The evolution of MAGI

I have wrestled somewhat with the ACA’s definition of MAGI (modified adjusted gross income) for purposes of determining eligibility for the premium tax credit. In fact, that is what led me to create this blog.  The information I found on the internet was contradictory and confusing, and even the tax professionals and insurance agents I consulted seemed confused.

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.  The term is defined for purposes of the Affordable Care Act in 26 USC 36B.  Various other definitions can be found in these sections:

To add to the confusion, there are two other sections of the Affordable Care Act which also provide their own, different definitions of MAGI:

  • 26 USC 1411 (Medicare Tax on High Level  Investment Income)
  • 26 USC 5000A (Requirement to Maintain Minimum Essential Coverage)

Although this statutory framework is confusing, it does leave one thing clear:  the definition of “modified adjusted gross income” is always clearly stated within the particular statute. That is, although the definitions differ, I could not find any example of a statute using the phrase without specifically defining it.  Every statute pertains to some tax,, credit, or deduction that is available to or imposed upon taxpayers at specified income levels. The definitions are always quite clear as to which types of income are added and which deductions are disregarded in determining whether or not a given taxpayer is eligible for the specific tax or benefit.

This leaves me firmly convinced that the 26 USC 36B definition is the one that must govern in determining eligibility for the insurance premium credit:

(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.

But that leaves another problem:  this definition does not make a lot of sense in the context of the purpose of the statute. As explored in a previous post, this enables all taxpayers to qualify for increased subsidies if they opt for one type of insurance policy over another, via the HSA deduction; and it enables self-employed taxpayers to shelter roughly one-fifth of their income in a tax-deductible retirement account, as well as being able to claim the full amount of a health insurance premium to reduce their income, while at the same time receiving a government subsidy for that premium by virtue of their lower income.

In trying to make sense of this, I discovered that the original language of the  Patient Protection and Affordable Care Act (PL 111-148, passed on March 23, 2010) used the phrase “gross income” and “modified gross income” rather than “adjusted gross income”:

‘‘The term ‘modified gross income’ means gross income
‘‘(i) decreased by the amount of any deduction allowable under paragraph (1), (3), (4), or (10) of  section 62(a),
‘‘(ii) increased by the amount of interest received or accrued during the taxable year which is exempt
from tax imposed by this chapter, and
‘‘(iii) determined without regard to sections 911, 931, and 933.’’
[124 STAT 217-218]
The deductions referenced in paragraph (i) are trade and business deductions, losses from sale and exchange of property, deductions attributable to rents and royalties, and alimony.
However, that section was modified almost immediately, with the passage of the Health Care and Education Reconciliation Act of 2010 (PL 111-152, passed on March 30, 2010). With that law, the word “adjusted” was added to the phrase “gross income,”  and the statutory language was changed to read:

‘(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, and

‘‘(ii) any amount of interest received or accrued  by the taxpayer during the taxable year which is exempt from tax.’’

[124 STAT 1034]

The changed language coupled with the elimination of specified deductions had the effect of  bringing all of the section 62 deductions back into the calculation.
I don’t know what was going on in the minds of whoever proposed and drafted this change in language, but obviously it substantially expanded the number of people would be eligible for government tax credits to subsidize their health insurance. It hits across board: everyone who takes any sort of above-the-line deduction will show some level of reduced income, and therefore qualify for a larger subsidy.  But it tends to benefit the least-poor, because the net impact is particularly great for those who would not otherwise qualify for any subsidy, and those with higher incomes are also more likely to be able to take advantage of the deductions which are closely tied to their ability to put money in sheltered accounts like retirement accounts and HSA’s.
I do know that the language was amended one more time, in order to require counting of the untaxed portion of Social Security income. This amendment came roughly a year and half later, in 2011,  with the Three Percent Withholding Repeal and Job Creation Act (PL 112-56, passed November 21, 2011). Leaving the reference to “modified adjusted gross income” in place, that law simply added the current third paragraph (iii) (“an amount equal to the portion of the taxpayer’s social security benefits….”) to the statutory language.
However, I was able to find a report from the Congressional Research Service prepared in October 2011 when that final amendment was pending, appropriately titled, “Definition of Income in PPACA for Certain Medicaid Provisions and Premium Credits.”  This is a document that Congress members and their staff might have relied on if they wanted a more detailed analysis of the issues.
Unfortunately, although the memo repeatedly refers to “adjusted gross income” as being the standard from which MAGI is calculated, the specific explanation of MAGI in that memo got the details wrong.  The memo reported,

Specifically, gross income is total income minus certain exclusions (e.g., public assistance payments, employer contributions to health insurance payments). From gross income, adjusted gross income (AGI) is calculated to reflect a number of deductions, including trade and business deductions, losses from sale of property, and alimony payments. MAGI is defined as AGI plus certain foreign earned income and tax-exempt interest.  (at p. 6)

But that was a description of the provision that was included in the first iteration of the ACA, not the amended language that was implemented by the 2010 Reconciliation Act.  No mention or reference is made to the long list income-reducing deductions listed on the 1040.

The primary focus of the CRS memo is on Medicaid eligibility.  It seems clear that the main concern was to make sure that Social Security income was counted as a factor in determining eligibility for the expanded Medicaid provisions under ACA.  In the context of people with very low incomes, the various AGI deductions probably have little impact. As noted above, they are generally the type of deductions available only to people with discretionary income to spend or save in ways that are favored by the tax code.

It’s hard to know whether the current statutory language will remain in effect, or whether at some time in the future there will be an amendment to require some AGI deductions to be disregarded (added back in) when determining MAGI.

As someone who is self-employed, I obviously will benefit if I am correct that I can use these deductions to reduce income and qualify for a tax credit.  As someone approaching age 60, the insurance premium I will pay without a subsidy is quite high, and much higher than I was paying under my former policy (which is being discontinued with the advent of Obamacare).

I have been moved to research this issue because I had the gut level sense that the law as written is too good to be true.  Before I took the time to check the statutes, I assumed that I would not be eligible for any subsidy, simply because I assumed the “household income” meant all income — not something that could be reduced by my stashing away money in an IRA.

I am guessing that in the end, we self-employed may represent a very small segment in the greater scheme of things.  It is true that some of us may qualify for subsidies that we would not get if some of our deductions were added back in, but there are many other quirks in the law that will benefit some over others. The reliance on household size to determine subsidy eligibility means that shifting family structures will also lead to individuals being qualified, or disqualified, in ways that might not make a lot of sense.  For example, a married couple in their early 60’s with an adult child and a household income of $75,000 would qualify for a subsidy, and  could purchase insurance for all three at a subsidized cost of $594 or less per month.  When their child ages out of their household at age 27 or gets a job with employer sponsored insurance, they will become a two person household — and with the loss of the subsidy, they are likely to find that the cost of insurance for two is more than double what they were previously paying to insure a family of three.

So it may be that the primary purpose of the ACA is to get as many people insured as possible, and work out some of the kinks later on.  I am focusing on one problem because it impacts me — not just because I may or may not be entitled to a tax credit down the line, but because that knowledge may also impact the choice I make as to what type of insurance I buy. With a subsidy, a Silver or Gold policy might seem best; without it, the only affordable option may be Bronze.

Unfortunately, I think that it will be many months away before the answers are clear.  The IRS will surely develop a form with instructions and a worksheet for calculations, and just about everyone will rely on that whether than trying to puzzle out what the statute or regulations means.  So by year #2 of Obamacare — 2015 — things will be much more clear.

In the meantime, those of us who are uncertain as to how this will all shake out will probably do best if we simply hope for the best, but plan for the worst.  We won’t know for sure until we file our 2014 return.


82 thoughts on “The evolution of MAGI

  1. Thank you very much for all of the research and information you are gathering. I have gone round and round with the Health Care Marketplace since October about the application and the problem that I do not want to sign and agree to their application because it defaults to wrong information on their form with no option to change it. On the summary of household information (in the application) I claim my adult child as a dependent (she is a full time student under 25). The Marketplace application defaults to state that Yes she will be claimed as a dependent and NO she will not file a 2014 tax return. The correct answer is YES she is a dependent and YES she will file her own tax return. Per IRS rules and regulations she is required to file a return. Per the Marketplace application I am not permitted to enter this information correctly and they auto fill this section in as NO she will not file. Then they say that I have to sign the application and agree that all information is correct then tell me if it is not correct and I do get a substitute then I might OWE them money at the end of the year. Totally absurd and frustrating.

    Totally other frustrating point about this entire program…..
    Has anyone done the math on this mess ?

    Lets be nice ans say on average each person in America paid $200/ month for a premium ( that is a very low estimate) The American Population is at 314 Million People. So $200/month premium Times 314 million people (314,000,000) = 62,800,000,000 That is a total of 62 BILLION, 8 HUNDRED MILLION DOLLARS EVERY MONTH IN PREMIUMS. YES BILLIONS….YES EVERY MONTH……… WHY DO WE HAVE TO PAY ANYTHING EXTRA ON TOP OF THAT FOR OUR HEALTH CARE ?
    Every Dr visit, specialist or regular, every blood test, every prescription, every procedure should be covered with NO MORE MONEY. This Affordable Health Care is not Affordable…It is ruining us and squeezing us harder than before. Thanks for the health insurance so we still have to pay extra to see a doctor and get necessary tests. Do you think it’s fair that these thieves ask for more, when we go to the doctor, than the Billions of dollars they are already getting from us?

    • You are absolutely right! I agree 100%. I am 51 yrs old, so my premiums have skyrocketed and will ruin me financially eventually in a couple of years. I will have to dip into my retirement savings to pay my premiums until eventually it will be gone. I will be forced to go without insurance in the long run or stop paying my mortgage due to the higher premiums. No one seems to believe me or care when I tell them. Everyone thinks I am making it up. The ACA was too much of a compromise that left the door open for insurance companies to goudge us even worse than before. Bill Maher was right when he said that the problem with the ACA isn’t too much Socialism, it’s too much Capitalism.

      On a different note, I need to know if my contributions to my employer’s Simple IRA plan must be considered or added back in to calculate my modified AGI? Nowhere is this mentioned and so far I’ve found no one who is able to answer this question, least of all the IRS which is no surprise. Does anyone know?

      • P.S. To my previous comment. My contributions to my employer’s SIMPLE IRA plan are made via payroll deduction, so they reduce my income on my W2 and never appear anywhere on my 1040 return as a contribution or reduction of income. I need to know if these contributions still have to be added back in to calculate my modified AGI? Thanks.

      • Are you talking about a salary-reduction contribution?

        There are ONLY 3 types of add-backs to to AGI: 1) untaxed dividend income (typically from municipal bonds), 2) untaxed social security income, 3) certain types of untaxed foreign income. NOTHING else gets “added back”.

    • You are correct, the plans are a rip off. They are nothing more than a discount program that we must pay to access. We pay insurance premiums and we pay for the healthcare services, up to the deductible which most of us will never reach in a year’s time. Therefore, unless you reach your deductible threshold, aside from your 100% covered preventive services (which are few) your insurance only benefits you by enabling you to pay the contracted rate vs the sticker price. I.e. your insurance will allow you to pay the price negotiated between the doctor and the insurance company, rather than the full retail price for that service. I also think it’s wrong that folks with no insurance are charged the full retail price for health services, but that’s an entirely different discussion. Folks who can’t afford insurance pay full price for all health care. So we all have to choose who we wish to pay, the doctors or the insurance companies. Regardless, it all costs too much because huge profits are built in for everyone all along the food chain and prices aren’t controlled in the US like they are in other countries. An insurance broker explained to me recently that’s why a doctor can come to the US and become a millionaire where he/she might only make $100K somewhere else.

      • There were, and likely still are, many patient assistance programs available for low income people. These may be less utilized as many now have coverage previously unavailable, some even required insurance to get benefits. Several drug makers lowered copays if you had Rx coverage and some even offered free medication (even high costs ones) if no insurance. You may need to prove low income and reapply annually but worth the trouble. Discount Rx cards are free and can lower costs below drugstore offers without them. Cost of Rx vary widely so several sites that let you shop cost are worthwhile, even major drug chains can have huge variations in price.
        Care providers often give discounts 20-50% or more if you ask and pay at time of service. You should ask your doctor if you need all the tests they may order, some unknowingly duplicate tests already done by others. You aren’t required to use your HMO or PPO doctor and maybe a local clinic can cost less although it won’t count towards your deductible. You need to be active in managing your usage without compromising your health to minimize costs.

        The ACA isn’t a perfect solution for everyone but did open up healthcare to millions of people that were not able to buy insurance due to preexisting conditions, didn’t have workplace coverage or couldn’t afford it. It’s always been a complex decision choosing low cost/high deductible vs high cost/low deductible plans requiring forecasting your health care costs – the ACA didn’t change that. For self-employed paying a higher premium plan (gold or platinum) may cost less depending on your health care usage and income. Any new system has it’s problems at the beginning so there is much to watch as it rolls out for another year.

  2. Shay, have you looked into filing a paper application rather than completing your application on line? When you are talking about the “Health Care Marketplace” – do you mean, or you in a state with its own exchange?

  3. Thank you so much for all the information. After going around the internet a few times I was beginning to think that the Berkeley fact sheet on MAGI linked to the Kaiser Subsidy Calculator was incorrect when in fact it might be correct. Yeah, if this is so.

    I have one question I hope you can answer. Our income varies greatly from year to year. We are not applying for a subsidy, but working out the Premium Tax Credit on our 2014 tax return. Do you know if we have to indicate anything on the application that we might qualify for the subsidy? If I just say no and don’t include any income figures can we still collect the Premium Tax Credit on the return?

    Thanks again.

    • Yes, you will get the tax credit (if eligible) for any policy that you buy via the Exchange. So you are ok to say “no” and then complete the application on

      However, it is not as clear as to whether you can get the tax credit down the line if you buy the same policy directly from the company off the exchange. There has been some uncertainty about this, in part because all of the web site problems led the Obama administration to announce that it was working with insurance companies to enable people to sign up for exchange-qualified policies directly from the insurer — but I haven’t seen any rules or regulations formally implementing that. So I think your best bet is to sign up on the exchange — and definitely ask for more help or advice if for any reason you want to buy a policy directly from the insurance company instead. (And by “more help or advice” I don’t mean what an anonymous internet blogger tells you — I mean something you can get from a licensed insurance agent or insurance company representative.)

      • A big thank you for the prompt answer! I am done with the topic of health insurance for the day and will be following your blog in the future.

  4. Thank you for your research on this. I have a question that I have not been able to get a satisfactory answer to.Some one from the GOV site was going to get back to me in 3-5 days – 3 weeks ago. I started a small business 2 1/2 years ago. Because of significant startup costs I have had a negative income for 2 years. I will have a positive income in 2013 and an anticipate positive income for 2014 (not including the loss carryover). However with the loss carryover my adjusted gross income will be negative in both 2013 and 2013. With a negative income I am not eligible for a subsidy. Can the loss carryover be excluded. Thank you. Grace

    • Hi Grace,

      I don’t have an official answer for you and I am not sure if anyone has one for you.

      If you ignored the loss carryover and just looked at your anticipated income for 2014, would you qualify for a subsidy? One option for you might be to simply fill out the forms based on your current income without accounting for various writeoffs such as the loss carry forward. Look at the clawback provisions of 26 USC 36b to see where you fit in terms of a potential liability down the line — you will see that if your income is less than 200% of the federal poverty line, the maximum you can be charged back would be $300 for an individual tax payer. This is in subparagraph (2)(B) “Limitation on Increase.”

      However, I still don’t know whether you would be approved to receive the subsidy– I’m just suggesting that is one way you could try. I think you probably would be asked to provide further documentation of income. If so, you could then submit a P&L statement from your business and basically see whether they accept that. Basically the process for determining eligibility for the advance payment is a little different from the reconciliation when tax returns are filed the following year, given that no one has a crystal ball to see in the future. You might find it also helpful to look at 42 USC 18082.

  5. Thank you for your prompt response. Each bit of additional information is helpful. Yes, I would be eligible for a subsidy without the loss carryover. Thank you for the two references. Grace

    • I think you will be fine because as I review the paper form for, it asks you to provide your current income from your self-employment — so you can truthfully answer what you are now making and what you expect to bring in next year. The rules about carrying forward a loss give you some flexibility: you are not required by law to carry that forward at all. I do think that you should be working with a tax professional, who can advise you as to the best way to handle the issue both for your 2013 and 2014 returns. I am thinking that by the time you are ready to file the 2014 returns, the tax accountants will have a lot better understanding of the way these ACA tax credits work, and may be able to give you better advice as to the best approach at that time.

      Keep in mind that a business loss can be carried back 2-5 years (depending on circumstances), or carried forward for up to 20 years, but your own tax situation may limit how much you can carry over from one year to the next. See IRS PUblication 536 for more information. So one solution may be to amend tax returns for previous years, or to take a smaller amount each year as loss going forward. The amount of subsidy you could get might be a determining factor.

      I do think that in general, it is generally safer for a self-employed person to buy through the exchange but waive the subsidy and pay full cost and simply take whatever tax credit you are entitled to when you file your tax return down the line, rather than risk error and a large tax bill in 2015.

      • Hello,
        This is one of the few places I could find where the loss carry forward’s effect in calculating eligibility for the Premium credit is discussed. I have a Net Operating Loss which drives my AGI to negative. Has any guidance surfaced which excludes the carry forward? My understanding is that I can not elect a smaller amount of the NOL.

      • I’m sorry, but I can’t really give you any guidance about NOL — I think you need to talk with a tax professional about that.

        I can tell you that if you received an advance premium tax credit (subsidy) in 2014, you will NOT have to pay anything back with a negative AGI. You will be treated as if your income was exactly at 100% of FPL for 2014.

        However, I’m not sure how the negative AGI impacts tax credit eligibility for future years. You may be asked by your exchange to document income for the current year– or it could be that you are fine for 2015 but are asked for documentation when you re-enroll for 2016. The problem is simply that if your income is too low, then you might not qualify for approval for the advance credit.

  6. Thanks for your info. I did an article on this in September, relying on the information at I’m waiting to see what updates come out, and looking for the best guidance for tax clients. adds back IRA contributions, student loan interest but not self employ,net expenses. I’ll be on the lookout for more updates, though I wish gave a clear answer, even if it was this is the current definition, these parts may be subject to change. Advance credits worth thousands of dollars – no need for details I guess.

    • Anne, thank you for letting me know about the misinformation at — the information there is incorrect. Keep in mind that site is not an authoritative source, but is just a grassroots site created by individuals who wanted to share what they could learn. Much of the information on that site is very helpful, but it appears that where MAGI is concerned they made the mistake that many do — of simply looking for an IRS form to calculate “MAGI” for a different purpose, rather than finding and reading the law that applies to the ACA calculation. So basically, they are giving the “MAGI” for something else.

      As I’ve noted, I am troubled by the math that would allow a self-employed health insurance deduction to reduce MAGI for purposes of determining the tax credit. I know that when IRS is developing forms and worksheets, it will be looking at the same law that I have cited — and I will be interested to see how they resolve the problem. I do see a legislative “fix” as being very possible. We may not really know until 2015 when final tax forms are available.

      I had also looked for information at but culd not find anything there — that is why I went to the statute.

      • 7. What is household income?
        For purposes of the premium tax credit, your household income is your modified adjusted gross income plus that of every other individual in your family for whom you can properly claim a personal exemption deduction and who is required to file a federal income tax return. Modified adjusted gross income is the adjusted gross income on your federal income tax return plus any excluded foreign income, nontaxable Social Security benefits (including tier 1 railroad retirement benefits), and tax-exempt interest received or accrued during the taxable year. It does not include Supplemental Security Income (SSI).

        The ACA says nothing about adding back retirement contributions, SE tax or health insurance premiums. The reasoning is this puts self employed on equal basis as employed who don’t pay employer share of SS tax and whose taxable wages can be reduced by 401k or Sec125 deductions and may have full or partial health insurance coverage. The edge SE have over employed is where health insurance premiums are deducted (for AGI vs Itemized Ded) and more control over retirement contributions (amounts, when, investments, etc)

        MAGI for purposes of subsidy is critical for true affordablity of health insurance. Anything you can do to reduce your AGI increases your subsidy and can make other tax breaks possible such as Savers Tax Credit or more Schedule A medical expense deductions. An example for (single over 50): SE income $80K less $44K for I401k & IRA maximums, less SE tax $5.6K, less insur premiums $6K (if over 60 this is possible) reduces AGI to about $24K. Add any other income and subtract any other deductions on front of Form 1040 and essentially that’s your base for subsidy. At $15K-25K range you can also qualify for Enhanced Silver Benefits.

        Most SE probably don’t have the financial ability to put away huge retirement plan contributions. But now more than ever it can result in immediate savings so every dollar contributed could cost less in income taxes and more in subsidy.

        Without a tax calculator program it’s hard to understand how all the lines on your tax return interact. Raise one amount and another can disappear and sometimes it takes only one dollar to make big change. I created my own Excel worksheet to do these interactive calculations but you can use tax program such as TaxAct (free federal download) to do estimates (2013 is available now, so not exact but good basis for 2014 what ifs).

  7. I’m self-employed with income that can fluctuate dramatically — and my income is often close to the threshold between qualifying for medicaid (WHICH I DO NOT WANT) and buying insurance on the exchange. NPR used one of my questions in a report: (I’m question #2)

    2012’s income puts me on Medicaid; 2013, I made a little more (and I did buy a great plan with great subsidies on the exchange), but this is the first year I got a SEP IRA, which drops my AGI below the threshold. Since they will be using 2014’s income, do you think I will be limited in how much I can contribute to a SEP? You write about people lowering their income with deductions to get higher subsidies, but do you think they will let people lower it to the point of getting on Medicaid, if that’s what they wanted? Again, NOT what I want. I just wish I didn’t have to stress so much about keeping my MAGI above that threshold ($15,856 is number). I want to stay on the exchange.

    But, as you noted above, the IRS may make changes to the formula. Anyway, I really appreciate all the great info you have on your site. Thanks!

    • Barbara, I would recommend that you wait until 2015 before making your SEP IRA contribution for 2014. As you know, you can wait until April 15th each year to make retirement contributions for the previous year. There is actually no penalty if your AGI is lower than expected — that is, you won’t have to pay any money back. There’s a special rule that provides that if someone is approved for exchange coverage based on anticipated income, and their income falls below 100% of the FPL, they will be treated for tax purposes as if their income had been exactly 100% of FPL.

      So basically, for 2014, people are safe to project high end income if that is what helps them. But my concern about the SEP contribution is what might happen in future years. That is, the tax return you file in 2015 (for 2014) could end up impacting whether or not you are able to renew your health plan on the exchange in 2015 or 2016 — and of course rules and procedures might tighten up over time.

      However, a year from now when it is time to prepare your taxes, I think things will probably be more clear. IRS will have issued all of its rules about subsidy calculation, the forms and worksheets will be incorporated within regular tax preparation software, and you will be able to get more reliable advice from an accountant if you need it.

      Keep in mind that if you are self employed, you can generally have both a SEP IRA and an Roth IRA. However, there is no tax deduction for a Roth IRA – so a contribution for a Roth does not reduce your AGI. So if you are worried about saving for retirement but also want to keep that AGI up to qualifying level, the Roth IRA might be your best bet.

      I’d add one more note: it is not a crime to forego a tax writeoff that you are entitled to. And keep in mind that the math begins with your Schedule C. You don’t have to write off every single business expense if you have an interest in keeping your income above a certain level.

      • Thank you for the reply! Yes, I would figure how much to contribute to a SEP after I’ve tallied all my #s for the year. That’s what I did this year and got my federal tax down to zero (wish I would have known about this before — and especially the “Credit for Qualified Retirement Savings Contributions” — that’s what I get for doing my own taxes…)

        I’ll be interested to see if the IRS ends up deciding to add IRA deductions back to AGI to get MAGI for the health credit. It just seems to make the most sense to do it that way.

        One deduction that will be a lot less for 2014 will be my health insurance deduction, so that will boost my AGI/MAGI.

      • The IRS argue with that last statement. It is just as illegal to forgo business expenses to acquire a higher income as it is to fail to report income. However there are many legal options: choosing actual mileage versus standard, varying depreciation methods for newly acquired equipment.

      • Anne, can you cite any sort of authority for your claim? I’ve only been audited once in 40 years of self employment, but the IRS agent didn’t seem at all interested in helping me find more things to deduct. I work from home so I am eligible to take a home office deduction — but I certainly don’t think that I am required to do so. I use my personal car for business-related travel, so I can deduct a portion of vehicle expenses or mileage — but I don’t think I am required to do so. I work by using a computer, so I can buy a new computer and treat that as a business expense…. but I don’t think I’m required to do so.

        We pay self-employment tax as well as regular income tax, so if we forego some deductions and report a higher income, we will pay more in taxes. In most cases that is incentive enough to try to maximize our deductions.

        I understand that there are some special circumstances related to expenditures that require accounting — for example, if I hire independent contractors to help me in my business, I am required to prepare and file 1099’s. But I really am not aware of any law or regulation that says that taking a deduction from one’s income is in any way mandatory.

        The tax code refers to deductions “allowed” — not deductions “mandated.”

        I think you might be thinking of situations where the IRS treats a deduction as taken whether or not it actually was claimed — for example, a homeowner who takes a home office deduction is allowed to include depreciation on the home as part of their annual business deduction — the homeowner can also waive that deduction on their tax form, but if they later sell their home, the depreciation amount attributable to their home office will be taken to reduce their cost basis, whether or not the claimed it on their tax forms.

        Similarly, post-retirement withdrawals from a standard or SEP IRA will be taxed as ordinary income, whether or not the taxpayer actually took a deduction from income the year that the funds were deposited. But again, IRS isn’t requiring the deduction to be taken.

      • Sorry for the delay on posting IRS concerns about reporting all expenses. This has come up in the past primarily regarding self employment income and Earned Income Credit. This is the IRS quote:

        the client is actually conducting a business,
        the client has records to support income and expenses, or can reasonably reconstruct income and expenses records, and
        the client has included all income and related expenses on Schedule C, Profit or Loss from Business (Sole Proprietorship).

        This is the link to the tax preparers due diligence page regarding EITC and self employment:

        I don’t know what the IRS guidance will be regarding self employment and minimizing expenses to gain health insurance.

      • On the contrary, a self-employed individual is required to report all income and deduct all expenses. Revenue Ruling 56-407, 1956-2 C.B. 564, deals with the issue of taxpayers not taking all allowable deductions in computing net earnings from self-employment for self-employment tax purposes. Rev. Rul. 56-407 held that under §1402(a), every taxpayer (with the exception of certain farm operators) must claim all allowable deductions in computing net earnings from self-employment for self-employment tax purposes. They do not have the option of reporting what is most beneficial.

  8. I’m very interested in the topic you are addressing here. MAGI for self employed persons and the Solo 401k and/or Traditional IRA take on new meaning in regards to healthcare starting in 2014. Do you have any new information on this topic? Thanks

    • No new info, really — but here are some pages from the IRS web site that show revision dates of 3/5/14 — so clearly up to date:

      • (See question #7 for definition of household income)

      I do get a sense of how it will all work on your tax return from these pages: “When you file your 2014 tax return in 2015, you will subtract the total advance payments you received during the year from the amount of the premium tax credit calculated on your tax return.

      So I am thinking that you will fill out your tax return as usual, and then there will probably be a form to calculate the amount of tax credit you are entitled to — and an extra line on the back of the 1040 for you to account for the advance tax credit you received in 2014 (if any). I am guessing that we will all receive some sort of informational return in January that shows the total premium charged and the total advance credit received.

      • Either the Kaiser Foundation is wrong or one can drastically reduce their MAGI and be eligible for massive ACA subsidies or even free Medicaid (depending on their home state). Theoretically, one can report net income perhaps beyond $60,000 in 2014 and still be eligible for Medicaid due to MAGI below approx $16,000. This assumes 401k and/or IRA contributions are indeed allowed to offset such income. However, Section 36b of the IRS code does not mention any way to reduce MAGI. It only addresses “add backs” which increase MAGI relative to AGI. I’m so confused.

        In any case, those facing the Obamacare fine, ironically starting on April 1st (April Fools’ Day) can accurately get their penalty amount using:

        You may be surprised at the size of your ACA fine. People are hearing $95 but it could be a few thousands dollars if you are a high earner. Know what you are facing and input your expected MAGI and filing status on that website.

      • Thanks for that link, James.

        As to your comment:

        However, Section 36b of the IRS code does not mention any way to reduce MAGI. It only addresses “add backs” which increase MAGI relative to AGI. I’m so confused.

        AGI is very clearly defined in the tax code — working from the 2013 1040, it’s the amount that is entered on line 39 after subtracting all the entries on lines 23-35. The line numbering in 2014 will be different and some of the income-reducing adjustments may no longer be available, such as the tuition and fees deduction — see CNN: 8 Disappearing Tax Breaks. But IRA contributions will still be deductible.

        Somewhere along the line Congress may revisit this and make some changes, but right now the law is pretty clear.

  9. Freelancer, since the tax credit is refundable, whether or not you qualify for a subsidy should not be a factor in deciding whether to get a bronze or silver poloicy. Pick your policy based on the highest out-of-pocket amount you can afford to absorb in any given year. That will be the most cost-effective (assuming you’re in good health), and any unused subsidy can be banked to pay that deductible in the event it becomes necessary. Also remember you can now change policies every year, so you’re not locked into anything if your financial situation changes.

    • But there is no tax credit to be “banked” for individuals whose income is above 400% of the FPL. For those of us who are healthy and have low end medical expenses, that can be thousands of dollars extra in premium dollars every year for medical services we never used.

      The maximum out-of-pocket on any policy is no more than $6350. In my state, the only policy with a lower maximum out of pocket is Platinum — but at full cost I would pay well above the difference in premium dollars.

      • You may have missed my point. The amount of subsidy, or whether you receive it or not, should not be a factor in your choice of policies (as you suggested in your article). You either get the subsidy or you don’t… it is not affected by which policy you choose. You should always buy the least amount of insurance you need, not the most you can afford. The amount of subsidy should not affect that choice.

      • Now I really don’t understand what you mean. First you wrote: “Pick your policy based on the highest out-of-pocket amount you can afford to absorb in any given year” Now you write, “You should always buy the least amount of insurance you need, not the most you can afford.” Those are two different and possibly conflicting statements.

  10. Ah yes, I see how that was confusing. My reference to “highest out-of-pocket amount” meant the out-of-pocket maximum of the policy… what you might have to absorb in a medical worst-case scenario. Of course, you want to minimize premium, which is what you have to pay even if you never see a doctor. As you pointed out, it costs a lot in premium to reduce the out-of-pocket maximum, which is not a good value unless you already have a medical condition. But since most Americans are used to comparatively generous employer-provided policies, I expect they will be tempted to use their subsidies to buy silver or gold plans in order to get the same benefits. My comment was meant to remind people that the subsidy is your money; you can spend it all on insurance or you can get a cheaper policy and bank the difference. When I do the math in my state, I’m finding bronze plans to be the best values across the board.

    Your analysis of the law brought up an interesting exception, however. For some self-employed who are near the edge of the ACA “cliff” (that threshold of qualifying for a subsidy), it appears that buying the more expensive policy might actually save them a lot of money!

    • OK, I see what you are doing now — but you are failing to take into account the difference between co-insurance and copay plans, and the impact of cost-sharing reductions.

      There is no rule of thumb that applies uniformly. Most of my posts looking at MAGI have been geared to moderately high income earners whose incomes may put them above subsidy range. These are the individuals who by definition have enough income to afford to pay for occasional routine medical visits, but who may benefit from planning to maximize income adjustments. I think many of us will benefit from purchasing HSA eligible plans and fully funding the HSA accounts, because of the impact of the HSA deduction on AGI. However, there may also be situations in which self-employed people will benefit by purchasing a plan with a higher monthly premium because of the impact of the self-employed health insurance deduction on their AGI. That is, for some, the added expense of +$1200 a year in premium dollars might be what puts them in range to qualify for +$4800 in tax credit dollars at the end of the year.

      However, for lower income individuals — those who qualify for subsidies in any case — the equation becomes very different. The deductibles take on a greater significance. Anyone who qualifies for cost sharing reductions is almost always better off with a Silver plan — because those are the only plans that qualify for the CSR’s. I think the only exceptions to that would be very young people who feel they need only catastrophic coverage, and whose premiums for Bronze level plans are at or near 0 with subsidies. Keep in mind that those whose incomes are low enough to qualify for the CSR’s probably have very little economic flexibility — they don’t have the money on hand to pay $150 to see a doctor — but perhaps with the CSR plan their copay will be $7.

      Individuals at any level with moderate, regular out-patient medical expenses or who rely on expensive prescription drugs probably will be better off with Silver and Gold plans because of the impact of the co-pays and prescription drug benefits. Imagine someone who typically sees the doctor once a month and gets regular lab work, resulting in medical billings of about $3500 a year, and who takes prescription drugs that would cost $600 a month at full cost, or $7200 a year. A high deductible, co-insurance plan would mean no benefits kick in until the deductible is reached. But a lower deductible, copay plan would mean that the savings from the copays and prescription drug benefits are realized from the start — so, for example, let’s say that person is buys a plan with $40 copay for outpatient visits, and $30 copay for their prescription drugs. That person is going to realize a $570 savings with the fist prescription filled in January — and perhaps within the first 3 months of the years the savings on their plan have outweighed any difference in premiums.

      I think that most people with chronic, regular health care costs would be well aware of these needs, and so can plan accordingly. For them, the math requires totaling up the number of expected doctor visits and prescription refills, and doing the math to see how the different premium and copay levels fit in.

      • Yes, as I said at the outset, my rule of thumb applies to healthy people without medical conditions. Those with medical conditions will have to do the math for their specific needs. For healthy people I have not found any advantage in co-pay and/or coinsurance benefits. They increase premiums but appear to benefit only those with specific needs, as in your examples. But you’re right, there is an exception if you qualify for CSRs.

  11. Thanks for this info. I studied Kaiser and relied on the Berkeley pdf for MAGI definition and singed up in Nov. Then I changed my app in Feb., the insurance company fixed my problem, but still I am now am told I am eligible for extra time to apply. I’m 58 with a spouse and with the HSA, SE tax, and SE health ins. premium deductions, come in just under the 4X poverty level. So it’s a beautiful thing! Also, my premium itself, for the identical policy as what I had as a small group with my wife, is about 20% less on the Exchange.

    My daughter who is 25 lives out-of-state and files her own return. She’ll earn somewhere between $14,500 and 16,000 this year. At first Colorado gave her a great subsidy plus the extra $2500 bonus credit. Then they called her last month and pulled it, presumably because the income she specified on the Exchange application was a bit less than $15,800. To make it trickier, she will be eligible (for the first time) later this year for health insurance at her seasonal employer, but the rest of the year (about 6 months), she would have no access to insurance.

    Initially she had a great policy with $500 max out-of-pocket for about $50 a month. I think now she’s being forced into Medicaid. I could have added her onto my Exchange application for what looks like about $150 a month ($6000 out-of-pocket.)

    So the questions:
    a) would the Exchange website, or a paper app, have allowed me to add her onto my app anyway? And maybe by later this year that becomes a different answer.
    b) Should she just have filed a new CO app and say she would earn $16000 for 2014?
    c) Generally, since the law is what it is as of now, and MAGI for me is advantageous, if the IRS in it’s infinite wisdom or even Congress changed this later this year, would that not be ex post facto for me? And in the era of lawlessness, would it matter?

    Thanks, this is excellent!!

  12. Just read thru all the info I could find on the internet to see how MAGI was going to be calculated by the IRS for a final ACA subsidy or tax refund. I now see why I was confused about Social Security inclusions and all of the other deductions. This isn’t really done until 2015! Congress can still make changes and the IRS will then have to publish forms based on their interpretation of the law. The best a single self-employed person can do is to make sure you have enough income (AGI) to stay well above the $15,900 minimum (California, other states vary) for an ACA plan, then use your optional deductions to bring the final MAGI number down to as low as you can go to get the maximum subsidy or tax refund. This may seem like it requires you to pay several hundred dollars more in income tax, but the net result can be many thousands of dollars as a tax refund or ongoing ACA subsidy. Even my dog could game this system. Who is going to pay for all of this? Because of the influx of hundreds of thousands of people into the Medi-Aid system, anyone that can afford a subsidized ACA plan should get it.

    • George, you are correct that the determination of MAGI will be made when taxpayers submit their returns for 2014 income in 2015 – and in theory Congress could still make changes. I don’t see it happening this year with our dysfunctional Congress, however — certainly not in an election year.

  13. Ok need some help. My husband evade self employed 1/2 way through this year. Taxes will be crazy. We have the silver plan for us as a couple and kids have child health plus. We are healthy adults – I need to see dr. 2x a year -also go to gynecologist 1x a year- take thyroid medicine and husband goes for visit 1x a year. The free well visits do Not include lab work until deductible is met – which is 250.00 a person. Which plan so u recommend we take in 2015 – bronze or silver? Budget is pretty tight

  14. The choices depend on what you estimate your 2015 income to be. Open enrollment for 2015 is from November 15, 2014 through February 15, 2015 — so you might want to wait until you have a better sense of your husband’s total 2014 income before deciding (assuming you meant to say that he is currently self-employed).

  15. Great discussion and thanks for your input freelancer. I noticed that another thing that really lowers adjusted gross income on my 1040 is line 17, rental real estate income. When you have interest payments on your rentals and depreciation is taken, line 17 can be a significant loss. I found that this loss added to line 27 (deductible part of self employment tax and line 32 (IRA deduction) is a significant deduction.

  16. I have almost the same question- will a self-employed 401K contribution be allowed for MAGI purposes? Is there a tax form out for this MAGI calculation yet? November 23 2014

    • A self-employed retirement contribution will reduce your MAGI to the same extent as it can be applied to reduce AGI.

      Nothing has changed — your MAGI for the insurance premium tax credit calculation is the same as your AGI, with only three potential add-backs based on untaxed income – either untaxed interest, untaxed social security benefits, or untaxed foreign income.

      And yes, there is a tax form for the calculation — I have written two posts explaining how it works:

  17. Thanks so much for the detailed analysis of the MAGI. I was scouring the net trying to find out how to calculate my MAGI for ACA purposes and was totally confused. This made it much clearer. Agree that as it stands now…contributions to IRA’s and HSA’s will have a big effect on subsidy eligiblity.

    One question I really haven’t seen addressed. For the premium credit, if your estimate of income was incorrect (i am self employed), the credit will be “corrected” when you file your tax return for the year. But what about the out-of-pocket subsidies that take effect below 250% FPL (I think). If a person’s estimate of income is significantly different than their actual income for the year, will this subsidy be “corrected” in the tax return or will they just we ignored?

    • Richard, those extra subsidies for lower income individuals and families, which reduce the amount of co-pays and deductibles, do not have to be paid back if your earnings end up too high.

      • Thanks. Thats is what I was guessing based on what I have been able to find. Thats puts me (and those in similar situations) in a difficult position. I don’t want to benefit when it is not deserved, but my income can vary drastically from year to year and to make an estimate of my 2015 earnings, when I haven’t even filed my 2014 taxes and don’t have a final 2014 income yet is, to put it mildly, a little difficult.

        I also haven’t been able to determine if I update my income during the year, will the “extra” subsidies be adjusted accordingly? Not sure it would matter anyway because a mid year adjustment to my income would still be just a guess.

        Thanks again for the very helpful blog.

      • Richard, if you update income mid-year in a way that impacts your eligibility, then your plan would in fact be adjusted accordingly. I understand your frustration with “estimating” — I just re-enrolled for 2015 by taking the figures from my 2013 tax return. When I had tried to use an estimate closer to what I thought would be my reality for 2015 the figures didn’t validate — I would have had to submit more paperwork in a few months to “document” income when I wouldn’t really know any more than I do now. So I just went back and used the numbers that match my tax return (allowing for automatic online verification) and moved on.

        However, I am in a different situation than you, as there is no possibility that I would qualify for the extra reduction in copay and deductible – in fact, I have a high-deductible HSA plan which wouldn’t ever qualify for those benefits in any case. In my case, I don’t see how I ever will be eligible for subsidies without the full benefit of all possible tax deductions, including the HSA deduction.

        Also, I don’t have chronic health problems — outside of the annual checkup (which is fully paid under ACA) — it is rare for me to see a doctor more than a couple of times a year. So whatever benefit I could get from a reduced co-pay is far outweighed by the premium differential between Bronze & Silver.

        I think that we self-employed really have to look at this as a cash-flow issue that is part of our overall cost of doing business. We have to make all sorts of financial decisions based on uncertain expectations — for example, whether to sign a lease for our workplace premises, invest in new equipment, or hire help.

        I also think that unless you are planning to retire soon, it’s better to try to make plans premised on the expectation of making more (rather than less) money in the coming year. We all are better off in the long run if we can increase our income, and so I think it’s better to have a positive mindset. Otherwise, it becomes something of a self-fulfilling prophesy: if we plan around a worst-case-scenario, that might impact our motivation, productivity, and the attitude we project to our potential clients.

        If ACA was not in place, I’d still have to pay for insurance, and I’ll bet my rates would have gone up even higher than they are now. I have decided to forego any subsidy for next year and pay my insurance premiums using a cash-back credit card (which pays more than the interest I could earn if I deposited the same amount of money in the bank). I know that if I were to suffer a major set back I will always be able to submit the new financial information — so that removes one source of stress from my life. That is, I don’t have to worry that I’ll get sick and then lose my insurance when I need it the most because of the impact of my illness on my earning capacity.

  18. Freelancer: I cannot begin to thank you for your articles & insights & research. Have so many of same issues as described (Self employed, etc., etc.) Even my CPA-who is excellent- says we are in a new world order & he’s struggling to advise clients like me. PLEASE keep up your great work !

  19. In computing my MAGI for purposes of ACA Tax Credit Reconciliation, are “Qualified” Dividends added to my Modified Adjust Gross income? My research tells me NO. Is this correct? Thanks.

    • Steve, those dividends don’t need to be added back in because they are already counted as part of your income. They are not taxed, but they are included within the number reported on 9a of the 1040 — so no need to add them back in.

  20. -Help Please-
    Hi Freelancer,
    Your blog entry above has been a real eye opener and is the best discussion of MAGI determination (for purposes of eligibility for the ACA tax credit) that I have been able to find on the web. The problem in my case is that my CPA’s understanding of proper MAGI calculation, I think, differs from yours (which sends my wife and I rocketing up through the 400% ceiling).

    Would you kindly help me with a brief fact-referenced reality check to share with my CPA as to exactly why she might actually want to consider recalculating my ACA-related MAGI for 2014, after you read-consider the matters I describe just below.

    A bit of background: I was retired during the entire year ( TY 2014), neither my wife nor I received any SS benefits. She is younger than me and I only became Medicare eligible last summer while she only worked (very) part time without any fringe benefits (but my pension income put us near the ACA 400% limit). I was on marketplace purchased insurance through April of 2014 and she was covered by marketplace insurance for the entire year. Neither of us were self-employed.

    Specifically, I remain confused because my CPA firmly advises that additional MAGI add-ins, beyond the three you listed above must be added back into the MAGI amount. [“Nothing has changed — your MAGI for the insurance premium tax credit calculation is the same as your AGI, with only three potential add-backs based on untaxed income – either untaxed interest, untaxed social security benefits, or untaxed foreign income.”].

    For example, in determining my MAGI for 2014, my CPA believes it’s necessary to add back into MAGI my $ 2,001 Traditional IRA contribution for TY 2014.

    In summary, as a complete tax tyro, I am asking you (knowing what you know) to place yourself in my shoes and tell me what you would share with her in order to consider this different perspective about calculating the ACA-related MAGI. This is important to me because her present calculation puts my 2014 MAGI over the IRS ACA tax credit eligibility line and it will apparently cost me four figures in a tax credit that we actually be eligible to receive. I feel reluctant to just share a print out of your lengthy blog entry with her since it’s relatively long, CPA time is very expensive, and since I may not even be correctly understanding your blog as it pertains to our particular situation.
    Thank You,
    P.S. MMM’s comment above really resonates with my experience because of comments my CPA made last week and because of your good efforts to clarify what seem like very, very muddy waters [“Even my CPA-who is excellent- says we are in a new world order & he’s struggling to advise clients like me. PLEASE keep up your great work !”].

    • Steve,

      I don’t know what I can advise you beyond printing out this article to show your CPA…..or working with a different CPA. (Or maybe asking your CPA to cite you the regulation that says you have to add back the IRA contribution?) I mean, unless there is a particular tax issue that has nothing to do with the ACA provisions, it sounds like your CPA hasn’t really kept up with the law. I know that is possible because on thing that prompted me to start this blog in the first place was reading misinformation on other blogs (run by CPA’s) — and also realizing that a local CPA I consulted with wasn’t understanding the new law.

    • Publication 974 and Form 8962 are authoritative IRS sources that define Modified AGI. See page 2 & 4 of the instructions for Form 8962 for the simple definition and worksheet 1.1 to go from AGI to MAGI. There is no add back of IRA or other retirement plan deductions. Most tax preparers use software to do tax returns so the program should follow the regulations, not what your CPA says.

      What may be confusing is there are many calculations of MAGI for used different purposes. Pub 974 mentions IRAs but only for self-employed and only for purposes of determining any limitation of deductibility based on SE income, not PTC which is later step.

  21. Dear Freelancer, do you know if it makes a difference or causes a problem when the federal exchange tries to verify income for my spouse and I if … I am the primary applicant, with my husband listed as spouse, but our joint tax returns have always been filed with my husband listed first and me listed as spouse?

    • I don’t know, but I don’t see any reason for it to cause a problem if both of your social security numbers are on the tax return.

      • Thanks for your quick reply. I thought it shouldn’t make a difference, but I needed a second opinion. Due to some health issues my husband stopped working in 2011, but never worked for a company that provided a pension or retirement plan. He had a 401k that we rolled into an IRA, but have never taken any distributions. I was down-sized from IBM back in 1993 and began taking my retirement in 2009. Last year I retired on 7/1 and began taking my retirement from the NC Retirement System. Retiring meant losing health insurance for myself and my husband so on 5/2/14 I applied online at and under a special qualifying event we both became eligible for coverage and based on our projected 2014 income also qualified for a premium subsidy and a cost-sharing subsidy, but we were required to send in supporting documentation because we had an income inconsistency. I thought it was because of the “name order” question I asked you about, but I now believe it was because retiring made my 2014 projected income about $9,000 less than our 2012 tax return (because in 2013 I increased my 401k pre-tax deductions) and about $5,000 less than my 2013 tax return (because my paycheck stopped when I retired in July and because I only received retirement checks from the NC State Retirement System for 6 months (July-Dec). This year during 2015 enrollment I projected our income to be about $4,000 less than our 2013 tax return and about $1,200 less than our 2014 income. This has caused another income inconsistency and we’re being asked for supporting documentation. I sent a letter explaining that we would have no wages due to me retiring last year, and that those wages would be replaced with taxable IRA distributions or capital gains income. I sent a copy of our 2012 and 2013 tax returns, a copy of the letter from the NC State Retirement System stating what my monthly amount was and that payments would begin on 7/1/14 and be for life, a copy of my 2014 1099-R from IBM because it will be the same every year, copies of my 1099-INT and 1099-DIV and said they would be the same, but I had nothing to send showing distributions from either of our Traditional IRA accounts or capital gains from our brokerage accounts because these were projections that had yet to occur. We received a letter dated 4/28/15 saying they received our documents, but that they need additional documents. But when we call the Marketplace, we are being told (by 3 different customer reps) that our names have messages next to them in our account that says “your documents have successfully been processed and no further action is needed.” They told us they believe we received the letter requesting more documents in error and that we don’t need to send anything else, but we are afraid they may be wrong. If the customer service reps are wrong then best case scenario, the income verification department is able to pull our IRS data, despite the “name order” situation I asked you about and reduce our subsidies based on 2013 or 2014 data. Worse case scenario they can’t pull our IRS data, will not use the data from copies of our 2013 or 2014 tax returns I uploaded yesterday and they totally eliminate our subsidies.
        When we used TurboTax to do our 2014 taxes and inputted our 1095-A data, we were only over our eligible tax subsidy by $18. That is how accurate our 2014 MAGI projection was.
        My question now is … If they eliminate our subsidy, let’s say effective 7/1/15, our 1095-A will only show we received subsidies for 6 months, but if our MAGI is exactly where I had projected it would be, or within a thousand up or down, will the tax forms compute the fact that we should have continued to receive our subsidies for the entire year and those eliminated subsidies will show as refundable on our tax return? Or, do we need to file an appeal when they eliminate them in order to het them back? We are very concerned because the customer service reps told us if we lost our subsidies to call them back and they would redo our application and get them back, but couldn’t promise we would end up with a month gap where we would end up having to pay the entire up subsidized premium.

  22. I have received over 20 correspondences from No resolution. We have a NOL of -281,000 for 2014 tax purposes on our 1040 making our Total income (line 22) -195,833 and our Adjusted income -214,816 (line 37) So we fill out Form 8962 for our Premium Tax Credit but putting -0- on line 3 which is what they require for a negative MAGI makes us 0% on line five (poverty line percentage) which when multiplied by the Applicable Figure in line 7 comes out to -0- for line 8 meaning we are not eligible for any kind of subsidy because we are “too poor to get a subsidy” – BUT they say we have income over 400% of the poverty line so we aren’t eligible because we make too much… We received Advanced Payment of the PTC which they calculated for 2015 but how do you make the forms jive?
    Do I have to claim all the NOL when calculating the Prem. Tax Credit? If so I will have to pay all the Advanced Payment back. My accountant has not found the answer yet. Where do we look?

    • I think you need to reread the instructions for form 8962 line 7. If you income is less than 133% of fpl the applicable figure for line 7 would be .0201 not 0. Because you estimated you income to be greater that 133% of fpl when you signed up for 2015 you are still eligible for a PTC for 2015. Now for 2016 you will need to show that you anticipate your income to be greater than 133% to maintain your eligibility for 2016.

      • Yes. But when you multiply line 7 by line 3 to get line 8a you get 0. Line 3 says if line 2a is negative enter zero. Am I wrong there?

      • Sorry, my reply above was partially incorrect. Let me add the following.

        Yes, in your calculation, 8962 Line 8a would be zero. (.0201 x $0 ). This would result in Line 11c to be $0. However this would result in your PTC (line 11e) to be the maximum based on your actual premiums and SLCSP premiums.

        So even with $0 income in 2015 you should be able to correctly complete the 8962 to reconcile the PTC you received with what you are eligible for.

        As I mentioned in my previous post, the problem becomes proving to the exchange that you have a reasonable expectation of income > 133% for 2016.

        I am not sure what you mean by your statement that “they say we have income >400%”.

      • If I don’t use any of my NOL our income is above the 400% of poverty. I would like to use some of my NOL to offset enough of the income to qualify for a subsidy.

  23. I will start out by saying I am not a tax professional so any advice I give here is for entertainment purposes only. 🙂

    As to your NOL, even showing the full NOL, with a resulting 8962 Line 3 equal to zero (as you mentioned in your earlier post), you would be eligible for the maximum PTC which is equal to the lesser of your actual premiums or the SLCSP premiums. The 8962 Line 11 calculations with 11c equal to $0 should show this.

    Also, I do not THINK you are permitted to not show all of the NOL on your return, nor do I think you would want to.

    As I said earlier, the problem becomes providing evidence of your expectations for the 2016, but this is really a separate issue from reconciling the 2015 PTC.

    Also, after rereading your original post you mention NOL from 2014. I was assuming you meant 2015. If you did not than the discussion we just had has to be rebooted. 🙂

    • It is 2015. Typing on phone. Sorry. They are calling about 2016. 2015 taxes not finished. That’s what I am trying to work out
      If I have to repay 2015 then I am sure I won’t get a credit for 2016.

  24. It can be a bit confusing, but it is important to keep your thinking about 2015 and 2016 separate.

    For 2015> If you received advanced premium tax credit during the year then you need to file form 8962 with your 2015 tax return to reconcile the advanced PTC with what you should have received. As I outlined above, with a NOL for 2015, resulting in a 8962 Line 3 of $0, you should be able to complete the 8962 Line 11 calculations which should show the PTC you are entitled to. You should not have to repay any advanced PTC for 2015 and in fact would most likely receive an additional PTC amount.

    For 2016> things will be much different. This is because the amount of any advanced premium tax credit for your 2016 premiums is based on your 2015 income. Because your income was less than 133% of fpl for 2015, the exchange is going to say you are not eligible to purchase insurance on the exchange and would qualify for Medicaid. This is where things get tricky. If you would like to keep your exchange insurance and not apply for Medicaid it will be necessary for you to convince the exchange that you expect your income in 2016 to be > 133%. I have no experience with this so I cannot give you any advice as to what you need to do.

    Your situation for 2016 has been discussed a bit elsewhere on this blog and if I can find it, I will post a link to it.

  25. Florida did not expand Medicaid and is asset based so I don’t qualify and you couldn’t find a doctor that accepts it even if I did qualify. It appears I will fall into the working poor who don’t quàlify for any subsidy. Can I keep the policy I got this year and pay the whole premium or will they drop me because I don’t qualify. It’s not a good policy but there is very little available here. I’m afraid to call them and ask just in case.

    • Can I keep the policy I got this year and pay the whole premium

      YES. That is exactly what will happen if you don’t qualify for the subsidy in 2016 –you will simply be billed for full premium amount.

      If you stay on the exchange, paying the full premium, and if you have carryforward from the 2015 NOL — or if your 2016 income falls short of expectations for other reasons – it’s possible that you could qualify for a premium tax credit when you file your 2016 return in 2017.

  26. I would recommend you contact one of the free ACA help centers. I think they would be able to help you by laying out all your options. They should have experienced people to help answer your questions.

    If you go to the web site, click on “Contact Us” in the middle of the page and then click on “Find local help” toward the right side of the page. I think this help is available at no cost.

    Best of luck.

  27. Thanks for all your responses. I spent several hours on the phone with a rep. We went thru everything and she said I was not eligible for any tax credit because the net operating loss makes us fall below the poverty line and if I leave it off there is a $250,000 fine for falsifying my income intentionally. I guess I fell between the cracks. By the time we use up our carry forward I will already be on Medicare. I never thought I would look forward to that…

  28. For the NOL and MAGI, I have a client who is below the 100% poverty line and does not qualify for the premium tax credit.

    I have searched and searched but cannot find any details on the NOL and MAGI for PTC.

    After all that, I think the answer is under Line 6 on the Form 8962. Even if your household income is under 100%, you can still qualify for the PTC if you meet 4 simple requirements. (Listed on Page 7 of the Form 8962 Instructions.)

    The requirements are pretty easy to meet.

    Has anyone else gone this route when dealing with NOL clearing out their MAGI and not being eligible for PTC?

    • If your client received an Advance Premium Tax Credit, then the NOL won’t wipe out eligibility for the previous tax year:

      You have correctly identified the portion of the instructions that covers it; the key is this requirement:

      The Marketplace estimated at the time of enrollment that your
      household income would be at least 100% but not more than
      400% of the Federal poverty line for your family size for 2016

      The reason is that the entire program rests on taxpayers being able to predict income for the coming year, and things change. Some people end up making less than expected, and some people end up making more. It would not make economic sense to penalize a poor person for being too poor — so if the person with the below-100% level income is treated as if their income was exactly 100% of the FPL.

  29. So, my situation is that I’m self employed and my MAGI is such that I when I deduct my SE health insurance payments and run the PTC calculations I’m eligible for a sizable credit (about 11k), however, when I make that reduction to my SE health insurance deduction and rerun the PTC calculations, I flip over the 400% line and am eligible for none, and back and forth. The million dollar question is: is it possible to take only part of the PTC, both as a credit and as a reduction of my SE health insurance deduction?

    Basically, if I was to take about $5k of the credit, it would reduce my SE health insurance deduction such that I’d be right below the 400% poverty line, which would be ideal. I would expect, if this was possible, to only take 5k credit PTC on page 2 of my 1040.

    With a cliff as high as it’s becoming, more and more people are going to be stuck in this “flip/flopping” situation with no way to get to a “middle” point.

    • You need to follow the reconciliation process as decribed in IRS publication 974. (Starting at page 52 in the 2016 instructions). That will give you the calculation needed to figure out how much can be taken as SE health insurance deduction, and how much you should be taken as a tax credit. The math will flip/flop as you go through the recursive process, but from what you describe you wil be eligible for some amount of premium tax credit, though perhaps less than what you opted to take in advance premium credits.

      • Sorry for my delay in responding.

        Yes, I’ve attempted the reconciliation process you mentioned, but it never approaches a value (unless I’m missing something or doing something wrong). What happens when I use the iterative method is something like this (we’re a family of 4):

        Income: 108000
        SE Health Insurance deduction: 17000 (without any ATPC- I didn’t have any)
        AGI: 92000

        Entering AGI into iterative calculation, puts me at 379% of poverty line= eligible for subsidy, so I continue the calculations which gives a subsidy of approx. 12000 dollars when taking into consideration the cost of the 2nd least expensive silver plan in my area.

        So, when I go back and reduce my SE Health Insurance deduction by 12000, my deduction becomes 5000. When that happens, it makes my AGI 103000 (108000-5000) which is over 400% of the poverty line which means I’m eligible for 0 subsidy, which puts me back where I started, and then I flip-flop back and forth.

        The same thing happens when I start the iterative process by setting my AGI at the 400% FPL = 97200. My subsidy is about 11,000 (basically the minimum possible unless I’m missing something). When I go back and reduce my SE HI deduction by that amount, my AGI is 102000– over 400% of the poverty line resulting in 0 subsidy, flip-flopping begins.

        However, if it was possible for me to only claim 5000-6000 of the subsidy I’d be eligible for, my SE HI deduction would be $11-12000, making my AGI 96-97000 which would still put me in the under 400% FPL “bucket”.

        Am I missing something?


  30. Have you tried running the calculation using a tax software program (such as TurboTax)?

    The figures you have given aren’t enough for me to do a sample calculation, because I don’t know the benchmark number for the second lowest cost Silver premium — but basically I see that the problem is that your AGI before the SE health deduction is $10,800 over the cutoff for subsidies.

    If I assume that the benchmark Silver plan would be $21,000 (extrapolating from your report that you would get a $12,000 subsidy with a $92,000 income) — then that would mean that if you had income of exactly 400% of FPL you’d qualify for a subsidy of about $11,600 — and subtracted from actual premiums of $17,000 that leaves only a maximum possible SE deduction of $5400 — which is not enough to qualify for the subsidy.

    So I think in your case the income is just too high to qualify for the subsidy, and I think you just take the full SE writedown of your income. That does give you some tax benefit — at that income level you would have a 25% marginal rate, so the deduction does reduce overall taxes by $4250.

    IRS does have a sort of loophole written into the Publication 974 instructions:

    “If you are unable to complete Step 6 because changes between steps are always $1.00 or more, do not use the Iterative Calculation Method. Instead, use the Simplified Calculation Method or any computation method that satisfies the rules for the self-employed health insurance deduction and PTC as long as the sum of the deduction claimed for the premiums and the PTC computed, taking the deduction into account, is less than or equal to the premiums.”


    So under that rationale you could try what you suggested — (” if it was possible for me to only claim 5000-6000 of the subsidy I’d be eligible for, my SE HI deduction would be $11-12000, making my AGI 96-97000 which would still put me in the under 400% FPL “bucket”.)– and basically see whether or not IRS allowed it. If not, you’ll get a letter from IRS demanding whatever amount they decide you owe… but at least you have an argument based on that “any computation method that satifies the rules” language.

    • Yes, you figured correctly. The benchmark silver plan is about $21000. I did see the verbiage “or any computation method that satisfies the rules for the self-employed health insurance deduction and PTC as long as the sum of the deduction claimed for the premiums and the PTC computed, taking the deduction into account, is less than or equal to the premiums.” that you mentioned, but aren’t sure exactly how to interpret it. Do you know if there’s been any IRS guidance about this? I haven’t been able to find any.

      With itemized deductions and exemptions, we actually end up in the 15% tax bracket so it is a significant difference in taking the full SE HI deduction and being able to take a PTC. (“Losing” 15% of $5000 ($750) by having to pay it in taxes, vs getting a credit of $5000.) I guess it boils down to whether the PTC is a required PTC or maximum PTC. I most often see it referred to as eligible PTC, which seems like it could be interpreted as maximum, but I’ll have to do some more research.


  31. Karen, are you asking these questions related to the tax return you will file for 2017? If so, have you maximized all deductions you can take — for example, do you have a SEP retirement plan you can contribute to? Is there a possibility of reducing income by investing more into your business at the end of the year? I think we self-employed people actually have a lot of flexiblity when it come to managing our cash flow. Because that might be the easiest approach.

    Beyond that, I’d suggest getting advice from a tax professional…. not what some random anonymous person tells you online. 🙂 (yes, I am that random anonymous person, and I do my best … but bottom line, I won’t be there to help you if you do something that triggers an IRS audit. )

    • Yes, I’ve done everything I can think of to maximize our deductions. It’s even slightly more complicated because we’re >2% shareholders in an S-Corp.

      And, I completely understand about being cautious about relying on a completely random anonymous person on the internet. 😀 But I didn’t know if you or someone who reads your blog would have had actual IRS experience or run into this issue personally. Don’t worry, even if you had said it was legit, I would have wanted references. 🙂

      Thanks again!

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