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:

• 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)

Figuring your household income (Part One)

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: