insurance

Who Qualifies for a 2014 Health Insurance Subsidy

The key to a tax credit is your “modified adjusted gross income.”

You’ve said that in order to qualify for a subsidy to help pay for my health insurance next year, my “modified adjusted gross income” must be between 100% and 400% of the federal poverty level. How do I calculate my MAGI? Is there anything I can do to stay under the income limits?

That’s a good question because the definition of “modified adjusted gross income” can vary depending on the tax break. For purposes of the subsidy to pay for health insurance on the exchanges in 2014, MAGI is your adjusted gross income (the bottom line of the first page of your Form 1040) plus certain deductions and exclusions you add back -- such as foreign income that was excluded from your taxable income, tax-exempt interest and nontaxable Social Security benefits. This MAGI is slightly different than it is for other benefits, such as the calculation to see if you’re eligible to make Roth IRA contributions.

To qualify for a health insurance subsidy, your MAGI must be between 100% and 400% of the federal poverty level (400% of the federal poverty level in 2013 is about $46,000 for an individual and $94,000 for a family of four). See How to Qualify for a Government Health Insurance Subsidy for details. The subsidies are on a sliding scale; the largest ones are for people earning 100% of the federal poverty level, and they gradually decrease as income reaches 400% of the federal poverty level.

Making pretax or tax-deductible contributions to a 401(k), 403(b) or 457 plan, a flexible-spending account or health savings account, a simplified employee pension or a traditional IRA can all lower your modified adjusted gross income. Selling losing stocks or boosting business expenses to offset self-employment income can lower it, too.

Be careful with moves that could boost that figure and make it more difficult to qualify for the subsidy -- such as converting a traditional IRA to a Roth. Wendy Roy, senior manager of the employee financial services practice for Ernst & Young, recommends running your numbers through the Kaiser Family Foundation’s subsidy calculator to see how much of a difference qualifying for the subsidy can make in your health-care costs.

Also keep in mind that the subsidy is an advance tax credit -- the money will be applied to your premiums immediately when you buy coverage on the exchanges, based on the income you’ve reported. The figures will be adjusted when you file your 2014 taxes the following spring. If you ended up earning more than you originally reported, you may have to pay back some of the credit.

The application for a subsidy asks you to report what you anticipate your income will be for the year, says Roy. “Be as accurate as possible because you won’t want to qualify for a tax credit in advance, then have to pay a very large tax bill.” For more information about buying health insurance on the exchanges, see Health Insurance Exchanges Gear Up for Action.

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