How do tax-exempt income and non-taxable Social Security affect AGI versus MAGI?

1. What AGI is — the tax return’s starting point

Adjusted Gross Income (AGI) is your gross income from all taxable sources minus specific "above‑the‑line" adjustments listed on Schedule 1; it’s the number reported on Form 1040 that determines many downstream tax rules ^{[5] [6]}. AGI includes taxable wages, taxable retirement distributions, business income, capital gains and the taxable portion of Social Security benefits, but it excludes income specifically made tax‑exempt ^{[5] [3]}.

2. What MAGI is — AGI with certain excluded items added back

Modified Adjusted Gross Income (MAGI) is not a single statutory figure but a family of calculations that begin with AGI and add back specified items for eligibility tests; common add‑backs are tax‑exempt interest, excluded foreign earned income/foreign housing, and Social Security benefits not included in gross income ^{[7] [1] [2]}. Different programs (Premium Tax Credit, Medicaid, Roth IRA limits, IRMAA, etc.) may use slightly different MAGI definitions, but the core concept—AGI plus certain non‑taxed items—holds across official and tax‑service explanations ^{[8] [9]}.

3. How tax‑exempt interest affects AGI vs MAGI

Interest that is legally tax‑exempt for federal income tax (for example, many municipal bond interest) does not enter AGI because it’s excluded from taxable income; however, MAGI calculations commonly require adding that tax‑exempt interest back in, which raises MAGI relative to AGI and can change eligibility for credits and means‑tested programs ^{[10] [4]}. Put simply: tax‑exempt interest lowers nothing in AGI but often increases MAGI when the MAGI test calls for it ^{[10] [4]}.

4. How Social Security benefits are treated differently in AGI and MAGI

Only the portion of Social Security benefits that the tax code deems taxable appears in AGI; whether benefits are taxable depends on a provisional‑income formula that includes AGI, nontaxable interest and half of Social Security benefits, and can result in up to 85% of benefits being taxable ^{[3] [11]}. For MAGI purposes used by the Marketplace and many Medicaid tests, however, the non‑taxable (i.e., not included in AGI) portion of Social Security is typically added back into MAGI, meaning your MAGI can reflect the full economic receipt of Social Security where AGI may reflect only the taxable slice ^{[1] [4]}.

5. Practical consequence: eligibility and phaseouts hinge on MAGI, not AGI

Because MAGI often includes items excluded from AGI, a taxpayer with low AGI can nonetheless exceed program thresholds once tax‑exempt interest or non‑taxed Social Security is added back. HealthCare.gov, H&R Block and other guides warn that MAGI—not AGI—is used to determine Premium Tax Credit and many Medicaid/CHIP eligibility tests ^{[1] [7]}. That means tax planning aimed purely at reducing AGI (for instance, maximizing above‑the‑line deductions) might not change eligibility where the MAGI add‑backs apply ^{[8] [9]}.

6. Sources disagree? Where nuance matters

There’s wide agreement in the cited guidance about the mechanics: AGI is taxable income after adjustments; MAGI is AGI plus specified exclusions ^{[5] [6] [2]}. The nuance is which specific add‑backs a given program requires and how Social Security is quantified (some program rules focus on “non‑taxable Social Security benefits” while provisional income rules for taxing benefits use formulas involving half the benefit) —so results can vary by purpose ^{[2] [3] [4]}. Consult the program‑specific MAGI rule you’re facing before assuming one single MAGI definition applies ^[9].

7. What to do next (summary guidance)

If you’re trying to predict eligibility for a credit, Medicaid, or Roth/IRA limits, start with AGI from your latest Form 1040 and then add any items the relevant MAGI test lists—most often tax‑exempt interest, excluded foreign income, and Social Security benefits not included in income ^{[2] [1]}. If sources don’t address a specific situation (for example, a newer local program or an unusual type of non‑taxable receipt), available sources do not mention that and you should seek program documentation or a tax professional (not found in current reporting).

Sources cited in this summary and explanation include HealthCare.gov, the IRS MAGI guidance, H&R Block and related tax explainers ^{[1] [2] [7] [10]}.