One of the first questions you will need to answer to purchase insurance on or off the new exchanges is your income. You can skip this question if you don’t want to claim an advance tax credit (subsidy) — but even the private insurance companies will encourage you to provide enough information to determine if you are eligible for a subsidy.
If you enroll via an exchange and opt to take a subsidy, that will be reconciled the following year when you file your tax return. If it turns out that your tax returns show that your 2014 income is higher than the number you reported, you may have to pay back some or all of the subsidy you receive in the form of a tax payment due in April 2015. If it turns out that your income is less — or if you enrolled via an exchange but opted not to take an advance tax credit — then you may be entitled to an additional tax credit, that will be paid to you in the form of a tax refund.
So it is important to get things right: but if you are applying for insurance now, you are answering questions about 2013 income when, in the end, it will be your 2014 income that counts. You will be able to report any changes of income during the year, but that could end up being rather cumbersome if you have some types of income that are fluctuating or subject to change – for example, if part of your earnings depends on earning commissions, or your work hours vary from one week to the next.
This is a complicated topic, but I will start by breaking it down in steps:
Who is eligible for a premium assistance credit?
Premium assistance is available to individuals or families who meet these criteria:
1. Their household incomes are between 100 and 400 per cent of the Federal Poverty Level (FPL) for the family size.
The FPL is determined annually by the U.S. Department of Health and Human Services, and is somewhat higher in the states of Alaska and Hawaii than the amount set for the 48 contiguous US states and DC. The premium assistance tax credit will be based on the FPL that will be set in 2014, but currently only 2013 numbers are available. We can expect the amounts to be adjusted upward each year due to inflation and rises in the Consumer Price Index.
2. They are not eligible for other types of health insurance which coverage, such as employer-sponsored coverage, that:
a. Provides “minimal essential coverage” – which means that in essence, it must be at least the equivalent of a Bronze plan on the exchange, and
b. Is deemed “affordable”, meaning that the employee’s premium for self-coverage must not exceed 9.5% of his household income. (But “affordable” does not include the cost of buying coverage for a spouse of children; see “Who’s Left Out (Part Two)“)
In other words, if you are eligible for coverage from your employer, you can choose to buy insurance for yourself or your family on your state’s health exchange, but you probably will not be able to get a tax credit to reduce the cost of the premiums.
Eligible or not, if your income is too high in 2014, you won’t be eligible for the tax credit.
What is Household Income?
Household income is the sum of:
1. The taxpayer’s modified adjusted gross income, plus
2. The combined modified adjusted gross incomes of all other individuals taken into account in determining family size who earn enough to be required to file a tax return.
That usually would include any persons shown as dependents on your tax return, and could also include an adult child up to age 26 whether or not the child currently lives with you.
What is Modified Adjusted Gross Income (MAGI)?
Modified adjusted gross income is the combined total of:
1. The taxpayer’s adjusted gross income, 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.
In other words, you will find your MAGI by looking first at the number written on the bottom line of the first page of your 1040 form. (Line 37 on the 2012 1040).
Then you will add in certain types of income if you had them. The untaxed interest or social security benefits would show up on the top half of your 1040:
For the third type of income, foreign income exclusion, you’ll file a form 2555. You’ll probably know if you have any of these types of income. If you are getting Social Security benefits, then the tricky part will be to remember to add back in only the untaxed portion – as the taxable part has already been included in AGI. So you would take the number in box 20a, then subtract the number in 20b (the already counted part), and add back the remainder to figure your MAGI.
After you have done that with your own tax return, you may have to also look at the tax returns filed by your children, if any of them filed their own returns.
Note: If you are married, you must file a joint return in order to qualify for a subsidy. So if you and your spouse were planning to file separately for any reason, you will have to rethink that decision if you also are counting on getting help with your insurance premiums.
“Present Law And Background Relating To The Tax-related Provisions In The Affordable Care Act” (Joint Committee on Taxation, US Congress, March 5, 2013) (Download Link)