If you’ve explored Healthcare.gov, you’ll notice one of the first things you’re asked is your estimated income for the following year. Specifically, you’ll be asked for your MAGI. Your estimated income plays a huge role in your eligibility for premium tax credits. These tax credits can save you thousands of dollars. Unfortunately, estimating inaccurately can have detrimental effects. If you overestimate, you may make yourself ineligible for those premium tax credits. If you underestimate, you may have to pay those tax credit back when you file. But how do you estimate your MAGI?
First you must understand the difference between your AGI and your MAGI. Your AGI is very important for tax purposes. It’s basically your gross income minus deductions. Gross income includes:
- Capital Gains
- Business Income
- Retirement Distributions
- Additional Sources of income
Once you’ve identified your gross income, you make your deductions. You are able to either itemize your deductions or take the standard deduction. Once you’ve subtracted these deductions, you are left with your AGI. This is where you have a little wiggle room. If you are planning on enrolling on insurance through the marketplace, you may want to work with an accountant. They can help you ensure your AGI falls within the proper bracket within the marketplace. Yes, you may have to pay to work with an accountant! But, paying $100 or $200 (more or less dependent upon the complexity of your taxes) can save you thousands of dollars on health insurance.
MAGI Income Ranges
On Healthcare.gov, your income will fall into one of four ranges. Your MAGI income range will affect your eligibility for tax credits. These can be applied to your monthly premiums.
- Medicaid- If you fall into the first range, you may be prompted to look into Medicaid.
- Premium Tax Credit Plus Extra Savings- The second income range will offer you a tax credit plus extra savings for silver plans.
- Premium Tax Credit- If you fall into the third income range, you will be offered a premium tax credit.
- No Premium Tax Credit- If your income is above a certain level, you won’t be offered a savings with a premium tax credit.
These tax credits will give you a savings of several hundred per month or more dependent upon your household size. So, as far as affordability, eligibility for a premium tax credit makes a huge difference.
Lowering Your AGI (and MAGI)
First and foremost you’re going to want to lower your AGI. An accountant may be able to walk you through alternative deductions or offer different suggestions (such as contributing to a retirement account like an IRA). Contributing a few thousand dollars to a retirement account may lower your AGI to the point of eligibility for a tax credit. Rather than spending those thousands of dollars on health insurance, you’ll simply be saving the money for your retirement.
You may also be able to lower your AGI by picking the right health insurance plan. If you pick a plan with a Health Savings Account (HSA), you can contribute towards that HSA and lower your AGI. In 2021, an individual can contribute a max of $3,600 to a Health Savings Account and a family can contribute a max of $7,200.
A HSA is your money in a special account. The account is interest bearing and that interest is tax free. As long as you use the money within your account for qualified medical expenses, it is tax free. The money rolls over from year to year and if you hold on to the account until you are 65, you can convert it to a basic retirement account and use it for whatever you want.
Unlike a retirement account, you can actually use your HSA now! You just have to use your HSA for qualified medical expenses.
- Going to the doctor? Pay for your copay from your HSA
- Need medicine? Pay for it from your HSA
- Physical Therapy, Chiropractics, Dental Work, Surgery, etc…
BUT, they’re not for everyone. HSAs are a great financial option, but they are only available with high deductible health plans. Your deductible is the amount that you have to pay out of pocket before your insurance kicks in.
So, why is this a bad thing? Honestly, it may not be. If you are a relatively healthy person, perhaps with no small children, then a HDHP may be a great option. ACA plans ensure that there are “Essential Benefits” that are covered. Some of these benefits and services are cost free even before you meet your deductible.
BUT if you are a person with, perhaps, more extensive medical needs or perhaps a family with young children (lots of doctor’s appointments) a HDHP may not be for you. If you have to take advantage of a litany of medical services, you may have to pay a large amount out of pocket before you meet your deductible with a HDHP.
What is MAGI?
AGI may be a more common term, but Healthcare.gov is going to ask for your MAGI. Honestly, for most people, the number is the same! Your MAGI is your AGI with a few items added back in.
- Tax Exempt Foreign Income
- Tax Exempt Social Security Benefits
- Tax Exempt Tier 1 Railroad Retirement Benefits
- Tax Exempt Interest
If your information should change at anytime, it is very important that you update Healthcare.gov. You can do so online, in person or via phone but NOT via mail. Changes in income, household size or residency may your eligibility for a premium tax credit may change.
If you have any questions, please feel free to contact us at iHealthBrokers at 888-918-0518 or schedule an appointment today.