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The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.
Question: What is modified adjusted gross income (MAGI) and how does it affect one’s health insurance pricing under the Affordable Care Act?
Answer: In 2014, everyone is generally required to have health insurance or face a penalty. If an individual earns less than four times the federal poverty level, she may be entitled to reduced health insurance premiums in the form of tax credits. The less she earns, the more her premiums will be reduced.
To determine her premium reduction, she would compare her MAGI to the federal poverty line. Modified adjusted gross income is simply one’s adjusted gross income increased by the following three amounts: (1) social security benefits which are not subject to income taxes (Form 1040, Line 20a minus Line 20b); (2) tax-exempt interest (Form 1040, Line 8b); and (3) foreign earned income and housing expenses excluded from gross income under Code Section 911(a) (Form 2555). The UC Berkeley Labor Center has a great summary of how to calculate adjusted gross income and MAGI at http://laborcenter.berkeley.edu/healthcare/MAGI_summary13.pdf.
The federal poverty level depends on the individual’s household size. For example, in 2013, a four-person household’s poverty level is $23,550. Therefore, if the annual household income is less than $94,200 (i.e. four times the poverty level), it will be eligible for a tax credit from the government. The Department of Health & Human Services provides the poverty guidelines at http://aspe.hhs.gov/poverty/13poverty.cfm.
There are multiple online calculators that can help provide estimates on the amount of tax credit an individual may be entitled to receive, such as the Kaiser Family Foundation calculator at http://kff.org/interactive/subsidy-calculator/. Such calculators should be used for estimates of one’s premiums only.
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