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. In 2021, these tax credits require lower income households to pay between 2.07-9.83% of their household income for the second lowest cost silver plan available in their region. The tax credits will cover the rest. The “household income” figure here is your modified adjusted gross income (MAGI).
Your MAGI is a measure used by the IRS to determine if you are eligible to use certain deductions, credits (including premium tax credits), or retirement plans. The percentage of income you must pay for individual health insurance depends on how close you are to the federal poverty line (FPL) based on modified adjusted gross income, not adjusted gross income (AGI). People whose modified gross income is less than 400% of the FPL are eligible for a premium tax credit Here's a quick overview of how to calculate your modified adjusted gross income.
Note: Premium tax credits work with the qualified small employer health reimbursement arrangement (QSEHRA), but you must report your HRA allowance amount to avoid tax penalties. They do not 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.
Step 1. Calculating your gross income
Your gross income (GI) is the money you earned through wages/salary, interests, dividends, rental and royalty income, capital gains, business income, farm income, unemployment, and alimony received. This is the basis for your AGI calculation. This figure is located on line 7b of IRS form 1040.
Step 2. Calculating 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, and student loan interest. There are many free AGI calculators available online, like this one from CNN Money. This figure is located on line 8b of IRS form 1040.
Step 3. Calculate Your Modified Adjusted Gross Income
The IRS phases out credits (including premium tax credits) and deductions as your income increases. By adding these factors back to your AGI, the IRS determines how much you really earned.
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 (Foreign earned income 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. (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.)
Most people don’t have any of the income just described so their MAGI is the same as their AGI.
Once you know your MAGI, you can shop the ACA marketplace or your state exchange for plans. These sites will ask for your MAGI and household size, then calculate tax credits for you. There are also online premium tax credit calculators, like this one from the Kaiser Family Foundation that can help you estimate your tax credit ahead of time. Massachusetts, Vermont, and California also have additional state-funded subsidies for qualified families.
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