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Income and Tax Credits: Sorting it All Out

By Lisa Zamosky

couple making calculations

What counts as income under the Affordable Care Act?

The question continues to be one of interest and concern for readers. And for good reason; it’s your household income – your modified adjusted gross income (MAGI), to be specific – that determines whether you’ll be eligible for a tax credit that lowers the cost of your health insurance, or qualify for Medicaid starting in 2014.

I spoke with Sam Richardson, instructor of public affairs at the University of Texas at Austin to help respond to readers’ questions about what will be counted as income and how it all connects with the tax credits available under the law.

Is there a simple and quick way to determine modified AGI (Adjusted Gross Income)?

For starters, you should know that for most taxpayers, MAGI – what the government will use to determine your eligibility for health insurance tax credits — will be the same as AGI.

Here’s where you can easily find the AGI, depending upon the tax form you use:

  • Form 1040 EZ – Line 4
  • Form 1040A – Line 22
  • Form 1040 – Line 38

What about investment income, such as dividends from mutual funds, stocks, etc.? Does that count toward my total household income?

Investment income is fully included in MAGI, Richardson says. However, it’s only the income that is generated by your investments or assets, not the assets themselves that count; your investment portfolio, for example, is not considered part of your MAGI.

Do you count Social Security when calculating your modified AGI?

This is an issue a number of readers have asked about, with one saying she’s so far gotten mixed messages about whether Social Security benefits will count at all toward income. As a starting point, it should be said that there are both taxable and non-taxable Social Security benefits. “The history is what makes this confusing,” Richardson says. “Under the normal definition of MAGI, non-taxable Social Security benefits are not counted.”

However, under the Affordable Care Act all Social Security income – taxable and non-taxable – will be fully counted as income and will be used to determine whether you qualify for financial help from the government.

Will I need to estimate our Social Security and pension for next year or just what we receive together in 2013?

“The answer is a qualified and complicated “yes”,” Richardson says. “Generally, eligibility for Medicaid is determined based on current monthly income, whereas subsidies on the exchanges are based on the most recent tax return information (i.e. 2012 taxes, filed April 2013),” Richardson says.

What that means is if you end up earning more money than you expected in 2014 and accept a tax credit to lower your insurance premiums that is based on the wrong income (especially if you under estimate your earnings), you may be required to pay at least a portion of the tax credit money back to the government.

 

What questions do you have about the health reform law and how you and your family will be affects? Please share your questions/comments below.

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