How might my tax deductions affect the size of my ACA premium subsidy?

How might my tax deductions affect the size of my ACA premium subsidy?

Your best bet is to talk with a licensed certified public accountant (CPA) who specializes in tax preparation. If you find a CPA who is trained on the ins and outs of tax preparation, that person might be able to help you spot places where you might be missing out on deductions and tax breaks that would lower your income for ACA purposes, which could result in larger premium subsidies.

That said, there are some basics to keep in mind. These will be especially important for 2026 coverage if the federal subsidy enhancements are allowed to expire at the end of 2025. If that happens, after-subsidy premiums will increase significantly, and people with household income above 400% of the federal poverty level will lose their subsidies altogether, as the “subsidy cliff”would return.

The debate over whether to let the federal subsidy enhancements expire is the crux of the government shutdown that’s been ongoing since October 1.¹ Open enrollment for individual market coverage is underway nationwide, and this issue is still unresolved. So the prices that people are seeing in their Marketplace accounts reflect the expiration of the subsidy enhancements, as it would take an act of Congress to extend them.

The expiration of these federal subsidy enhancements is why people are experiencing sticker shock when they look at their Marketplace account and see their 2026 premiums.² We don’t yet know what Congress will do, but people need to prepare for the fact that lawmakers might do nothing, and let the subsidy enhancements expire. That would lock in the net premiums that people are seeing in their Marketplace accounts in early November.The return of the subsidy cliff for those with income above 400% of FPL will be particularly challenging for older enrollees, and for those in areas where health insurance is more expensive than average.

(To clarify “older”and “younger” it’s important to keep in mind that health insurance premiums adjust upward as people get older, under a 3:1 ratio set by the ACA.³ In most states,⁴ a person 64 or older will be paying exactly three times as much as a person who is 21, before subsidies are applied. And a person in their early 50s will be paying twice as much as a 21-year-old, before subsidies are applied. The age rating variations follow a curve rather than a straight line, so age-related premium growth gets sharper as people get older.⁵)

The open enrollment period for ACA-compliant individual/family health insurance (on-exchange or off-exchange) runs from November 1 to January 15 in most states (some state-run exchanges have different deadlines, and open enrollment will become shorter starting in the fall of 2026, due to a new federal rule that was finalized in 2025). The enrollment window applies both on-exchange and off-exchange, but premium subsidies are only available if you buy your coverage through the exchange. So, if you’re subsidy-eligible (most exchange enrollees are, and that was the case even in the years before the subsidy enhancements took effect)⁶ (and most exchange enrollees are, or think you might be subsidy-eligible, you’ll want to make sure you sign up for coverage through the exchange during the open enrollment period.

ACA premium subsidies are based on modified adjusted gross income (MAGI), but the calculation for it is specific to the ACA (and different from other definitions of MAGI, such as the one used to determine Medicare income-related monthly adjustment amounts⁷ and the one used to determine how much your tax-deductible traditional IRA contribution can be if you’re covered by a retirement plan at work.⁸) For the most part (unless your income is very low, which is discussed at the end of this article), a lower MAGI will result in a larger premium subsidy. (A lower MAGI results in a larger premium subsidy, unless your income is low enough that it makes you eligible for Medicaid or puts you in the coverage gap in states that haven’t expanded Medicaid.) And if the subsidy cliff returns in 2026, a MAGI below  400% of FPL will prevent an enrollee from losing their entire subsidy, which would happen if their MAGI goes over that limit.

For many people, ACA-specific MAGI is the same as adjusted gross income, or AGI (from Form 1040, line 11). But if you have any tax-exempt Social Security income, tax-exempt interest income, or untaxed foreign income, you have to add those amounts to your AGI to get your ACA-specific MAGI.⁹

How MAGI is reduced by contributions to a retirement plan and/or HSA, and the self-employed health insurance premium deduction

A lower income and more adjustments to income will reduce MAGI. You should consult your tax advisor to consider the available deductions/adjustments on your tax return that are above the line that shows your AGI (This is on Line 11, and the deductions/adjustments are calculated on Schedule 1 and then transferred to the 1040 on Line 10.) since reductions to your AGI will also reduce your ACA-specific MAGI.¹⁰

Tax-deductible contributions to a traditional individual retirement account (IRA) will reduce your ACA-specific MAGI.¹¹ Your tax advisor should be able to explain the details of this to you, including how to determine whether you’re eligible to make tax-deductible contributions to a traditional IRA.

In addition, your tax advisor can explain how contributing to an employer-sponsored pre-tax retirement plan like a 401(k) will lower your ACA-specific MAGI. (Note that if your employer offers health benefits, it’s unlikely that you’ll qualify for a Marketplace subsidy. Here’s more about that.)

If you’re self-employed, your tax advisor can advise whether it is in your best interest to set up a self-employed retirement plan such as a SEP IRA, SIMPLE IRA, or Solo 401(k). Talk with your tax advisor to see if one makes sense for you. Keep in mind that these retirement plans for self-employed people have contribution limits that are potentially higher than those of traditional IRAs allowing people to reduce their MAGI by a larger amount than a traditional IRA would allow.

If you have an HSA-eligible high-deductible health plan (HDHP), contributions to an HSA will reduce your ACA-specific MAGI.¹¹ Your tax advisor should be able to answer any questions you have about this. It's important to note that starting with the 2026 plan year, all Bronze and catastrophic plans purchased in the health insurance Marketplace will be considered HDHPs. So if you enroll in one of these plans, you'll be eligible to contribute to an HSA, as long as you don't have any additional major medical coverage.

Marketplace premium subsidies cannot be used with catastrophic plans.¹² But if you enroll in a Bronze plan, contributions to an HSA might lower your MAGI enough to make you subsidy-eligible if you would otherwise be facing the loss of your subsidy due to the subsidy cliff. (Again, the return of the subsidy cliff is based on the assumption that the federal subsidy enhancements will expire at the end of 2025, which was still up in the air as of early November.)

Self-employed people may also deduct their health insurance premiums, which may lower their MAGI, but it gets a bit complicated if that’s the factor that makes you eligible for a premium subsidy.

Your subsidies might go a long way toward covering the contributions you make to your IRA and HSA

To put all of this in perspective, consider a married couple, each 55 years old, with a household MAGI of $85,000. For 2026 coverage in the continental United States, that income puts them at 402% of FPL,¹³ which means they won’t be eligible for any federal premium tax credits if the subsidy enhancements are allowed to expire.

Let’s say this couple is in Montana, where average full-price premiums for 2026 are about in the middle in terms of nationwide average premiums.¹⁴ If they live in Billings, here’s what they can expect in terms of how much they’ll pay for the lowest-cost Marketplace plan in 2025 and in 2026, assuming the subsidy enhancements are allowed to expire:¹⁵

• 2025 lowest-cost plan = $54/month in premiums
• 2026 lowest-cost plan = $1,090/month in premiums

But if their household income is $84,000 instead, the lowest-cost plan’s premium will drop to $0/month, because they will be eligible for a subsidy that covers the entire premium.

It’s important to understand, however, that the subsidy ultimately has to be reconciled when the enrollee files their tax return. If this couple projects an $84,000 income, enrolls in the lowest-cost plan for $0/month (with the full premium paid by the subsidy), and then ends up actually earning $85,000, they will have to repay every penny of that subsidy. That would mean they’d owe $13,080 to the IRS, to repay the $1,090/month subsidy that was paid on their behalf. So if you’re projecting an income below 400% of FPL qualifying for  subsidy, it’s crucial to understand that you’ll only keep that subsidy if your income does indeed end up being no more than 400% of FPL.

Bronze Marketplace plans are HSA-eligible in 2026, this couple can enroll in the lowest-cost plan (which is Bronze), contribute just $1,000 to an HSA for 2026, and see their MAGI drop from a subsidy-eligible $85,000 to a subsidy-eligible $84,000.

The $1,000 they contribute to the HSA (which is still their money, and has no “use it or lose it” requirements) could save them over $13,000 in premiums over the course of 2026, since they’ll be paying $0/month instead of $1,090/month.

If we look at West Virginia, where average premiums are much higher, and consider an older couple, the impact of the HSA contribution becomes even more significant. Let’s say our couple lives in Charleston, WV, and both are 63 years old.¹⁶

• Household MAGI of $85,000: The lowest-cost 2026 plan is $2,830/month
• Household MAGI of $84,000: The lowest-cost 2026 plan is $0/month

With a household MAGI of $84,000, there are actually five zero-premium Bronze plans available to this couple, and two others that have premiums under $25/month. Since all of these plans are Bronze, they’re all HSA-eligible. This couple can select any of those plans, contribute just $1,000 to an HSA in 2026, and save almost $34,000 in premiums for 2026.

Again, this couple will need to keep in mind that if they project an income of $84,000 and then end up with an income of $85,000, they will have to repay the full subsidy when they file their taxes. Assuming they had enrolled in the lowest-cost plan, they would be repaying almost $34,000 to the IRS (12 months of $2,830/month subsidy).

The maximum allowable HSA contribution for 2026 is $4,400 if you have self-only coverage under an HSA-eligible plan, and $8,750 if your HSA-eligible plan covers at least one additional family member¹⁷ (plus a $1,000 catch-up contribution if you’re 55 or older).¹⁸ So this approach won’t help you avoid the subsidy cliff if your MAGI exceeds 400% of FPL by more than those amounts.

But it’s important to understand that pre-tax retirement plan contributions will also decrease MAGI. So a household could potentially decrease their MAGI with both HSA contributions and retirement plan contributions, assuming they’re eligible to make both.

Assuming a household has earned income (meaning their income isn’t all from investments and capital gains) each spouse can contribute to an individual retirement account (IRA). For 2026, the IRA contribution limits are projected to be $7,500, with an additional catch-up contribution limit of $1,100 for those 50 and older.¹⁹

So with earned income and a Bronze Marketplace plan, the couples we’ve discussed above would be able to contribute up to $10,750 to HSAs (they would each need their own HSA in order to make catch-up contributions for each spouse),²⁰ and up to $17,200 to IRAs (maximum contributions for each, plus the catch-up contribution).

With these contributions, they could potentially reduce their MAGI by up to $27,950. That means they could start with a MAGI of more than $112,000, and be able to reduce it down to the $84,600 threshold for subsidy eligibility (400% of the FPL), simply by maximizing their HSA and traditional IRA contributions. (Note that Roth IRA contributions are post-tax, so they do not affect MAGI.)²¹

Younger applicants get smaller subsidies, because the underlying premiums are lower for younger people. But the general concept remains the same: Contributing to a pre-tax retirement account and/or HSA will result in lower health insurance premiums, as long as your MAGI stays above the lower threshold for subsidy eligibility: At least 100% of the FPL in states that haven’t expanded Medicaid, and above 138% of the FPL in states that have expanded Medicaid.

All calculations above are based on results from the HealthCare.gov plan comparison tool.

You have until April to make the prior year’s HSA or IRA contributions

Another thing to keep in mind about HSA and IRA contributions: You can deposit money in those accounts at any time during the year or even in the first few months of the next year, as long as you make your contributions before the tax filing deadline.²²

So you’ll have until April 15, 2027 to make your 2026 contributions to an IRA and/or an HSA (assuming you have an HSA-qualified health plan) and reduce your MAGI for 2026. (See Question 4 here, for an example of this.) Premium subsidies are reconciled on your tax return, so that’s when you’d be sorting out the details with the IRS in terms of the exact amount of premium subsidy you were supposed to receive during the year.

Other deductions and their impact on MAGI

There are other deductions/adjustments that will reduce your MAGI, since they reduce your AGI²³ and don’t have to be added back to calculate the ACA-specific MAGI. These include things like alimony payments (from settlements executed before 2019; alimony from a settlement executed in 2019 or later is not counted), student loan interest, tuition and fees, educator expenses (up to the allowable cap, currently set at $300),²⁴ moving expenses, and the deductible portion of self-employment taxes.²³ The deductions that reduce AGI are found on lines 11 through 24 of Schedule 1 for Form 1040.

Itemized deductions like mortgage interest, charitable contributions, medical expenses, etc. (or the standard deduction instead) are subtracted after AGI is calculated. So they do not lower AGI and thus do not have an impact on MAGI.²⁵

How an increase in MAGI may result in eligibility for subsidies

On the other end of the spectrum, for people living in states that have not expanded Medicaid, Medicaid is available on a very limited basis, and premium subsidies in the exchanges are not available to households with incomes below 100% of the FPL.

If your income is very low and the Marketplace is showing that you’re not eligible for Medicaid or any financial assistance with your coverage, you’re probably in the coverage gap. This article is a good summary of how you might be able to handle the coverage gap.

Your MAGI needs to be at least the poverty level to avoid the coverage gap and qualify for subsidies. So depending on your income, you might decide not to take the deductions described above that serve to lower MAGI. But again, you’ll want to speak with a tax professional to make sure you understand the best approach for your specific circumstances.

Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written hundreds of opinions and educational pieces about the Affordable Care Act for healthinsurance.org.