Deductions: "Modifying" Your Adjusted Gross Income Can Save You Money

The Gift Of "MAGI": What Is That?

Adjusted Gross Income is your annual income, as defined by the IRS. If you file taxes using the 1040, you will find it on Line 37. [It is line 4 on the 1040EZ and line 21 on a 1040A.]

For purposes of applying for health care--both Marketplace and Medicaid--and for assessing whether or not health coverage is affordable--the federal government uses "Modified" Adjusted Gross Income, fondly referred to by those of us in "the biz" as MAGI.

*Do you know the story of The Gift of the MAGI?   Pronunciation /ˈmeɪˌdʒaɪ/.

What Gets Modified In Order To Get To A Modified Adjusted Gross Income? Add Backs AND Deductions 

Income includes everything on the list below. More common items are in bold.

  • Wages, Salaries, tips, etc.
  • Taxable interest
  • Taxable amount of pension, annuity, or IRA distributions and social Security benefits
  • Business income, farm income capital gain, other gains (or loss)
  • Unemployment compensation
  • Ordinary dividends
  • Alimony received
  • Rental real estate, royalties, partnerships, S corporations, trusts, etc.
  • Taxable refunds, credits, or offsets of state and local income taxes
  • Other income

This list is from the UC Berkeley Labor Center MAGI handout.

Add Backs

There are a few things you need to "add back" as income--the most common of those is non-taxable social security benefits. Other possible add backs include tax-exempt interest and foreign earned income for Americans living abroad.

Deductions

If you do a Marketplace or Medicaid application, after you are asked about your income, you are asked if you have any deductions such as alimony or student loan interest. The actual list of potential deductions is quite a bit longer, and might make a difference for you. 

Here is the list. More common items are in bold.

  • Educator expenses
  • Certain business expenses of reservists, performing artists, and fee-basis government officials.
  • Health savings account deduction
  • Moving expenses
  • Deductible part of self-employment tax
  • Self-employed SEP, SIMPLE, and qualified plans
  • Self-employed health insurance deduction
  • Penalty on early withdrawal of savings
  • Alimony paid
  • IRA deduction
  • Student loan interest deduction
  • Tuition and fees
  • Domestic production activities deduction

What This Means

On the Marketplace, cost-sharing goes up to 250% of the poverty level (or $60,750 for a family of 4) and tax credit subsidies go up to 400% of the poverty level (or $97,200 for a family of 4). In some cases, putting money in an IRA, paying tuition, or setting up a health savings account can make your MODIFIED Adjusted Gross Income lower, and you could qualify for more benefits. [Note: Not all Marketplace plans allow the use of health savings accounts, but some of them do.]

Of course, we're not tax experts--so you might want to check with yours!

Resources:

UC Berkeley Labor Center MAGI handout

Advocate's Guide to MAGI from the National Health Law Program. 

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