When you apply for insurance on the public exchanges come October 1 when the exchanges open, you will be asked what your income is in order to determine eligibility for an insurance subsidy. This will also determine the amount of your insurance subsidy. The question is: how much is our income? The general public thinks they will fill in what their W2 shows or will show. While this amount will be close for many people, it is not the number the government is looking for. They aren’t even looking for AGI (Adjusted Gross Income) which you could find on your taxes. They are looking for MAGI. So, how do we calculate MAGI from AGI?
From the IRS website, MAGI is determined by computing AGI without:
- Any passive loss or passive income, or
- Any rental losses (whether or not allowed by IRC § 469(c)(7)), or
- IRA, taxable social security or
- One-half of self-employment tax (IRC § 469(i)(3)(E)) or
- Exclusion under 137 for adoption expenses or
- Student loan interest.
- Exclusion for income from US savings bonds (to pay higher education tuition and fees)
- Qualified tuition expenses (tax years 2002 and later)
- Tuition and fees deduction
- Any overall loss from a PTP (publicly traded partnership)
This is the basic calculation. More details can be found at http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Passive-Activity-Loss-ATG—-Exhibit-2.2:-Modified–Adjusted-Gross-Income-Computation.
Let’s look at a few of these items. If you have a student in college, you will need to add back any deductions regarding college expenses that reduced your AGI, but not any tax credits related to college expenses. Also, if you have rental losses, except maybe if you are a real estate professional, you will need to add those losses back to your AGI. Also, if you are an owner in a business that you don’t actively participate in, you may have to add back in those losses as well.
The one that doesn’t make sense to me at all is adding back IRA deductions, but not needing to add back in 401k contributions. If you are a small business owner, it could possibly make sense to initiate a 401k for your business instead of contributing to an IRA. Low cost individual or small company 401k options are now available. Only $1 can have a significant change to the subsidy you are eligible for.
I am not a tax advisor, but I can help you determine the income limits for different subsidy levels for your family. I also have investment and tax advisors that I can recommend to help you navigate these ACA waters.
If you have any questions regarding any of my articles or any health insurance related questions, feel free to give me a call. As always, more to come…