Updated August 2024
Determining financial eligibility for key healthcare programs like the premium tax credit, most Medicaid categories, and the Children’s Health Insurance Program (CHIP) hinges on a specific income calculation known as Modified Adjusted Gross Income (MAGI). This guide breaks down what types of income are included in MAGI, providing clarity for individuals navigating the Affordable Care Act (ACA) and related health coverage options.
Keep in mind that many income guidelines and thresholds are updated annually. For the most current figures, please consult the Yearly Income Guidelines and Thresholds Reference Guide.
Decoding MAGI: The Income Standard for ACA and Medicaid
For the premium tax credit offered through the ACA Marketplace, the majority of Medicaid eligibility categories, and CHIP, income assessment is uniformly conducted using MAGI. Both federal ACA marketplaces and state Medicaid and CHIP agencies adhere to this standard. It’s important to note that traditional income calculation methods still apply for Medicaid eligibility based on age, disability, or for children in foster care.
MAGI is calculated starting with your Adjusted Gross Income (AGI) and adding back certain items. These additions include tax-exempt interest, Social Security benefits that were not included in your gross income, and any excluded foreign income. Each of these components has a precise definition under tax law and can generally be found on your tax return (refer to Figure 1). Furthermore, it’s worth noting that Medicaid has specific exclusions for certain income sources for Native Americans and Alaska Natives within MAGI calculations.
Adjusted Gross Income (AGI) Explained
Adjusted Gross Income (AGI) is a crucial figure in your tax calculation. It’s derived by subtracting specific deductions from your gross income. Gross income encompasses all income from any source that is not legally exempt from taxation. The deductions subtracted to arrive at AGI are known as “above-the-line” deductions or “adjustments to income.” Common examples of these deductions include contributions to traditional Individual Retirement Accounts (IRAs), Health Savings Accounts (HSAs), and student loan interest payments. It’s important to be aware that many of these income adjustments have limitations or phase-outs based on income levels. For a detailed explanation of income adjustments, refer to IRS Publication 17.
Understanding What Types of Income Count Towards MAGI
Generally, all income is considered taxable unless specifically exempted by law. Income isn’t limited to just cash wages; it can encompass money, property, or services received.
Table 1 provides a comprehensive list of examples of both taxable and non-taxable income to clarify what counts towards MAGI. For an in-depth discussion of various income types and their taxability, consult IRS Publication 525.
Alt text: Table listing examples of taxable income such as wages, salaries, business income, and non-taxable income including child support, gifts, and welfare payments for Affordable Care Act income calculations.
Pre-Tax Deductions and MAGI: What’s Included?
Income that’s deducted from your paycheck on a pre-tax basis, such as health insurance premiums, retirement plan contributions, or flexible spending account contributions, is not included in MAGI. These pre-tax deductions are subtracted from your wages by your employer before taxes are calculated. Since this portion of your income isn’t subject to income tax, it is not counted towards your MAGI. The wage figure reported in Box 1 of your Form W-2 already reflects these pre-tax deductions, meaning they are neither reported as income nor as deductions on your tax return.
Non-Taxed Income Sources Included in MAGI
Yes, MAGI does include certain income sources that are either non-taxable or only partially taxable. These additions are crucial for determining eligibility for premium tax credits and Medicaid. Specifically, these include:
- Tax-Exempt Interest: Interest earned from specific investments, such as many state and municipal bonds, and exempt-interest dividends from mutual funds, is exempt from federal income tax but is included in MAGI.
- Non-Taxable Social Security Benefits: For many individuals, especially those with limited income from other sources, Social Security benefits may not be taxed. However, if you have other income sources, a portion of your Social Security benefits might be taxable. Regardless of taxability, the total amount of Social Security benefits, as reported on Form SSA-1099 (Social Security Benefit Statement), is included in MAGI.
- Foreign Income Exclusion: Under Section 911 of the Internal Revenue Code, U.S. citizens and resident aliens living abroad may exclude some earned income for tax purposes if they meet specific residency or physical presence requirements. Any foreign income excluded under this provision must be added back when calculating MAGI.
Determining Household Income for MAGI
Household income for MAGI purposes is calculated by summing the MAGI of the tax filer, their spouse (if applicable), and the MAGI of any tax dependents who are legally required to file a tax return. It’s important to note that a dependent’s income is only included if they have a tax filing obligation. If a dependent files a tax return for reasons other than a legal requirement (e.g., to receive a tax refund), their income is not included in the household MAGI.
When is a Dependent’s Income Included in Household Income?
A dependent’s MAGI is incorporated into household income only if they are required to file a tax return. For the 2024 tax year, a dependent generally must file a tax return if they have earned income of at least $14,600, unearned income of at least $1,300, or a combination of earned and unearned income exceeding the greater of $1,300 or earned income (up to $14,150) plus $450. Unearned income typically refers to investment income. It’s important to note that Supplemental Security Income (SSI) and Social Security benefits are not considered when determining if a dependent has a tax filing requirement. However, if a dependent does have a filing requirement, their Social Security benefits will be counted towards the household’s MAGI.
Conversely, if a dependent is not required to file taxes but files voluntarily—for instance, to get a refund of taxes withheld from their paycheck—their income is not included in household income for MAGI calculations.
Timeframe for Income Assessment: Projecting Income for ACA and Medicaid
Financial eligibility for the premium tax credit and Medicaid is evaluated based on income within a defined “budget period.” For the premium tax credit, the budget period is the entire calendar year in which the advance premium tax credit is received. When applying for advance premium tax credits, applicants must project their household income for the entire calendar year.
Medicaid eligibility, in contrast, is typically assessed based on current monthly income. However, recognizing income fluctuations throughout the year, states are required to consider yearly income if an individual would not qualify based solely on monthly income. For example, a seasonal worker who appears above the income limit based on their income during employment months might fall below the limit when their entire year’s income (including unemployment periods) is considered. In such cases, the Medicaid agency must use the yearly income to determine eligibility. This provision prevents situations where individuals are ineligible for both ACA marketplace subsidies due to projected yearly income and ineligible for Medicaid due to high monthly income during certain periods.
Furthermore, Medicaid treats certain lump-sum income differently than the ACA marketplace. Lump-sum income may only be considered for the month it is received.
MAGI vs. Previous Medicaid Income Rules: Key Differences
The MAGI methodology represents a significant departure from prior Medicaid income calculation rules. Certain income sources that were previously counted under traditional Medicaid rules are now excluded under MAGI. These exclusions include child support received, veterans’ benefits, workers’ compensation, gifts and inheritances, and payments from Temporary Assistance for Needy Families (TANF) and SSI. Table 2 summarizes the key distinctions between the former Medicaid rules and the current MAGI rules.
Alt text: Table comparing income sources counted under former Medicaid rules versus MAGI Medicaid rules, highlighting differences in self-employment income, salary deferrals, child support, and veterans benefits for Affordable Care Act eligibility.
Additionally, states are no longer permitted to impose asset or resource limits under MAGI-based Medicaid. Various income disregards that existed under the old rules have been replaced by a standard income disregard equal to 5% of the poverty line. Finally, there are also differences in household composition and whose income is counted towards eligibility.
Understanding MAGI is essential for accurately determining eligibility for affordable healthcare coverage under the Affordable Care Act, Medicaid, and CHIP. By carefully considering the income sources included and excluded in MAGI, individuals can confidently navigate the application process and access the healthcare assistance they need.
Disclaimer: This information is for educational purposes and does not constitute legal or financial advice. Consult with a qualified professional for personalized guidance.
