What counts as income for MAGI?

A key service agents provide to ACA health insurance eligible clients is assisting them to determine their Modified Adjusted Gross Income, MAGI. This unfortunately puts agents in the role of being income and tax experts. One of the biggest questions agents get is what qualifies as household income for the purpose of receiving the Advance Premium Tax Credits.

What income is included in MAGI?

What was lost on the authors of the Affordable Care Act is that individuals can have numerous types of income from hourly wages to annuity income. In general, if it is not “taxable income” it’s not part of the MAGI. The two big exceptions are Social Security benefits and tax-exempt interest. The other gray areas are workers compensation and disability insurance payments. These sources of income are usually not taxed unless they are in lieu of unemployment benefits.

The Affordable Care Act defines household income as –

Modified adjusted gross income means adjusted gross income (within the meaning of section 62) increased by

(i) Amounts excluded from gross income under section 911;

(ii) Tax-exempt interest the taxpayer receives or accrues during the taxable year; and

(iii) Social security benefits (within the meaning of section 86(d)) not included in gross income under section 86.

I believe section 911 refers to Foreign Earned Income Exclusion.

In an era when filing out our tax returns is so complicated most of us just turn over the paper work to a tax preparer, it can be a challenge for an average family or insurance agent to know what income streams should be included on the ACA application for health insurance.

IRS Publication 525

Below is short list of some of the various types of income the IRS recognizes. Some of the income is not taxable and therefore should not be included in the MAGI and is notated with a NO in the Taxable/MAGI column. Some types of income are marked as both YES and NO indicating that there may be circumstances where only a portion of the income should be included in the MAGI. For more clarification on the income type you can download IRS Publication 525 that describes the different types of taxable income and conditions that make it taxable.

For example, the benefits from an individuals disability insurance plan are not taxable. However, if the plan is provided by the employer at no cost to the employee, the IRS says the benefits are taxable. If the employee makes a contribution toward the premium amount for the disability plan then part of the monthly benefits are not taxable.

Sickness and Injury Benefits

In most cases, you must report as income any amount you receive for personal injury or sickness through an accident or health plan that is paid for by your employer. If both you and your employer pay for the plan, only the amount you receive that is due to your employer’s payments is reported as income. However, certain payments may not be taxable to you. For information on nontaxable payments, see Military and Government Disability Pensions and Other Sickness and Injury Benefits, later in this discussion.

Workers’ Compensation

Amounts you receive as workers’ compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers’ compensation act or a statute in the nature of a workers’ compensation act. The exemption also applies to your survivors. The exemption, however, does not apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury.

The income table was prepared with additional guidance from the UC Berkeley Labor Center flyer on MAGI. While I have tried to prepare the most accurate reference table possible, there may be errors. You should always confer with a certified tax prepare, CPA and the state or federal health exchange to verify whether the income and circumstances require it to be included in the MAGI calculation.