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:
- 26 USC 24 (Child Tax Credit)
- 26 USC 25A (Hope and Lifetime Learning Credits)
- 26 USC 36 (First Time Homebuyer Credit)
- 26 USC 36A (Making Work Pay Credit)
- 26 USC 86 (Taxable portion of Social Security Benefits)
- 26 USC 135 (Interest from US Savings Bonds used to pay higher education expenses)
- 26 USC 219 (Retirement Savings)
- 26 USC 221 (Interest on Education Loans)
- 26 USC 408A (Roth IRAs)
- 26 USC 469 (Passive Activity Loss Limitation)
- 26 USC 1395r (Setting Medicare Premium Rates)
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 incomeThe 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
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]
‘(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]
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.