Adjusted Income in Obamacare

Anna Spooner
Health insurance form

As you're looking at your health insurance options, you probably wonder if you are among the 86% of people who qualify for a subsidy to help offset the cost of coverage when purchasing through the Marketplace (healthcare.gov). Whether or not you qualify for an insurance subsidy is based on your 'modified gross adjusted income' (MAGI) compared to the national poverty level.

What is MAGI?

MAGI is usually very similar to the adjusted gross income from your tax return. The way you determine MAGI is simple:

  • Find your adjusted gross income on your tax return
  • Add foreign income, even if it was excluded on the tax return
  • Add social non-taxable security benefits (including tier 1 railroad benefits)
  • Add tax-exempt interest

You do not include Supplemental Security Income (SSI) in your MAGI calculation. Your MAGI should be based on everyone in your household who is required to file a tax return, not just those who need insurance coverage.

Note: Marketplace subsidies are based on your expected income for the coming year, not on last year's income. However, many people don't have a lot of variation in income from year to year. As a result, modified adjusted gross income (MAGI) based on the previous year's tax return can be a good estimate.

Determining MAGI if Your Income Is Hard to Predict

If your income varies a lot - for instance, if you are self-employed or work in a commission-based job - or if you expect your income to be radically different than the previous year, you will need to determine your MAGI using a different method.

Varying Income

If you expect your income to be dramatically different from last year, include those expected changes when calculating your MAGI. If your income is hard to predict, do your best to make a realistic estimate based on your past experience, and be prepared to update your Marketplace application during the year if your estimate isn't correct.

Unemployed

If you are unemployed when you fill out your application, you need to make your best estimate of income based on what you expect to receive during the next year. Include unemployment compensation and income from other members of the household. Also include additional types of income such as capital gains, interest income, and cash support.

If you were unemployed when you applied for insurance in the Marketplace, but get a job during the year, be sure to update your Marketplace application with your new income and health insurance coverage information.

How Does MAGI Affect Insurance Subsidies?

Once you know your MAGI, you'll be able to find out if you qualify for a subsidy that will help offset the cost of your health insurance.

There are two kinds of subsidies.

  • Advanced Premium Tax Credit: Lowers your monthly health insurance payment
  • Cost Sharing Reduction: Reduces your out-of-pocket costs by helping cover copayments and deductibles

Whether you are eligible for a subsidy depends on two factors:

  • How your MAGI compares to the Federal Poverty Level for your household's size
  • How much health insurance costs where you live

Subsidy qualification is based on income. If you earn between 100% - 400% of the federal poverty level, you'll qualify for some level of the Advanced Premium Tax Credit. If you earn between 100% - 250% and choose a Silver level plan, you may also qualify for a Cost Sharing Reduction.

If Your MAGI Changes During the Year

Insurance update form

If your MAGI changes during the year, your eligibility for assistance with your health insurance costs may change. If your household income decreases or your family grows during the year, you might be owed a bigger Advanced Premium Tax Credit. If your MAGI increases, you may have to return some of the Advanced Premium Tax Credit you received.

To avoid a surprise at tax time, it's important to update your Marketplace application with any changes that occur in income or family structure during the year.

You can report changes to the Marketplace by updating your application online, over the phone, or in person. If you move to a different state, you'll need to start a new application in the Marketplace, rather than updating your old one.

Some of the changes that should be reported include:

  • Changes in health insurance coverage for members of your household
  • Becoming pregnant, birth or adoption
  • Marriage or divorce
  • A child on your plan turning 26
  • Change in disability status
  • Change in citizenship

MAGI Is Your Best Estimate

In the end, MAGI simply uses your previous year's adjusted gross income, with a few changes, to predict your next year's income. It serves as the best estimate available of what you will earn and therefore what, if any, subsidies you are eligible for.

A lot can happen in a year, and your MAGI may change from the initial estimate. If it does, it's important to update your application right away, so you don't face any surprises at tax time.

When you understand what MAGI is, you'll have a better grasp of how your income affects your health insurance options and how the Marketplace subsidies can help you get the health coverage you and your family need.

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Adjusted Income in Obamacare