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MAGI - What It Is and What It Isn't.

By on | 43 Comments

Guest Author, A.Marshall, is a retired attorney whose blog, An Ad Hoc Guide to the Affordable Care Act, seeks to make sense of buying health care under Obamacare. A. Marshall has been a frequent commenter on our Q&A Advice blog under the name, Freelancer.

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We Are Confused

Many individuals and families with complicated income situations are confused about how to calculate their MAGI (modified adjusted gross income) for purposes of determining eligibility for premium support under the Affordable Care Act (ACA). Official web sites such as the Healthcare.gov site or IRS.gov tend to focus only on earned income and do not provide much guidance as to how to handle other forms of income or various tax deductions. Much of the information posted on other internet sites is mistaken or misleading. Part of the confusion stems from the fact that the tax code uses the phrase “modified adjusted gross income” to mean different things for different purposes. Some web sites or blogs have posted worksheets based on IRS forms developed for very different purposes. In fact, MAGI is defined in different ways in well over a dozen different sections of the tax code. Although this statutory framework is confusing, it does leave one thing clear: the definition of “modified adjusted gross income” varies depending on the purpose of the income calculation, and it is always clearly stated within the particular statute which defines a particular income-related tax or benefit. The term is defined for purposes of the Affordable Care Act in 26 USC 36B.

Adjusted Gross Income Plus

The term “modified adjusted gross income” means adjusted gross income increased by—

  1. any amount excluded from gross income under section 911,
  2. any amount of interest received or accrued by the taxpayer during the taxable year which is exempt from tax, and
  3. 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.

This means that MAGI is the combined total of:

  1. the adjusted gross income of the taxpayers within a household, plus
  2. any amounts excluded from taxation by section 911 (the exclusion from gross income for citizens or residents living abroad),
  3. any tax-exempt interest received or accrued during the tax year, and
  4. any portion of the taxpayer’s social security benefits that are excluded from gross income.

Tax Deductions Not Included

Other than the items specified by the statute, there are no other add-backs to the calculation. That means that the various types of tax deductions listed in the Adjusted Gross Income sections of the IRS 1040 or 1040A forms are also income reductions for purposes of the ACA. This means that in determining subsidy eligibility, taxpayers can continue to benefit from a variety of tax deductions, including the following:

  • Deductions related to college expenses (student loan interest and college tuition deductions
  • Deduction for contributions to a traditional IRA
  • Health Savings Account (HSA) deduction
  • Self-employment deductions, including:
  • One-half of the amount of self-employment tax
  • 100% of the amount of self-employed health insurance premiums
  • Contributions to a qualified retirement account, such as a Simplified Employee Pension (SEP) plan.

Keep in mind that these rules are subject to change - in fact, the definition of MAGI in the Affordable Care Act has already been changed by Congress twice since the law was first written. Taxpayers with complex profiles should seek the advice of a tax preparation professional

43 Comments

Thanks for the great answer, Phil, especially the point regarding different MAGI's using different calculations. Not many will have foreign income or tax-exempt interest but quite a few who receive social security before age 65 will be affected.

This is a good and timely article. I have been advising individuals and families to employ the following calculation to derive MAGI for the purpose of determining subsidy eligibility under the ACA.

Find Adjusted Gross Income ("AGI") on your most recent tax file. AGI can be found on (line 37 of form 1040) or (line 21 of form 1040A) or (line 4 of 1040EZ).

Add back certain income which includes non-taxable social security benefits (line 20a less 20b on form 1040), tax-exempt interest (line 8b on form 1040), and foreign earned income & housing expenses for Americans living abroad (calculated on form 2555).

This calculation should provide the MAGI on file with the IRS and a benchmark that can be considered when determining subsidy eligibility under the ACA.

Unfortunately all of this information does not address rental income specifically and the expenses that reduce the gross rental income.
Would it be prudent to call the IRS to get more comprehensive information? People do not want to get a subsidy and have to pay it back, when they should really be in medi-cal.

Joan, your rental income minus expenses is already included in your AGI.

You mention that the definition has already been revised twice.

Could you please give an account how MAGI definition has changed since the law was passed.

Some of the misinformation may be due to that - but it would be interesting to know the trajectory of how we got here. If you can point me to a link where I can get more detail about the same would also help tremendously.

Whereas this information does not address rental income specifically, it does encompass rental income.

Properly reported rental income less rental expense flows from "Schedule E - Supplemental Income and Loss" to line 17 on form 1040 and becomes part of AGI.

Moreover, Covered California asks applicants to report any rental income as part of "other income" on their application.

As such, net rental income is considered when determining advanced premium tax credits and cost sharing reductions (aka "subsidies").

I have done some further research on MAGI and social security benefits and have learned the following.

- Social Security Disability Benefits (SSDI): not included in MAGI calculations
- Supplemental Security Income (SSI): is included in MAGI calculations

Source: UC Berkeley Labor Center & written correspondence with Covered California

You mention that the definition has already been revised twice. Could you please give an account how MAGI definition has changed since the law was passed.

You'll find that information here:
https://obamacareguide.wordpress.com/2013/10/21/evolution-of-magi/

I will need to increase my income to meet the subsidy requirements. Would a Traditional IRA to Roth conversion be counted as income for this? I am not yet 59 1/2 so do not want to make actual withdrawals.
Thanks,
Scott

Phil, If one is terminated from their job and they receive a severance payment, plus, a disbursement of a non-qualified plan, would both those pay outs be excluded from the MAGI. Especially since one would never have rec'd those payments but for the termination and it distorts the income calculations for the MAGI?

Many thanks,

Scott - the answer is yes, the IRA to Roth conversion will suffice to increase your income. But keep in mind that there is no penalty for overestimating your income -- if you provide CoveredCA with an estimate at or above 138% of the FPL in order to qualify for a subsidized plan, and your 2014 income is less than estimated, your subsidy will be determined in accordance with your actual income. If your income is under the 100% FPL mark, you will be treated at tax time as if your income is exactly 100% of the FPL.

Ozzie, those one-time payouts would be excluded from MAGI for purposes of determining eligibility for MediCAL but NOT for subsidy calculation. Keep in mind that MAGI is determined on an annual basis, so the situation you describe might undermine subsidy eligibility for one year, but would not impact future years.

I think there are various tax strategies that might help a person in the position you describe, but it would vary depending on the amounts involved and the individual's situation. Aside from that, I would suggest that the person would need to bank enough of the severance payment to cover the insurance premiums. That person might also look at at one of the Bronze HSA plans for 2014 -- the person could get the tax advantage (including reduction of AGI) by depositing part of the severance money into the HSA, although the HSA money could not be used to pay premiums. But premiums for Bronze are less, and that might be a way of addressing concerns about the higher deductible during the year of the job loss.

As a self-employed new HSA qualified Bronze policy holder, how fast could they change, by law, what is currently deducted from AGI? Could they actually change mid year subsidy rules to add back any one or all of the following -HSA contributions, self-employment health care premiums, deductible portion of self employment tax, and contributions to traditional SEP/IRA's? This could take away all my subsidy and at what point of application could a law change take place?

Gary, the answer to your question (whether the law about MAGI can be changed) is YES -- the law can be changed, and it theoretically possible for the law to be changed very quickly. When Congress wants to pass through a law they can do it in a matter of days, and laws impacting the tax code can be made effective immediately or even retroactive.

However, I do NOT think it is LIKELY that there will be any such changes this year. I don't think that the self-employment MAGI issues are on anyone's radar, and I think that it would be quite difficult for any legislation related to Obamacare to pass Congress this year, especially as with midterm Congressional elections coming up.

While it is a very big issue to many self-employed individuals, it is a very small issue financially in the greater scheme of things. There is probably a relatively small number of self-employed whose income puts them at the cusp of eligibility for subsidies, and there are many different ways that self-employed individuals can reduce their tax liability simply by re-investing in their own businesses - so it is unlikely that anyone would see this as a high priority.

I do think that all self-employed people should track their income and expenses carefully, and follow the adage: "plan for the best and prepare for the worst."

I think the best plan is to forego subsidies in 2014, with the hope of getting a nice tax refund in 2015 -- for an added benefit, use a cash-back credit card to pay your insurance premiums.

If cash flow is a problem, then you could go ahead and accept the subsidy -- but figure out what your unsubsidized premium would be and bank the difference. Keep in mind that you can wait to make 2014 contributions to a SEP or traditional IRA until April of 2015 -- so one option would be to put those funds aside, perhaps in a short-term (1 year) CD to earn a little interest -- and then in 2015 when you have all of the information you need and tax rules are finalized, you would have those funds available to put them where they are needed. If a contribution to your SEP account qualifies you for the subsidy, then you would make the contribution at tax time - if the rules have changed or your income was higher than expected, you could instead use the funds to pay the tax bill.

Also, do keep in mind that you are better off generally to maximize earnings-- so don't be penny wise and pound foolish. I've posted a rough formula for figuring out your breakeven point here --> https://obamacareguide.wordpress.com/2013/10/09/do-you-want-that-raise-or-not-a-formula-for-400-percenters/ -- that is, the formula answers the question, how much money do you have to take in so that you come out ahead, even if you lose your premium subsidy.

My husband is a self employed painter. I est our income at $40K for ACA in CA, which includes his gross, my investment income, and a tiny rental income. In preparing for our 2013 tax return, I'm unsure whether to use the full, legal tax deductions on his biz. Paint, supplies, truck mileage, airless depreciation, not to mention our $18K medical expenses (monthly private insurance premiums and hi deductible before insurance kicked in). My CPA advises just to extend our filing, but I don't want to lose out on the cost savings of having subsidized premiums vs what we were paying for private insurance. Thank you for your thoughts.

To Barbara:

I'm not sure what you are asking.

To start with, your 2013 tax filing does not matter - your subsidy eligibility is based on your 2014 income, and will be reconciled at the time you file you return in 2014.

If you estimate your income to be about $40,000 per year, then you clearly do qualify for subsidies -- so you should just apply via Covered California and accept the subsidies. It might be a good idea to choose to take something less than the full subsidy you are entitled, in case you end up with a higher than anticipated income in 2014. You have the option to choose how much to take and how much to pay up front.

In 2014 you will just fill out the tax forms as you normally do. There is no change at all to the Schedule C -- you pay taxes on the net income from self-employment, after deducting for business expenses, as always. There is no penalty if your income is less than anticipated. IRS will have the necessary forms and worksheets ready in 2015 that should help your CPA better understand how to calculate subsidy eligibility for you -- but for now you are fine simply giving Covered California the figures you have posted here.

If one has a LOSS on one's rental property -- i.e. rental expenses fall short of rental income, and/or one has carryover losses from previous years -- does one "include" the loss in MAGI by netting it out? In some cases, this could significantly reduce MAGI (and enhance subsidy eligibility under ACA, if I understand correctly). However, the website does not seem to allow entering componentts of income as negative amounts

On your tax return, all allowable losses will reduce your MAGI. Keep in mind that there are various tax laws that can limit the amount of loss you can claim or carryover - if you have substantial losses it's probably best to work with at tax accountant.

The Covered California web site form for income is clearly not designed to replicate all possible tax deductions. I would not advise trying to account for anticipated losses with the Covered California app. If a loss or loss carryover increases your subsidy eligibility you will get that back in the form of a tax refund. If you are certain you will be experiencing a loss and have difficulty paying your premium without a subsidy, then you could enter the amount as a positive amount in the deductions section - I believe that there is a category for "other".

But I think that in general, the better course of action is to defer the subsidy and wait until tax time for the refund. If you are self-employed and pay quarterlies, you could also opt to pay the higher premium, but reduce the amount you pay in quarterlies to compensate for the anticipated tax credit.

Will they ever change it to that? It seems a much more fair way to determine premiums. We would qualify for subsidies if that were the case. As it stands, our health ins. went from $700. per month to $1700.!!! I am 60, with a 10 year old child, and now my retirement money I WAS putting away is gone for insurance.

Self employed, and so is my wife. This is killing us financially.

One more question, I claim both of my boys on tax form, do I need to include their income on our family income, or just my wife and I.

Our 2013, tax return reflects a large vehicle depreciation on schedule c. It reduces our income so much that we don't qualify for a subsidy. We cannot get insurance. Since our state chose not to extend medicaid program adults of my income. We are exempt from penalty fees for lack of coverage. We need coverage. So the BIG question. My gross income schedule C line 7 is 70,285. line 48 is 48,233. resulting in a net profit/loss of 22,052 on line 31. $24781 alone was for vehicle depreciation. This results in my AGI on line 37 of my 1040 being below the amount to qualify for a subsidy......How do the self employed figure an accurate MAGI from that? I should be able to add back depreciation don't you think. This would increase my income enough to qualify for a subsidy.

I'm confused by your question because for most people, the MAGI is the same as AGI, after appropriate deductions. If you have untaxed dividends, social security income, or foreign income, you would need to add that back in - but you are able to keep all other income-reducing adjustments.

I'm wondering if you mean "taxable income" rather than AGI.

Keep in mind that the deductions that reduce AGI appear to include the self-employed health insurance deduction -- so if your insurance now costs $1700, that's an income reduction of $20,400. If you make retirement contributions to a 401K or SEP-IRA, that also reduces your family income. I'd add that most self-employed people have some flexibility to control the timing of income and expenses related to their business -- if you are close to the borderline to qualify for a premium tax credit, you might consider investing some money back in your business to reduce the net on your schedule C.

Your household income includes the the income of your kids IF they are also included on your policy and if they earn enough to require them to file a tax return. It's not really clear from your question how may people are covered by that $1700 premium, but as the number of household members goes up, so does the level at which you qualify for subsidies.

Elaine,

Your eligibility for a tax premium subsidy is based on your projected 2014 income -- the depreciation taken in 2013 is irrelevant.

In applying for insurance in 2014, you should have disregarded non-recurrent expenses in preparing your application.

I'm a little bit puzzled by the problem you present in any case - I thought the maximum depreciation you could take on a vehicle would be $11,360 - does your business require multiple vehicles? (See http://www.cbiz.com/page.asp?pid=10336 for limits)

In any case, I would strongly urge you to work with a tax professional when preparing your 2014 return. I do think that the problems you raise may be avoided with appropriate tax planning.

This is my understanding as well, but do you have a specific section of the code or rules that you can reference on this? Thanks!

My business has a loss carry forward of approximately $200,000 in addition to the normal business expenses. When applying for covered california, I estimated our income at approximately $54,000 (family of two), which qualified us for the government subsidy. We are manufactured housing dealers and all income (exception social security retirement for my husband) is based on escrow closings (feast or famine dependent upon the housing market). In the past four or five months we have suddenly been extremely busy and to date have income of approximately $90,000, with a projected income of approximately $110,000 or so. With that being said, how much of the loss carry forward, if any, will we be able to reduce our MAGI by? Also, above you mentioned something about reinvesting in your business as a way to reduce tax liability and am wondering if this would somehow affect the MAGI?
It's so refreshing to finally find a site with someone so knowledgable in this area....Kudos!!!!!

Hello, Thank you very much for your comment on whether SSDI is included in figuring MAGI. I have been searching EVERYWHERE for this information. I realize your post is from 2013, though. Can you say whether this situation has changed since your post? We are still in the process of considering insurance (California), and the vagueness of the Covered California Site is awesome.
Thank you again, sir.

Is a SEP contribution considered an income deduction when calculating MAGI? I see contradictory info.

"Tax deductions not included: Contributions to a qualified retirement account, such as a Simplified Employee Pension (SEP) plan."

and then …
"If a contribution to your SEP account qualifies you for the subsidy, then you would make the contribution at tax time"

what line do i enter as income on form 1040ez?

Sue -- your self-employed SEP contribution does reduce your MAGI for subsidy calculation.

Can you tell me where you found the "contradictory" information? Keep in mind that the acronym "MAGI" is used to mean different things for different purposes -- so the "MAGI" for calculating insurance tax credits or subsidy eligible is not going to be the same as the MAGI for other purposes. That is explained in this blog post:
http://obamacareguide.wordpress.com/2013/10/21/evolution-of-magi/

It is just the opposite. SSDI IS included in MAGI and SSI is not. Also non-taxable Social Security benefits are added back to AGI.

Add back certain income: "Social Security benefits” includes disability payments (SSDI), but does not include Supplemental Security Income (SSI), which should be excluded."

"Non-taxable Social Security benefits(Line 20a minus 20b on a Form 1040)

http://laborcenter.berkeley.edu/pdf/2013/MAGI_summary13.pdf

I'm not clear if "interest received or accrued by the taxpayer during the taxable year which is exempt from tax" also includes IRA earnings during the year. Assuming I have not taken any IRA distributions, do the IRA earnings during the year add to MAGI?

IRA earnings, otherwise know as increases in fair market value, are not added to MAGI.

IRA distributions are added to MAGI.

Since SSDI is included in MAGI, does anyone know, if back pay for a prior year is awarded for a disability claim, does it all get applied to the tax year in which it was received?

For the purposes of IRS, the money approved for disability in the prior year, is indicated on the 1099 and can be added to the prior years earning to figure the tax due---rather than the amount for the current and prior year all counting in the same tax year.

However, I have not been able to find out how it figures into the MAGI for purposes of subsidies. For IRS, 0-85% of the SSDI is taxed but for MAGI 100% is included.

The question is, can the prior year SSDI be added to the prior years MAGI or does it all count in the current year?

1 1/2 to 2 years of SSDI coming in at the same time will undoubtably put me over the amount for a subsidy---and the prior year's SSDI would go for medical bills and living expense bills I still have from the prior year of not working. So I'd have to pay back the subsidy instead of paying bills for the time I was disabled and not working in the prior year.


Hi,

I just received my 1099 from my broker and I was surprised to see a fairly large capital gain from a stock conversion from Kinder Morgan. It was unexpected and a one time event. I also have significant loss carry forward on my schedule D that will offset the gain for 2014. Am I going to have to add the Kinder capital gain to my MAGI or will I be able to use the net amount (after the loss carry forward) on line 13 of my 1040?

Net rental income is included in adjusted gross income.

I sold two income-producing properties in 2014, one for a gain and another for a loss. I called the Healthcare.gov to report a change in my income and I was told that a sale of a property is a one-time event and will not count toward my income. I asked for a Supervisor's concurrence and he verified that it would not change my income.

Now, doing my taxes on TurboTax shows that I owe the full subsidy of $11,217 because the gain does count as income. I've called in a few times and have gotten different responses from different agents. The September sale changed my income from $21,500 to $141,000. Do I really have to pay back the full subsidy and does the timing of the September sale effect the amount?

I'm from Florida and I sold two income-producing properties in 2014, one for a gain and another for a loss. I called the Healthcare.gov to report a change in my income and I was told that a sale of a property is a one-time event and will not count toward my income. I asked for a Supervisor's concurrence and he verified that it would not change my income.

Now, doing my taxes on TurboTax shows that I owe the full subsidy of $11,217 because the gain does count as income. I've called in a few times and have gotten different responses from different agents. The September sale changed my income from $21,500 to $141,000. Do I really have to pay back the full subsidy and does the timing of the September sale effect the amount?

My question was what about the sale of rental property? I sold two rental properties, one for a big gain and the other for a small loss. Net affect was a medium gain. I called Healthcare.gov. to report it and was told by the agent and his Supervisor on Nov. 12th 2014 that these were one-time events and would not affect my income. It is in their notes that they told me this. Now after doing my taxes, I find that the medium gain DOES count against me and I'm told that I have to payback the full Subsidy of $11,712. Which is correct?

The sale of assets (i.e. income producing properties) may be a one-time gain or loss. However, such a transaction does count toward adjusted gross income which is used to calculation the premium tax credit.

When I re-upped my Covered California plan for 2015, I estimated my income at $60,000, and if that were the case, I would not apply for a subsidy. Now, however, it looks as though my income will be low enough to apply for a subsidy, but part of what is bringing my MAGI down is my insurance premiums for 2015. How do I reconcile this? If I receive a refund of subsidies I would have gotten had I been correct about my anticipated income, doesn't that bring my MAGI back up I can't figure this out for the life of me.

Thank you!

If I am paying more towards my student loan payments than is required by my minimum payment, is it possible to count that towards my income deductions?

Do yo have to add back NOL carry forwards to arrive at modified adjusted gross.

Paid student loan interest is an adjustment to income (deduction) up to the modified adjusted gross income phase-out threshold. The maximum deduction is $2500 and the threshold is $80000 for single filers and $160000 for married filers.

So the answer to your question is it depends.

Marina -- the answer to your question about the self-employed health insurance deduction is that it is complicated. My advice is to figure out whether you qualify for a subsidy using the figure as to what you would pay out-of-pocket after the subsidy as the deductible amount -- that is, do your projection based on the lowest possible deduction. If that puts you over the line to qualify, and if it is affordable to you to pay the full premiums, then I think it's best to pay the premiums and get a tax refund later on. Then the tax software will do the calculation for you when all numbers are in.

Alternatively, if you have plenty of money in savings, you can take the subsidy knowing that there is a risk you will need to pay it back when taxes come due. So if you can live with that risk, and you might opt for the subsidy, especially if you are in a line of work with cash flow problems.

In theory you could take the subsidy and bank the difference - then you have the money available to pay if needed, and you are earning interest along the way. I say "in theory" because the banks don't pay any interest to speak of these days -- I figured out that I was better of paying the full premium with a cash-back credit card. Then, if and when I get a refund from IRS, I've also maximized the cash rewards on my card.

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