What Is Modified Adjusted Gross Income Now? Big Beautiful Bill Creates Tax Headaches for Advisors.

While the wealthiest must be overjoyed with all the tax giveaways in the One Big Beautiful Bill Act, the new legislation can create headaches for their financial advisors. There are unexpected changes in the ways income is calculated that are specific to this legislation. For wealthy investors, it affects whether or not they qualify for new deductions.

One tax advisor says “AGI management” is “the name of the game under the One Big Beautiful Bill.”

Consider the State and Local Tax or SALT deduction. The OBBBA raises the maximum deduction from $10,000 to $40,000, but only if one’s income is below $500,000. From $500,000 to $600,000, the OBBBA begins to phase out the deduction, and above $600,000, the deduction falls back to $10,000.

That seems reasonably straightforward until you consider that the bill doesn’t refer to standard Adjusted Gross Income (AGI), but what is called Modified Adjusted Gross Income (MAGI). MAGI can be a nebulous term and is calculated differently depending on the tax statute. In some instances, including for determining the income level for taxation of Social Security benefits and the amount you pay for Medicare Part B prescription drug coverage, MAGI adds back normally tax-free items to adjusted gross income, such as municipal bond income. But in this SALT deduction case and the OBBBA, it doesn’t.

Uncertainty remains. Although the OBBBA is law, the IRS hasn’t issued guidelines on how the law should be interpreted for MAGI or final regulations codifying its interpretation. It may clarify confusion around municipal bond interest. Usually, the guidance comes first, then suggested regulations with a comment period for the public, and finally, formal rules. That leaves taxpayers and advisors in a gray area regarding the OBBBA’s quirks.

Meanwhile, after conferring with his colleagues, Leo Varner, managing director, National SALT Leader at tax firm UHY Advisors, stated “I’m not sure that clarifications [from the IRS] will be coming related to municipal bond interest. It should generally be excluded consistent with the prior law.”

He also noted that the OBBBA did clarify which income sources should be counted toward the MAGI phaseout for the SALT deduction—foreign earned income, income from sources within Guam, Samoa and the Mariana Islands, and income from Puerto Rico. Does that mean interest on munis issued by U.S. territories counts toward MAGI? Hopefully coming guidance will clarify.

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