The Affordable Care Act (ACA) offers premium tax credits to help eligible individuals and families purchase individual health insurance coverage through the Health Insurance Marketplace.
With the changes made through the American Rescue Plan, no American will ever pay more than 8.5% of their household income for health coverage. If your premium is more than 8.5% of your household income, then you’ll qualify for a premium tax credit to help cover the rest.
The “household income” figure here isn’t just what your household makes in a year—it’s based on your “modified adjusted gross income” (MAGI). So how do you figure out what your MAGI actually is? In this article, we’ll go over what MAGI means and how you can calculate yours.
What is modified adjusted gross income?
In short, your MAGI is simply your adjusted gross income with any tax-exempt interest income and certain deductions added back in. The IRS uses your MAGI in a lot of ways to determine if you’re eligible for certain deductions and credits.
Your MAGI determines whether or not you can:
- Contribute to a Roth IRA
- Deduct your traditional IRA contributions if you or your spouse have an employer-sponsored retirement plan
- Qualify for a premium tax credit*
*If your employer offers an HRA, there are special rules in place to coordinate your premium tax credit with your HRA allowance compliantly.
Premium tax credits work with the qualified small employer HRA (QSEHRA), but you must report your QSEHRA allowance amount to avoid tax penalties.
Premium tax credits don’t work with an individual coverage HRA (ICHRA). If your employer offers you an ICHRA allowance that allows you to purchase a plan that meets affordability criteria on the ACA marketplace or your state exchange, you lose your premium tax credits—even if you opt out of the ICHRA.
How do I calculate my modified adjusted gross income?
Calculating your MAGI is an important step in determining if you qualify for a premium tax credit and other deductions.
Here's a quick overview of how to calculate your modified adjusted gross income:
- Step 1: Calculate your gross income
- Step 2: Calculate your adjusted gross income
- Step 3: Calculate your modified adjusted gross income
Let’s go over each step in more detail.
Step 1: Calculate your gross income
Your gross income (GI) is the simplest form of income. It includes all the money you earned without any tax deductions figured in.
Your GI can come from a lot of places, including income you earned through:
- Rental and royalty income
- Capital gains
- Business income
- Farm income
- Alimony received
Rather than doing the math yourself, you can find your GI on line 7b of IRS form 1040. Your GI will serve as the basis for your adjusted gross income (AGI) calculation, which we’ll cover in the next section.
Step 2: Calculate your adjusted gross income
Once you have gross income, you "adjust" it to calculate your AGI by subtracting qualified deductions from your gross income.
Adjustments can include items like:
- Some contributions to IRAs
- Moving expenses
- Alimony paid
- Self-employment taxes
- Student loan interest
Again, you’re welcome to whip out your calculator and make these subtractions yourself, but you can also find your AGI on line 8b of IRS form 1040.
Step 3. Calculate your modified adjusted gross income
Now that you’ve figured out your AGI, you’re finally ready to calculate your modified adjusted gross income. The IRS phases out credits (including premium tax credits) and deductions as your income increases. So by adding these factors back to your AGI, the IRS determines how much you really earned, giving you your MAGI.
According to Internal Revenue Code ((d)(2)(B)), you should add the following to your AGI to determine your MAGI:
- Any amount excluded from gross income in section 911
- Examples include untaxed foreign income, non-taxable Social Security Benefits, tax-exempt interest, and housing costs for qualified individuals
- Any amount of interest received or accrued by the taxpayer during the taxable year which is exempt from tax
- Any 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. This includes any amount received by the taxpayer by reason of entitlement to a monthly benefit under title II of the Social Security Act, or a tier 1 railroad retirement benefit.
If this looks confusing, the good news is that most people don’t have any of the income described above, so it’s likely your MAGI is the same as your AGI.
Once you know your MAGI, you can shop the ACA marketplace or your state exchange for your own individual health insurance plan. These sites will simply ask for your MAGI and household size, then calculate any tax credits you may qualify for. By following the steps in this article, you’ll have everything you need to know about your income and how it influences your health insurance premiums.
This article was originally published on September 22, 2020. It was last updated September 20, 2021.