested out. MAGI drops to $450,000. The Child Tax Credit comes partly back: $50,000 over the threshold cuts it by $2,500, leaving $1,900 for two children (using the 2026 credit amount of $2,200 per child). The SALT cap is back to the full amount because MAGI is under the phase-down start. A leave year, a job change or a sabbatical is when it is worth running the MAGI numbers again.
How RSU vests, ESPP sales and ISO exercises move MAGI
Raises MAGI:
- RSU vests and NSO exercises (both are wages).
- The ordinary-income part of an ESPP sale and any disqualifying disposition of ESPP or ISO shares (IRS Publication 525).
- Selling appreciated shares, including RSU shares that rose after vest.
- Electing to report a child’s investment income on your own return with Form 8814, which adds it to your AGI.
Exercising ISOs and holding the shares does not add to regular AGI. It can create alternative minimum tax instead, which is a separate calculation.
Lowers MAGI:
- Pre-tax 401(k) deferrals ($24,500 per person for 2026), payroll HSA contributions ($8,750 family limit for 2026), the dependent care FSA ($7,500 per household for 2026) and nonqualified deferred compensation elections.
- Harvesting capital losses to offset gains, plus up to $3,000 of ordinary income per year (IRS Topic 409).
- Giving appreciated shares to charity or a donor-advised fund instead of selling them, which keeps the gain out of AGI.
Two common mistakes: cash charitable gifts, mortgage interest and property tax are itemized deductions, so they reduce taxable income but not AGI or MAGI. The standard deduction does not reduce MAGI either (see does the standard deduction reduce MAGI). More levers are in how to reduce modified adjusted gross income.
California and Washington: how state tax treats the same income
California starts from federal AGI but makes its own adjustments. The biggest one for this family: California does not allow the HSA deduction and adds employer and payroll HSA contributions back into income (FTB 2025 Form 540 booklet). In the example, California AGI is at least $8,750 higher than federal. California also has no lower rate for capital gains, so the $35,000 of gains is taxed like salary, and the RSU vest is hit by the 1.3% SDI withholding on all wages for 2026 (EDD).
Washington has no tax on wages for 2026, so the RSU vest carries no state income tax. Long-term gains above the annual standard deduction ($278,000 for 2025, the latest published) are taxed at 7%, and 9.9% above $1 million of taxable gains (WA DOR). Washington has also enacted a 9.9% income tax on AGI over $1,000,000 starting January 1, 2028 (WA DOR). The Department of Revenue has not yet published how income will be defined, so watch for its guidance before planning around 2028.
What to write down for your kids
Once a year, a one-page note can record your AGI, which thresholds you were above, and why you chose the backdoor Roth or a pre-tax 401(k). It takes ten minutes after your return is filed. Years later, it shows your children how you thought about taxes, not just what you paid. As Kevin Luu puts it: “Your kids will inherit your money. Will they inherit your judgment?” The Age Five Wealth Education program uses notes like this in the FamilyKnowledge® Library.
Common questions
Is MAGI the same as AGI?
For most W-2 families in California or Washington with no foreign income, yes for the NIIT, Child Tax Credit and SALT tests. The Roth IRA test is the one most likely to differ, because it adds back a deductible IRA contribution and student loan interest, and subtracts Roth conversion income. Always check which rule you are applying.
Does my 401(k) contribution lower MAGI?
Pre-tax deferrals do, because they are left out of box 1 wages and never reach AGI. Roth 401(k) and after-tax contributions do not. For 2026 the pre-tax limit is $24,500 per person, so a couple can keep $49,000 out of AGI, which matters most in a year when you are near a phase-out.
Next step
Pull last year’s Form 1040, note your AGI, and compare it with the table above to see which phase-outs apply to you. If a leave year, a large RSU vest or a stock sale is coming, the Tax & Wealth Assessment can model it before year end.
This is general education, not individual tax advice. The right move depends on your family’s full picture.
Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.
Connect on LinkedIn → · About KevinThis is part of how we approach Tax Management for high-income W-2 families at Bright Advisers.
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