Will You Be Eligible for A Government Subsidy When You Buy Health Insurance in 2014? Check out Your “Modified Adjusted Gross Income” (MAGI) –You May Be Pleasantly Surprised

Before writing this post, I had no idea how to calculate my “Modified Adjusted Gross Income” (MAGI). But I did know that this is the number the IRS will use when deciding whether people purchasing their own insurance in their state’s online marketplace (a.k.a. Exchange) will qualify for a tax credit to help them cover their premiums.

This piqued my interest.

The first thing you need to know is that there are different definitions of Modified Adjusted Gross Income (MAGI) for different situations. The  the Affordable Care Act has its own definition to be used when determining whether someone is eligible government subsidies (premium tax credits) when purchasing  his own insurance in the state Exchanges. 

When calculating your MAGI, you can subtract certain items from your adjusted gross income including: student loan interest, certain moving expenses,, some self-employment expenses, and any alimony that you pay.

As a result, an individual grossing $50,000 (or a family of four with income of $98,000)  might well discover that after they deduct these items from, their MAGI falls under the cut-off for subsidies ($45,960 for an individual, $62,040 for a couple,  $78,120, for a family of three, $94, 200 for a family of four)

This is why, even if think you earn a few thousand too much to qualify for government help, you should ask whoever prepares your taxes about your MAGI.

Kiplinger’s  Kimberly Lankford, suggests other ways to lower your MAGI by “selling losing stocks or boosting business expenses to offset self-employment income.”  But, she warns, “Be careful with moves that could boost that your MAGI and make it more difficult to qualify for the subsidy — such as converting a traditional IRA to a Roth.”  .

Clearly MAGI is a tricky number. The good news is that you don’t have to do the arithmetic yourself. Your Exchange will do it for you when you apply. j(Ultimately, the IRS does the calculation).

30 thoughts on “Will You Be Eligible for A Government Subsidy When You Buy Health Insurance in 2014? Check out Your “Modified Adjusted Gross Income” (MAGI) –You May Be Pleasantly Surprised

  1. I thought that the IRA deduction is added back to get the MAGI total. That’s what many other websites say.
    And another question I have is:
    Can I still use losses on Schedule C self-employment?
    Can I still use losses from rental property – Schedule E?

    • Steve–

      MAGI is calculated differently depending on whether it is being used to figure out whether you can open a ROTH IRA or whether you are using it to find out whether you are eligible for a subsidy under the Affordable Care Act. The Affordable Care Act has its own definition of MAGI.

      You’re right– when applying for a subsidy you must add any IRA deductions back in when calculating modified adjusted gross income.
      /

      T

  2. It’s great that the IRS calculates eligibility as per your Adjusted Gross Income, and not your actual gross income. With a little bit of care, you could qualify for a lot of credits and benefits.

  3. Matthew–

    Thanks

    I think everyone needs to know that subsidies are based on
    Modified Adjusted Gross Income and ask whoever prepared their taxes whether they might qualify.

    If you don’t’ have someone who prepare your taxes–or he doesn’t seem sure–than you should just go ahead and apply with your state Exchange for a Subsidy.
    It won’t do any harm to apply, and it won’t be a lot of work-i’ts one-page form that will be used in all states.

    The IRS will look at your application, look at your past income taxes, and quickly figure out whether you MAGI comes in under the threshold. (If there is a reason why you think your MAGI will be lower in 2014 than it was in the past, you can tell them and they will take that into account.)

  4. Steve–

    My apologies– I was wrong about the IRA contribution.

    Covered California, the Exchange in Oregon and other state Exchanges agree that alimony, etc. can be deducted from
    adjusted gross income to arrive at MAGI– but not your
    IRA contribution. So, as far as I can tell, increasing your IRA contribution would not lower your MAGI.

    (My accountant worked on this for about 2 hours this morning. It is very, very tricky stuff, but I’m pretty sure that I now have it right, and have revised the post to reflect this.)

    • Maggie, I don’t think you are correct here – every single source I can find, including the federal site, cites that IRA deductions are valid. More to the point, they cite what must be added back to your AGI, and IRA deductions (deductible ones, of course!) are not part of that. That said, it seems absurd how byzantine it is finding this information – it should be front and center of every state exchange (don’t get me started on Cover Oregon) and the IRS and healthcare.gov, along with a REAL calculator, none of which seem to exist.

      • Bob–

        You’re right– when applying for a premium tax credit you have to add your IRA deductions back in to your adjusted gross income.
        The post was correct, but my first comment on this thread (replying to Steve) was wrong.
        I was relying on the Berkeley Labor Center’s information, and they had it wrong.

        I’ve fixed that comment.

        • No, that’s the part I’m disagreeing with – I believe the Berkeley information is correct – IRA (traditional and SEP type) deductions do NOT have to be added back in. If you read the actual law it defines MAGI and IRA deductions stand. Healthcare.gov defines it the same way as the Berkley information.

          • Bob–

            Okay, now I’m confused! I have read the law– (and have gone back and forth on this issue)
            but it’s not clear to me that IRA deductions stand.

            Could you cut & paste the section of the law that has convinced you that the IRA deductions do Not have to be
            added back in?
            (I’m not doubting you, but I have read so many persuasive seemingly authoritative sources on both sides of the issue, and have
            not been able to find anyone who cited a relevant section of the law.)

          • So, Healthcare.gov has this section: https://www.healthcare.gov/what-income-and-household-information-do-i-provide-when-i-apply-for-marketplace-coverage/

            Which doesn’t specifically state either way, although at the bottom, it does sum up by stating that it’s AGI (which would include the deductions) plus those 3 things that are generally cited everywhere (“tax-exempt Social Security benefits (except for Supplemental Security Income (SSI), which is not counted), tax-exempt interest, and tax-exempt foreign income.”)

            However, this part is significant because it’s the exact wording of the definition of MAGI in the actual ACA, which defines MAGI here: http://www.law.cornell.edu/uscode/text/26/36B
            skip down and you’ll find it as:
            (B) Modified adjusted gross income
            The term “modified adjusted gross income” means adjusted gross income increased by—
            (i) any amount excluded from gross income under section 911,
            (ii) any amount of interest received or accrued by the taxpayer during the taxable year which is exempt from tax, and
            (iii) an amount equal to the portion of the taxpayer’s social security benefits (as defined in section 86 (d)) which is not included in gross income under section 86 for the taxable year.

            Which is probably why Healthcare.gov quotes it almost verbatim. I would take anything posted by any non-government websites with a grain of salt, as the burden to define everything falls of course on the government.

            Also, to be clear, I think most experts agree that this is the way MAGI is defined RIGHT NOW and could be further clarified or changed by the IRS in the coming months and years, perhaps changing this position.

          • Bob–

            You are right that MAGI could be revised.

            But it might be revised in ways that help people save money for retirement–including those that, in the past, didn’t have access to IRA-type savings accounts, but now do.

          • For sure, there is definitely a lot of misinformation out there that seems definitive – the “obamacarefacts” site seems to be spreading this issue with MAGI, as well as quite a lot of health insurance (3rd party) sites; the confusion comes from the word MAGI, I think – MAGI is defined in statute many places in many ways, because it’s used a lot – but for the purposes of the ACA, the only definition that matters is the one that the ACA references; not one done a decade ago for passive rental income, not one for overseas tax calculations, not a legal definition, etc. I would continue to watch healthcare.gov and the IRS. For the moment, IRAs help, and for many people, especially self-employed who max a SEP, that puts them into the realm of getting subsidies.

          • There certainly is plenty of confusion of what is or is not in MAGI. What is most important for those of us preparing for the new IRS Subsidy tax form is what the IRS says for 2014 and if any fed agency or congressional actions before then will change anything n MAGI. What are the chances that tax law changes can still be implemented into 2014 affecting my subsidy calc? When will we get the 2014 subsidy tax form from the IRS is anybodies guess.

  5. Maggie:

    Why don’t you refer to subsidies as what they actually are, welfare!

    I am going to help a family of four bringing in almost 100K a year with their health care insurance costs.

    You have got to be kidding me. Do they want me to pay their mortgage. I am already paying for their kids education and lunches at school.

  6. And as Mr. Read well knows, many other folks helped pay for 18-21 years of his education too. And for business tax loopholes for whatever industry he was employed in, and even to defend his right to complain about somebody, anybody, receiving what should be a basic human right: Health Care.

    • France Davis–

      France Davis-

      Thanks very much for your reply.

      I am always so happy when readers reply to other readers’ comments.

      This is the best way to whack the moles (sorry, I meant ” trolls”.)

      I hope you continue reading HealthBeat, and replying –positively as well as negatively — to other
      readers.

  7. Maggie, I’m not sure this was the article I read by you about the MAGI, but it gave me hope because it suggested that survivor benefits would be exempt from income calculation. Something about Kaiser. At any rate, if that were true, we would be able to purchase a Bronze Plan. However, it is NOT true, and we will not be able to participate at all in Obamacare. We will be exempt. So maybe you ought to clear that up for your readers: Survivor benefits count. Nothing is sacred.

    • Savanna

      Assuming you are right (and I think you are) survivor’s benefits are not exempt because they are part of the disposable income that you can use to buy insurance.
      If these are benefits that you are receiving through an annuity, they are just like other investment income.

  8. I was under the impression that anyone would be able to buy affordable heath care under this new law. I was wrong! I was turned down several times because my income was too low. I was denied purchasing insurance and had to settle for MAGI under the state plan for low income individuals. I am almost too embarrassed to use it as I have enough income to pay for occasional doctor appointments and medications as I have been doing for 3 years since my husband died and his policy cancelled. I guess it may come in handy if I have an emergency and end up in hospital though.

    • Kathy–

      Kathy

      Definitely–take whatever protection you can get!
      Anyone can land in the hospital–and wind up losing their home.

      Because you qualify for Medicaid (which is free) you can’t get a subsidy to help you buy insurance in the Exchange.
      (Medicaid has separate funding). Similarly, if you qualified for Medicare (which also has separate funding) you couldn’t
      get a subsidy in the Exchange. The Exchange subsidies are for people who don’t qualify for any government program, and don’t have an employer subsidizing their health benefits at work.

      • MAGGIE,
        So what happens if you over estimate your income, obtain exchange coverage, with or without a subsidy. when you file your taxes on 4/15/15 it turns out you were not eligible?
        do they refund your premiums? retroactively put you on medicaid? would you payback the subsidies?

        I believe this may happen to me this year, I have not taken subsidies up front but expect to receive them when I file my return. fortunately in November I go on medicare, so by 4/15/15 I will be living the good life without this nonsense.

        • ps. I am also self employed so have no idea how this will effect my 1/2 medical insurance deduction.

          • JIM–

            Since you are self-employed, you can deduct your premiums (after subtracting any subsidy) on your taxes, just as you do now.

        • JIM–

          If your income changes, you just need let your Exchange know any time during the year… If you are no longer eligible for subsidies –or if your subsidies are bigger than your income warrants–they will cut them or reduce them.

          If you don’t let them know, in April of 2015, the IRS will deduct extra subsidies from any money you might expect to get back from the govt.

          I’m sorry that you see health reform– which guarantees healthcare for so many children and adults who had not health insurance — mere “nonsense.”

          I also hope that you’re happy with Medicare. You may be surprised to find that it is not nearly as generous as Obamacare. (It doesn’t pay for much preventive care–including eye checks–unless you pay a for-profit insurance company extra for “Medicare Advantage.”
          IF you are hospitalized, your co-pays will be very high –unless you pay a for-profit company substantially more for “Medi-Gap” or “Medicare Advantage.” Both programs are designed to fill large holes in Medicare.

          If you choose “Medicare Advantage” you will find that it works like Obamacare: most plans will cover you only if you see providers on their network.

          That said, I hope that you are happy with Medicare.

          • Maggie,

            I think you missed the point of my question. What will happen if one estimates their income high, such that they do not qualify for medicaid. buys an exchange policy and pays for it in 2014, with or without a subsidy. then when filing ones taxes on 4/15/15 it turns out that you income was less than estimated, you should have been on medicaid and were not eligible for the exchange policy?

          • JIM-

            First, anyone who is anywhere close to qualifying for Medicaid would get a subsidy in the Exchange. If you underestimated your income, and in fact your income makes you eligible for Medicaid, you file taxes on 04/15 you will get a check from the government increasing your subsidy for the past year.

            There will be no penalty for the fact that you were not eligible for the Exchange policy.

            Finally, the government would expect you to apply for Medicaid as soon as it becomes clear that your income is low enough make you eligible.

  9. Dear Maggie

    I did a recharacterization of my IRA to ROTH which my accountant says puts me over the subsidy level. But I did not actually receive the income, I just recharacterized it to pay taxes now on it instead of later. Why does that whole amount count in my MAGI?

    • It counts in your MAGI because this year, it is part of your taxable income.(Ideally, you would have moved only part of your
      IRA to Roth this year–part next year–and been eligible for a subsidy each year.)