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MAGI and HSA contributions

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Question: I have had an Individual HSA plan for years and probably will select one if available in Oct. When I estimate my MAGI for 2014, should I include my annual HSA contribution in the figure or will this not be tax deductible anymore?

Answer: Thanks to Max Herr’s very informative comment on my previous HSA entry. I have your answer. Your 2014 HSA contribution will be added back onto your AGI to make up your MAGI for the purpose of calculating your tax credit. That will lower your credit and may even cause it to disappear. So I’d recommend that you do not take your tax credit in advance and you may find that you have an unused tax credit once you do your 2014 taxes. That pleasant surprise would be easier than paying the tax man a surcharge.

8 Comments

Thanks Max. There was not a specific mention in that bulletin but it was useful for me to go through it, and I had not thought to go back to 2012. I’ve set up a blog to discuss some of these issues (linked to my user name). I’m not an insurance agent, just a web designer — but I’m wrestling with a lot of these issues because I’m older and my income puts me at the cusp of subsidy eligibility so it is +$5000 if my bottom line comes in over $46K. (Which I wouldn’t mind if my income could be, say, $60K…. but it tends to hover much closer to that $46K mark)

I’m pretty sure I found it tucked somewhere inside Bulletin 2012-24 (June 11, 2012) — a little farther back than I indicated above. I didn’t find that until a couple of weeks or so ago.

All these determinations and final rules and last minute changes are enough to drive a teetotaler to drink.

Thanks so much Max. Do you by any chance have an IRS bulletin release number that I could reference?

There were some early (third-party)indications that HSA deductions would be added back to MAGI, and I apologize for the misinformation I initially posted. As I later researched the matter, I discovered that the IRS issued guidance earlier this year clarifying that because HSA money cannot be used for the payment of premiums that it would not be includable in MAGI.

So don’t worry about HSA contributions affecting one’s eligibility for tax credits —feel free to reduce your MAGI by fully funding your HSA, your IRA, your 401(k), etc.!!

Follow up to my previous post — I’ve got confirmation that the HSA and other deductions are NOT added back in to calculate MAGI. You need to download the Covered California brochure at https://v.calheers.ca.gov/apspahbx/public/ecm?document=paperApp

Page 5 has the basic financial questions.

Attachment E on page 26 has the instructions as to what can be included under “Deductions” and specifically references the HSA deduction.

It’s vague in the reference to “Certain Self Employment Expenses” but I would go back to IRS Publication 535 for that.

Hi, I have found your web site to be one of the most helpful available on the ACA, but I think you may be mistaken about adding back the HSA for the MAGI.

I’ll admit that the information available is very confusing. I am self-employed and very much concerned about this issue, as the impact of various deductions including the one for HSA contributions are likely to determine whether or not I will qualify for a tax credit worth about $5000 to me.

Here’s a chart that I think is the most helpful that I have seen: http://laborcenter.berkeley.edu/healthcare/MAGI_summary13.pdf

As you can see, according to that chart just about all of the various credits available to self-employed individuals can be used to reduce MAGI.

I realize that the situation is confusing and that there is a definite possibility that clarifying regulations will be issued sometime in the future.I think a definitive answer will come only when IRS issues a specific worksheet for the calculation.

However, I do not think that any self-employed person will run into trouble if they apply for the advanced tax credit (subsidy) based on an honest representation of their most recent tax return (preserving all deductions) — as long as they realize that they may have to pay the money back in April, 2015. There are no penalties or interest associated with the clawback (assuming it is timely paid), and I think that for those of us who are seeing higher full-cost premiums with ACA, taking the subsidy might ease cash flow problems at the outset.

I am having a hard time sorting out the very different statements I have seen about MAGI because it seems that people rarely cite to a specific source or reference. The only authoritative sources would be the actual IRS statutes and regulations. The chart I linked to above cites to 1 Internal Revenue Code Section 36B(d)(2)(B). That in turn specifies:

“(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.”

Nothing about adding back the HSA deduction or any other deduction listed on the 1040. (Section 911 is the foreign earned income exclusion)

Your information about HSA contribution being added to AGI to be included in MAGI cannot be substantiated in anything I have read.

Please reference where you got this information?

I do not believe it is accurate!

Thank you.

Leslie Jablonski

Just remember that, in the individual marketplace, the HDHP plan you select MUST be obtained through the Exchange or you will not be entitled to the tax credit at all. Your current HDHP may be preferable to the one choice in the Exchange, but if there is any possibility of qualifying for the tax credits, you will have to choose the Exchange-based plan.

All Exchange-based HDHPs are bronze tier plans offering only 60% Actuarial Value, with a $4,500 annual deductible, 60-40 coinsurance after that until the maximum out-of-pocket limit ($6,350 individual, $12,700 family) is reached. In the Los Angeles Region 15, for example, the HSA choices include a PPO from Blue Shield, an EPO from Anthem Blue Cross, and an HMO from Kaiser. An individual age 34 with $30,000 in income would qualify for about a $33 credit, and with the advance credit, would pay about $164-$174 per month.

To clarify what I mentioned earlier about HSA contributions affecting tax credits, the IRC generally does not permit HSA money to pay insurance premiums (there are limited exceptions not related to employer-sponsored plans), so that money would not be “double-dipping” in combination with a premium tax credit.

There are some conflicting documents that discuss whether qualified money subtracted from income affects MAGI, and some of those may not be authoritative. But the IRS has said that employer contributions to a person’s HSA do not affect the “affordability” test of premiums (9.5% of MAGI).

According to IRC Section 36B, MAGI includes otherwise exempt foreign income (“Section 911 income”), non-taxable interest (all those California muni bonds people own), AND all Social Security “income” not included in gross income (retirement and disability) which MUST BE ADDED BACK to the AGI at the bottom of page one of Form 1040 to obtain one’s MAGI. [It does NOT discuss qualified money deductions/reductions.] Some reports indicate that the 1/2 of Self-Employment tax deducted from income to arrive at AGI is part of the “M” that must be restored.

As complex as this is going to be, when in doubt … go without. At least one commenter suggests that maxing out one’s 401(k) contributions could result in obtaining a premium tax credit. Could be right, could be wrong. If you simply forgo it today and qualify for the $300-$400 credit at year-end, great. If not, better than having to repay it, possibly with interest or other penalties.

Oh … be sure not to forget, MAGI also includes the income of everyone in the HOUSEHOLD who is not exempt from filing a federal tax return (mostly minor children whose income is below the filing threshold). So that 25-year-old “child” who chooses to remain on Mom & Dad’s health plan instead of purchasing his own, and who has an MBA and earns $80,000 per year, will pretty much disqualify the household for any tax credits (even if that person files a separate tax return). And don’t think you can get around that by husbands and wives filing separate tax returns either — that, too, is a disqualifier.

The real problem with the tax credits is that one truly will not know what their 2014 MAGI is until 2015 when it’s time to file an income tax return. If a person underestimated the household’s MAGI, some or all of the advanced premium tax credits received will have to be repaid — perhaps with money one does not have, which means the potential for tax penalties and interest. The IRS has already estimated the amount of excess advance tax credits it expects to recapture for 2014!

Everyone needs to fully understand that the whole purpose of the premium tax credits was to remake the “personal responsibility” approach to health insurance into a national health care welfare plan. It is a back-door approach to creating the single-payer health care system most Americans don’t want, and Congress failed to implement when it had the chance, but we’ll eventually be forced to accept unless the PPACA is dramatically retooled in the coming 3-4 years.

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