Small Business Employee Benefits and HR Blog
The Affordable Care Act (ACA) introduced premium tax credits to give you and your family a discount to buy individual health insurance coverage through the Health Insurance Marketplace. If you are eligible, these tax credits can reduce your family’s health insurance cost to no higher than 9.5 percent or as low as 2 percent of your household income . Before you can calculate the amount of your premium tax credit, you must first calculate your modified adjusted gross income (MAGI).
Note: Keep in mind that premium tax credits can work with reimbursement plans like the Small Business HRA, but that you must report your HRA allowance amount to avoid tax penalties.
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. Eligibility for the premium tax credits is based upon whether your income is no more than 400 percent of the federal poverty line (FPL)—modified adjusted gross income, not adjusted gross income (AGI). Here's a quick overview of how to calculate your modified adjusted gross income.
Generally, your adjusted gross income is your household's income minus various adjustments. Adjusted gross income is calculated before the itemized or standard deductions, exemptions, and credits are taken into account.
What Is Modified Adjusted Gross Income?
Generally, your modified adjusted gross income (MAGI) is the total of your household's adjusted gross income plus any tax-exempt interest income you may have (these are the amounts on lines 37 and 8b of IRS from 1040).
How to Calculate Your Gross Income
Your gross income (GI) is the money you earned through wages, interests, dividends, rental and royalty income, capital gains, business income, farm income, unemployment, and alimony. This is the basis for your AGI calculation.
Gross income includes salary, interest earned, income from investments, and basically any income you made through business, trade, or investments.
How to Calculate Your Adjusted Gross Income
Once you have gross income, you "adjust" it to calculate your AGI. You make adjustments 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.
How to Calculate Your Modified Adjusted Gross Income
Once you have adjusted gross income, you "modify" it to calculate your MAGI. For most people, MAGI is the same as AGI.
Specifically, Internal Revenue Code ((d)(2)(B)) states that MAGI is AGI increased by:
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.)
The IRS phases out credits (including premium tax credits) and deductions as your income increases. By adding MAGI factors back to your AGI, the IRS determines how much you really earned.
Based on that, it determines whether you can take full advantage of premium tax credits. If you are eligible for a tax credit, an online premium tax credit calculator will help you estimate your actual tax credit.
Editor's Note: This post was originally published in August 2014.
Do you have any questions about premium tax credits? Please leave a comment below.