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Covered California and Obamacare related questions from consumers, employers and agents are answered by Phil Daigle with the best information available at the time. Archived entries may no longer be accurate as the Covered California and Obamacare knowledge-base is evolving quickly. TO REQUEST A PERSONAL RESPONSE INCLUDE EMAIL ADDRESS.


Covered Care & AGI

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Question: I’m having a hard time understanding how to enter my income on the Covered Care application. I’m self-employed, so my monthly salary does not include withheld taxes (I pay those quarterly). On the Covered Care application, if I enter the amount of the monthly check I receive, it looks like my salary is greater than it really is. There is no place on the application to enter a yearly AGI. Should I divide my AGI (line 37 of my income tax) by twelve, to show the monthly salary I actually end up keeping? And also, because I have a home office deduction, and there is a place on the Covered California application to list self-employment deductions, am I supposed to enter that amount on the application? Thank you. I’ve tried e-mailing Covered Care, but they still haven’t answered my questions. (You can click the chart to enlarge it.)

Answer: Yes. I think your idea of estimating your AGI for 2014 then dividing by 12 is a good way to report your income on a monthly basis. Perhaps this chart will help to deterring what part of your income counts toward AGI. (You can click the chart to enlarge it.) MAGI Chart.jpg

16 Comments

Mr. Ripley …

You can begin here https://forms.spb.ca.gov/bulletins/ejv.cfm?criteria=0&loc=0&dept=N499

or here

http://www.healthexchange.ca.gov/Jobs/Pages/Default.aspx

How to report a foreign aid from husband, will this be consider household income? Fact: Husband work and lives in other country and wife and children lives in USA. will they be eligible for Covered Ca?

Max and Freelancer,

Thanks for the further comments and explanation. I guess by “penalty” I meant the possible clawback.

Yes, one wouldn’t want to be determined to have committed insurance fraud. It’s funny though, because all the time you see things like the self-employment tax deduction and self-employment health insurance deduction in lists of deductions people commonly fail to take. You never hear about the IRS calculating them back in, in those scenarios. In fact, I’ve never heard of the IRS going out of its way to give someone a deduction that failed to claim. But I don’t know that much about it.

Obviously, if one is claiming something like the APTC, which is a tax credit, the IRS might suddenly look upon it differently. But if they’re going to add in deductions that people fail to claim, they should either always do it or never do it, not just whichever way benefits the government more.

That aside, I really don’t think that it’s merely a perception that Medi-Cal is not as good as the policies on the exchange (depending on the policy). A lot of doctors don’t take Med-Cal. It is not nearly as widely accepted as Medicare. The limitation in the network of doctors is a non-trivial distinction in the quality of potential care one can get. Of course, unfortunately, the networks are shrinking with the new plans, as insurance companies scramble to control costs.

G.

George,

If you apply for a subsidy and get it based it, based on anticipated income above 100% of FPL — and then your actual tax return shows income below 100% of FPL — there is no penalty. In that case you would fall in the situation described in 26 CFR 1.36B-2, “Special rule for taxpayers with household income below 100 percent of the Federal poverty line for the taxable year” - see http://www.law.cornell.edu/cfr/text/26/1.36B-2

So there is actually no reason to worry about the end result being too low. I do see issues arising with self employed individuals whose income is irregular, because Medicaid is not really designed to cover the type of person who might earn $10,000 one month and -0- the next. Individuals such as real estate brokers who derive their income from commissions,or attorneys who work mostly on contingency, might fit that pattern.

George …

I get what you are saying. But don’t forget that the IRS has the authority to add in deductions that you should have taken, such as 1/2 of the SE tax — believing that you inadvertently forgot to include it. And if they know you are receiving APTCs then they will probably be surprised that you did not take a deduction for your health insurance premiums as a self-employed person.

While there is no “penalty” for unintentionally obtaining more premium tax credits than you were ultimately eligible for (the clawback is limited to just $1,500, and the IRS has already said the only mechanism they intend to use to collect that, like the penalty for not being insured, is through a reduction in a person’s tax refund), there could be problems with intentionally inflating your income to obtain a tax credit instead of accepting Medi-Cal that you would otherwise be eligible for.

That might even be viewed as a fraudulent application to CoveredCA, which could lead to any number of other consequences, such as having to repay all claims payments to an insurance company, or being accused of insurance fraud … and I would not want to see that happen to anyone.

Congress really doesn’t like the idea of giving the money to the insurance companies for health insurance premiums in the first place, but has no problem doling it out to the states as a welfare benefit where a portion ends up lost to bureaucracy.

You know your tax situation better than anyone here. Given the sorry state of our government and its inability to control spending, I don’t know why you would willingly give them more in income tax than you may be obtaining in APTCs.

If your objective is to minimize income to obtain the APTCs, I would think the better place to do it is within your Schedule C — forgoing enough of the legitimate business deductions to offset the legitimate SE tax deduction and health insurance premium deduction on your Form 1040.

There are advantages to doing that. Higher net profit has a slight increasing effect on your Social Security retirement benefit (if that’s still around when you get there) because of higher pre-deduction SE tax, and also gives you the opportunity to put more money in your SEP (which is another deduction on your Form 1040).

I would think that having more money at retirement time will probably be more beneficial to you than taking APTCs today, unless that’s the only way you can afford the health insurance premiums. And if that’s true, then you might be better off initially with Medi-Cal.

I think you are fighting against the a perceived “stigma” associated with Medi-Cal. But if it’s there and you could be using it, then you are probably better off in the long run by accepting it than not.

There is a reason the HHS regulations for implementing the PPACA is in the section of the United States Code titled “Pubic Welfare”.

Max,

Thanks for your response, but did you read my comment? You seem to be answering exactly the opposite question of what I asked.

I was asking if it’s okay to deliberately not take the deduction for half of the self-employment tax (form 1040, line 37), as well as to deliberately not take the deduction for what you pay for health insurance (form 1040, line 29), or to deliberately not take any of the other deductions on lines 23 to 35 of form 1040.

If one’s income is right at the cusp between Medi-Cal and qualifying for subsidies, then such a person might prefer not to take deductions in order to increase their AGI and qualify for the subsidies.

But (I was asking) if you don’t take those deductions and then submit your taxes, will the IRS just calculate them back in and thereby push your AGI below the level for the subsidy? In which case, if you’ve taken the APTC there is I believe a (small) penalty that you have to pay.

G.

George wrote: “causing you to owe a penalty for taking the APTC?”

You will not be penalized for obtaining premium tax credits — you will only be penalized for not having insurance. Many people will have changes in their incomes or household size that reduces their 2014 AGI below what they have posted in their applications. It’s not a problem. In fact, if you find that you are having trouble paying your premiums, and your income is below the 138% FPL, you can report the change to CoveredCA and be enrolled in Medi-Cal at any time during the year.

As a self-employed person, you are going to be able to deduct 100% of what you pay for health insurance, along with half of the self-employment tax, and all other expenses connected with your business. Where your income ends up at the end of 2014 is anyone’s guess today. Chances are it could be well below the 138% mark.

If you do not want to be enrolled in Medi-Cal in 2014, just make sure that your reported household income is more than 138% of the 2013 federal poverty level when you apply via CoveredCA ($15,856 for one person, add $5,548 for each additional household member).

What about a person with self-employment income in the opposite position, right at the cutoff between Medical and the subsidies? But who would prefer to get one of the subsidized exchange plans. So this person wants to increase their AGI to qualify.

Do you have to take the self-employment tax deduction (that goes into the AGI at the bottom of page 1 on 1040, line 27)? Do you have to take the health-insurance premium deduction (line 29)? Or any of the other deductions on lines 23-35? Can you choose to forgoe those deductions to increase your AGI over the threshold? Or will the IRS recalculate your AGI, after you send your taxes in, put the deductions back in and push you back into Medical, causing you to owe a penalty for taking the APTC?

Leslie …

Take all the deductions at the bottom of your Form 1040, page 1, that ultimately reduce the Schedule C net income reported above. Premium tax credits are based on MAGI, which is slightly different than the list posted above.

What also needs to be added back into AGI to arrive at MAGI is foreign income, Social Security Benefits, and nontaxable interest (such as municipal bonds).

Student loan interest is deductible, if that matters.

This information is a godsend today as I slog through covered California application. Myself and husband are self-employed. For streamlining application to follow 2012 tax return info, did you itemize deductions on eligibility form? FYI deduction type OTHER and then list self employment tax, self employed health insurance deduction, etc. I want to be as accurate as possible to get application through.

Also, it seems counterintuitive that those qualifying for and taking Premium Subsidies to also take 100% of the Self Employed Insurance Deduction for tax year 2014 and beyond. Thoughts, anyone?

I agree, and I wrote about it extensively here: https://obamacareguide.wordpress.com/2013/10/20/figuring-your-household-income-part-two/ and https://obamacareguide.wordpress.com/2013/10/21/evolution-of-magi/

I think it’s a loophole that allows self-employed people to “double-dip”, as the law is currently written. But I haven’t seen the forms the IRS will develop.

The deduction, like most others, is based on actual dollars paid out, and would not include the advance tax credits. If a self-employed person is eligible for tax credits, the Line 29 deduction will be 100% of the NET premium paid for health insurance after any advance credit is applied.

But there is no law or regulation to implement that sort of calculation, and it’s hard to see how the math works out given that the AGI figure is also used to determine the amount of tax credit. The only way to figure the allowable tax credit is to know the total modified AGI and the total, gross premiums charged by the insurance company. Otherwise you have a situation where if the person underestimates income and takes too large of a credit, their deduction won’t support the credit — and if they are near the 400% cut off, they could be subject to clawback for the full amount.

But what if that full clawback amount is enough to put them back in subsidy territory?

Maybe IRS will develop a specific worksheet for this, and I definitely look forward to seeing a regulation that clarifies the calculation — but I can also see that the law simply does not set out the specifics.

Again, I think this is one of those areas where there was complicated legislation that is full of little details that need to be cleaned up — but that can’t be, due to the political gridlock in Washington.

I still think that the self-employed who are near the 400% mark should either pay full cost, or do the math and bank the difference so that they have funds available for whatever clawback is due.

But, as the law is written, I would take the full cost of insurance as a write off, because a tax credit is just that: an amount that is based on the total paid.

And yes, I do see this as double counting the same amount, which is something that the tax laws ordinarily do not allow. But in all other cases that I am aware of, there is also a specific law that specifies how the benefit will be calculated. Not so here.

My mistake. You’re right, the deduction that used to be on Schedule C is now on Form 1040, line 29. But it still has exactly the same effect — reduces taxable income dollar-for-dollar in a way that no employee can take advantage of. One of the perks of being in business for yourself (too bad you can’t use that deduction to claim your spouse’s cost of employer-sponsored health insurance).

“it seems counterintuitive that those qualifying for and taking Premium Subsidies to also take 100% of the Self Employed Insurance Deduction”

Well, that’s not going to happen the way you envision, is it? The deduction, like most others, is based on actual dollars paid out, and would not include the advance tax credits. If a self-employed person is eligible for tax credits, the Line 29 deduction will be 100% of the NET premium paid for health insurance after any advance credit is applied. And the AGI will remain accurate.

@Max Herr Regarding your statement: “Remember, however, that as a self-employed person, you may deduct 100% of your cost of health insurance, and it comes right off your Schedule C, so be sure to factor that in, too.” This has me a little confused. Self Employed Insurance Deduction is currently taken on line 29 1040 to arrive at AGI. Only in 2010 was a self employed individual able to take deduction directly off of their Schedule C. Please correct me if I’m wrong, but has the tax law changed regarding where this deduction is taken?

Also, it seems counterintuitive that those qualifying for and taking Premium Subsidies to also take 100% of the Self Employed Insurance Deduction for tax year 2014 and beyond. Thoughts, anyone?

Just one more suggestion for anyone on the borderline for subsidy eligibility — if your income fluctuates and you are unsure whether you will be entitled to the tax credit, but have the present ability to pay the full premium— set up your insurance for auto-pay via the most generous cash-back or airline rewards credit card you can find. At today’s interest rates, you’ll probably do better that way than you would if you held the same amount of money in the bank for a year.

You can use your 2012 Form 1040 to estimate your 2014 income, but this could be a mistake if your income in 2014 ends up being much higher. Be aware that premium tax credits are based on MAGI, not AGI, and require that a person add in tax-free interest from bonds, Social Security payments of any kind (SSDI, Survivors, SSI, SSP), and foreign income not subject to US income tax, among other things.

All of your business deductions are accounted for on your Schedule C, and personal deductions on your Schedule A. Those numbers are all accounted for on the last line of Page 1 of your Form 1040. There is nothing else for you to do but divide that number by 12 to estimate your monthly income.

If you believe 2014 will be a “better” year, then you need to factor that into the equation.

Remember, however, that as a self-employed person, you may deduct 100% of your cost of health insurance, and it comes right off your Schedule C, so be sure to factor that in, too.

This is not the easiest of tasks for the self-employed, which is why, if you are eligible for premium tax credits, but don’t need them to pay for your insurance up front, you should enroll in an exchange-based health plan, forgo the advance credits, and take all of what you are entitled to as a credit when you file your taxes for 2014 in 2015. That way you won’t make any mistakes.

I thought I’d weigh in here - as I spent a good deal of time thinking about this issue.

I would recommend either:

1) Take the 2012 AGI and divide by 12, and enter that number in the monthly income field on the Covered California application. If you expect that 2014 will be significantly higher or lower, you can do some math and add a multiplier to that (for example, increase by 10%). [Easiest way]

2) For a little more math, working from the 2012 tax return, enter 1/12 of the amount shown on the 1040 for business income (line 12); for other income, 7-21; and for deductions, enter 1/12 of any additional amounts shown on lines 23-35. Do not enter amounts that are Schedule C deductions (those have already been deducted from the amounts shown on line 12 of the 1040). The only variation should be for amounts that you know will change in 2014.

The advantage of doing it my way is that your application will pass verification quickly (as mine did), because the numbers will be a close match to your 2012 return figures, which currently is the only number available for verification.

You are not following the written instructions, but you are complying with the spirit of the law: which is to make a good faith prediction of what your AGI will be in 2014. (It’s modified AGI, but as of now, the only add backs are untaxed foreign income, social security, and interest - so unless you have those things you can go with the AGI).

I think that it’s important for we self-employed to stay on top of tracking our income through 2014, so that we can plan and make adjustments as needed through the year. It helps me to keep in mind that the “subsidy” is merely a tax credit, and to look at it as a cash-flow issue rather than counting on keeping any subsidy that I have. Because it is a part of the tax system, if we realize that we have been underpaid or overpaid a subsidy amount, we also have the option of adjusting our quarterly tax payments to compensate. In fact, I think that the best option is to forego any advance tax subsidy - knowing that you can reduce the January 2015 quarterly if you know at that time that you are entitled to the credit — by then, we will have a good picture of our 2014 income and should have IRS forms available for calculating the credit, so things should be a lot more certain.

I believe that the reason the Covered California instructions ask for monthly (rather than averaged yearly) income figures is that their top priority is to screen for Medi-Cal, which is determined based on monthly income.

But I don’t think that works well for self-employed, whose income may fluctuate significantly from month to month, especially for individuals who derive income from commissions or contingent fee arrangements. It’s also very possible for a self-employed person to have no income coming in for several months while they are generating tens of thousands of receivables — again, it all comes down the payment arrangements for the particular business. In most cases, we are not appropriate Medi-Cal candidates, even if we do have a short fall of income for a few months or a year.

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