what income is used to determine health care subsidy

MAGI is used to determine ACA premium subsidy eligibility, but it's an ACA-specific calculation that differs from other types of MAGI.

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If you buy your own health insurance in the U.S. (i.e., you don't go it from an employer or a regime-run programme like Medicare or Medicaid), you're probably aware of the premium subsidies (premium tax credits) created by the Affordable Care Act (ACA).

While nearly people are aware that subsidy eligibility is based on income, there'southward still enough of confusion in terms of how your income is really defined under the ACA.

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Understanding MAGI

The ACA uses the term "modified adjusted gross income" (MAGI) to draw the mode income would exist calculated for premium subsidy eligibility, and that's accurate terminology—the calculation is a modification of adjusted gross income. Only the concept of MAGI already existed for other tax-related purposes, and is calculated differently, which has resulted in some confusion.

The important takeaway here is to empathise that MAGI for premium subsidy eligibility (and in many cases, Medicaid eligibility) is not the same as the MAGI definition that you might accept already understood in the past. It's specific to health insurance and has its ain rules. Fifty-fifty within this category, the calculation is a little different for Medicaid and CHIP versus eligibility for financial assistance with private health insurance purchased in the commutation.

The practiced news is that it's calculated in a way that allows you more flexibility to punch in your MAGI in order to optimize your eligibility for premium subsidies.

Premium Subsidies, Cost-Sharing Reductions, Medicaid, and Chip

ACA-specific MAGI is used to decide eligibility for premium subsidies (the subsidy is actually a taxation credit that's available upfront or on your tax render) and cost-sharing reductions when people shop for coverage in their state's health insurance substitution. Information technology's as well used to determine eligibility for Flake and Medicaid.

How Does the Calculation Work?

If you lot're familiar with the concept of MAGI that's used in other settings, y'all know that information technology requires you lot to start with your adjusted gross income and so add dorsum in various things, such equally deductions you took for educatee loan interest and IRA contributions. (Notation that AGI is found on your taxation return; AGI is on line 11 on the 2020 Form 1040, although the placement on the form does sometimes vary from i yr to another.)

Only when information technology comes to ACA-specific MAGI, you don't accept to add together back either of those amounts—or almost of the other amounts that you'd take to add to your income to become your regular MAGI.

Instead, the ACA-specific MAGI formula [defined in 26 U.S. Code 36B(d)(2)(B)] starts with adjusted gross income and adds back just three things:

• Non-taxable Social Security income (on the 2020 Form 1040, this is Line 6a minus Line 6b).
• Taxation-exempt involvement (this is Line 2a on Form 1040)
• Foreign earned income and housing expenses for Americans living abroad (Form 2555)

For many people, the amounts of these 3 things are $0, pregnant that their ACA-specific MAGI is the aforementioned as the AGI listed on their tax render. Merely if you practise have amounts on your tax return for any of those iii items, yous demand to add together them to your AGI to determine your MAGI for premium subsidy and cost-sharing reduction eligibility.

For Medicaid and Flake eligibility decision, some amounts are either subtracted or counted in a specific way:

• Qualified lottery winnings and lump-sum income (including inheritances, tax refunds, etc.) is merely counted in the month information technology's received, if information technology'southward less than $80,000; larger amounts are prorated over a longer timeframe (Medicaid eligibility is based on monthly income; premium subsidy eligibility, on the other mitt, is based on annual income, and then a lump-sum payment would bear on the entire year's subsidy eligibility, whereas it may only touch a single calendar month of eligibility for Medicaid.)
• Certain payments to American Indians and Alaska Natives are subtracted if they were included in AGI.
• Scholarships, awards, and fellowship grants are subtracted if they were included in AGI (as long as they were used for education expenses rather than living expenses).
• Nominal amounts received nether regime grants by parent mentors who help other families enroll in health coverage are non included in MAGI.

Other MAGI Factors to Continue in Listen

MAGI is based on household income, but there are dissimilar rules for how a kid'due south income is counted towards a family'due south household MAGI depending on whether the eligibility determination is for Medicaid/CHIP or for premium subsidies.

If a married couple wants to apply for premium subsidies in the exchange (or claim them on their tax render later paying full toll for a program purchased through the substitution), they have to file a joint taxation return. But if a married couple that lives together applies for Medicaid, their total household income is counted together regardless of how they file their taxes.

Premium subsidies are a tax credit, merely they differ from other tax credits in that you can—and about people practice—have them upwardly-front instead of having to wait to claim them on your tax render (note that the money is paid on your behalf to your health insurer; it'south not sent to you).

That likewise ways when you lot're enrolling in a wellness plan during open enrollment (November 1 to January fifteen in most states, for coverage that will take consequence January one or February 1), you'll exist using a projected MAGI, based on what you lot estimate your income to be in the coming year.

If your income is steady from one year to the next, you can reasonably estimate your MAGI for the coming year based on your past year's taxation return. Just many people who purchase their ain health insurance are self-employed and their income varies from one year to another—which can arrive challenging to accurately project the coming twelvemonth'south MAGI.

In one case the twelvemonth is underway, if you start to notice that your bodily income is diverging significantly from what you projected, y'all tin can report your updated income to the substitution and they tin can adjust your premium subsidy amount in existent-fourth dimension (or switch you from a private programme to Medicaid or vice versa, if your changed income results in a change in Medicaid eligibility condition).

To business relationship for the fact that premium tax credits are paid in advance throughout the year, they accept to be reconciled on your tax render. If it turns out that the subsidy corporeality that was paid on your behalf throughout the year was too small, the IRS will pay you the difference when you file your taxes. Simply if the subsidy amount that was paid on your behalf was too big, y'all may have to repay some or all of it.

The details regarding premium tax credit reconciliation are explained in the instructions for Grade 8962 (Grade 8962 has to be included with your tax return if a premium tax credit was paid on your behalf during the year or if you want to claim the tax credit on your tax return. This is true regardless of whether an aligning to the subsidy amount is necessary on your tax return).

For the first several years that the health insurance exchanges were in operation, there was an income cap for subsidy eligibility, equal to 400% of the poverty level. That was the maximum corporeality you lot could earn and still qualify for a premium tax credit, and so people who ended up earning more than this had to repay all of their premium taxation credit to the IRS when they filed their tax render.

Only the American Rescue Plan eliminated the repayment of excess subsidies for 2020 (nobody had to repay excess subsidies for that twelvemonth, regardless of why they would otherwise accept had to do so). And the police as well eliminated the income cap for subsidy eligibility in 2021 and 2022.

Then for those 2 years, subsidies are available to households that earn more 400% of the poverty level, if the price of the benchmark plan would otherwise exist more than viii.v% of the household'south income. (The elimination of the income cap for subsidy eligibility might be made permanent; Congress is because this in the fall of 2021.)

How Saving Coin Might Make You Eligible for Subsidies

Because of the style ACA-specific MAGI is calculated, in that location are some actions you tin take to reduce your MAGI and authorize for a larger subsidy than y'all might otherwise receive (if the income limit for subsidy eligibility is immune to take event again in 2023, this arroyo will once again be particularly important in order to avert the "subsidy cliff" when MAGI exceeds 400% of the poverty level).

Note that for premium subsidy eligibility the prior year's poverty level numbers are always used, since open enrollment for a given year's coverage is conducted earlier the poverty level numbers for that twelvemonth are determined (for Medicaid and CHIP eligibility, electric current poverty level numbers are used, since enrollment in those plans continues year-round). So premium subsidy eligibility for 2022 volition be based on how the enrollee's projected 2022 income compares with the federal poverty level numbers for 2021.

Premium subsidy eligibility extends well into the middle course, especially with the American Rescue Plan'southward subsidy enhancements that are in result for 2021 and 2022. Simply the higher your MAGI is, the lower your subsidy amount volition be.

This is where it's helpful to sympathize that pre-revenue enhancement contributions y'all make to retirement accounts volition reduce your MAGI, every bit will contributions to a health savings account (assuming y'all have an HSA-qualified loftier-deductible wellness plan and are eligible to contribute to an HSA).

Depending on your employment state of affairs and the health insurance programme you take, you lot may be able to set bated a significant corporeality of money in a retirement account (this includes traditional IRAs, but also includes things like 401(thousand)s, SEP-IRAs, Simple-IRAs, solo 401(k)s, which tend to have higher contribution limits) and/or a health savings account, and lower your MAGI in the process.

This might mean that you receive a subsidy when you would otherwise have had to pay total price for your coverage, or it might mean that you receive a larger subsidy than you'd have received without the pre-tax contributions.

You'll want to consult with a taxation professional if you have questions about your specific situation. Merely go on in mind that contributions to things similar an HSA or traditional IRA (only non a Roth IRA, since those contributions aren't pre-revenue enhancement) will reduce your ACA-specific MAGI, even though they don't reduce other types of MAGI calculations.

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Source: https://www.verywellhealth.com/magi-calculation-for-health-insurance-subsidy-eligibility-4686993

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