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ACA need to know: What's 'modified adjusted gross income?'

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If you qualify for a healthcare subsidy on the Affordable Care Act's new marketplace, one factor on which the subsidy will be based is your "modified adjusted gross income." What is that and why should you care?

Most individual tax payers know "gross income" as the sum of all of their income from various sources, such as wages and interest on savings accounts. "Adjusted gross income (AGI)" reduces that sum by subtracting the allowable deductions listed on your 1040 tax form:

Adjusted Gross Income 
23 Educator expenses
24 Certain business expenses of reservists, performing artists, and
fee-basis government officials.
25 Health savings account deduction.
26 Moving expenses.
27 Deductible part of self-employment tax.
28 Self-employed SEP, SIMPLE, and qualified plans
29 Self-employed health insurance deduction
30 Penalty on early withdrawal of savings
31 a Alimony paid b Recipient’s SSN
32 IRA deduction
33 Student loan interest deduction
34 Tuition and fees.
35 Domestic production activities deduction.

When applying for a health insurance tax credit, you may be told that "modified adjusted gross income" is basically the same thing. It's not.

Keeping in mind that the “M” stands for “modified,” if you took certain deductions to report your AGI, you may need to add them back to report your MAGI, such as: 

  • Deductions for IRA contributions.

  • Deductions for student loan interest or tuition.

  • Excluded foreign income.

  • Interest from EE(employee) savings bonds used to pay higher education expenses.

  • Employer-paid adoption expenses.

In other words, the adjusted gross income you report for income tax purposes isn't necessarily the same as the modified adjusted gross income you would report for the purpose of the healthcare tax credit. 

The reason to get it right when applying for a healthcare tax credit is that you'll have to pay some of it back at tax time if you under-reported your income, 

Comments

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Kay

O.k. so what is the "modified adjusted gross income" comprised of?

Patricia Borns

:) You had to ask.
MAGI still allows you to deduct the expenses of carrying on a trade or business,health savings account deductions, work-related moving expenses, half of self-employment, and other standard deductions you take for your AGI. Just watch for the MAGI's special exceptions.

Patricia Borns

Thanks, 16, much apreciated.

Shawn Harrington, EA

I have never seen five paragraphs with this much incorrect information. First, personal exemptions and itemized deductions have nothing to do with Adjusted Gross Income. They are deducted to arrive at Taxable Income, an entirely different number. Second, the third paragraph is just plain wrong. This article should be removed.

Patricia Borns

Shawn, thanks for your clarification about the business expenses that reduce taxable income apart from AGI. We've changed the post soas not to confuse the two. The IRS and other tax experts confirm that AGI and MAGI aren't the same thing.

Freelancer

MAGI for the affordable care act is defined in 26 USC 36B as follows:

The term “modified adjusted gross income” means adjusted gross income increased by—
(i) any amount excluded from gross income under section 911,
(ii) any amount of interest received or accrued by the taxpayer during the taxable year which is exempt from tax, and
(iii) an 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.

Under the law as currently written, there are no add-backs to AGI other than than untaxed interest, the untaxed portion of social security benefits, and income subject to the foreign earned income exclusion.

(Note: the law is subject to change. A person with above-median income who is uncertain of 2014 MAGI can sign up for the exchange, opt to defer taking any subsidies, and instead take any potential benefit as a tax credit in 2015. If you miscalculate and accept a subsidy that is larger than you are entitled to, you will have to pay back some or all of that with your tax return, depending on your actual income level)

More info here: http://obamacareguide.wordpress.com/2013/10/21/evolution-of-magi/

Patricia Borns

Good to have it verbatim. Thanks, Freelance.

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