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Since a lower income results in a larger subsidy, is there anything I can do to reduce my income under ACA rules?

You can reduce your MAGI — and thus increase your subsidy amount — with contributions to a retirement plan, HSA contributions, and self-employed health insurance premiums.

Q. Since a lower income results in a larger health insurance premium subsidy, is there anything I can do to lower my income as far as the exchange is concerned?

A: Your best bet is to talk with an accountant. They are trained to spot places where you might be missing out on deductions and tax breaks, and the money you spend to hire one will be well spent.

That said, there are some basics to keep in mind. And we can start with the fact that the rules are a lot different in 2021 and 2022, as a result of the American Rescue Plan. This legislation, aimed at helping Americans recover from the COVID pandemic, eliminates the “subsidy cliff” in 2021 and 2022. That means subsidies are available to people with income above 400% of the poverty level (the income cap for subsidy eligibility in prior years) if they would otherwise have to spend more than 8.5% of their income to purchase the benchmark plan.

This makes it less important for people to bring their ACA-specific modified adjusted gross income down to under 400% of the poverty level, as subsidies now extend well above that income level depending on the circumstances. (Older people and people in areas where health insurance is more expensive can have incomes well above 400% of the poverty level and still qualify for a subsidy, whereas younger people and people in areas where coverage is less expensive may still find that they don’t qualify for a subsidy even with an income a little above 400% of the poverty level; this chart shows some specifics that help to make this clear.)

For the time being, the American Rescue Plan’s subsidy enhancements are temporary. But lawmakers are considering the possibility of making them permanent (the projected impact of that is outlined here).

Regardless of whether the subsidies are made permanent or not, the specifics of how income is calculated under the ACA remain the same. Here’s how it works:

ACA premium subsidies are based on modified adjusted gross income (MAGI), but the calculation for it is specific to the ACA (and different from the general MAGI rules) For most people, ACA-specific MAGI is the same as adjusted gross income, or AGI (from Form 1040). But if you have any tax-exempt Social Security income, tax-exempt interest income, foreign-earned income or housing expenses for Americans living abroad, you have to add those amounts to your AGI in order to get your MAGI.

Reduce your MAGI with a retirement plan, HSA contributions, and self-employed health insurance premiums

You can reduce your MAGI by earning less money, but a lot of people prefer to look for deductions instead. Consider the available deductions on your tax return that are above the line that shows your AGI (this used to be Line 37 on the regular 1040; it’s now Line 11). If you’re not already contributing the maximum allowable amount to an individual retirement account (IRA), doing so would lower your MAGI (it has to be a traditional IRA; contributions to a Roth IRA are not tax-deductible). You and your spouse can each contribute to an IRA, further lowering your total household MAGI. Keep in mind that if you also have a retirement plan at work, the amount of deductible contributions you can make to a traditional IRA depends on your income.

(Note that the general MAGI calculations require you to add back traditional IRA contributions, but ACA-specific MAGI rules are different–your deductible traditional IRA contributions do lower your ACA-related MAGI.)

If you have access to an employer-sponsored pre-tax retirement plan like a 401(k), you can contribute to that in order to lower your MAGI. If you’re self-employed, you can set up a self-employed retirement plan. SEP IRA, SIMPLE IRA, or Solo 401(k) are all options — talk with your accountant to see which one will work best for you, keeping in mind that these retirement plans for self-employed people have contribution limits that are potentially much higher than traditional IRAs, making them a good option if you’re trying to reduce your MAGI. Depending on your income, you may also be able to make tax-deductible contributions to a traditional IRA.

If you have an HSA-qualified high-deductible health plan (HDHP), contributing to an HSA (health savings account) will also lower your MAGI. The maximum contribution amount in 2021 is $3,600 if your HDHP covers just yourself, and $7,200 if it also covers at least one other family member. Those contribution limits in 2020 were $3,550 and $7,100, respectively. And although you normally have to make contributions for a given year by the following April 15, the IRS has extended the 2020 HSA contribution deadline to May 17, 2021, due to the COVID-19 pandemic.

Self-employed people can also deduct their health insurance premiums as a means of lowering 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 towards 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 HSA-qualified health coverage and a combined household income of $80,000. Prior to the American Rescue Plan, this was well above the MAGI cap for premium subsidy eligibility ($68,960 for a household of two in 20210; based on 400% of 2020 federal poverty level numbers). Now that the ARP has been implemented, this couple would be eligible for a subsidy even with a MAGI of $80,000. But we’ll use this example to illustrate how their subsidy will increase if they make various pre-tax contributions.

Assuming they have earned income (ie, their income isn’t all from investments and capital gains), they can each contribute up to $7,000 to an IRA for 2020 ($6,000 plus a $1,000 catch-up contribution, since they’re over age 50), and they can contribute up to$7,200 to an HSA. Contributing the maximum amounts would bring their MAGI down to $58,800.

Let’s say this couple lives in Norfolk, Virginia. In 2021, with the American Rescue Plan’s subsidy enhancements in effect, they qualify for a monthly subsidy of $1,105 if their MAGI is $80,000. But if their income is $58,800, they qualify for a subsidy of $1,327 per month (in order to make contributions to an HSA, they’ll need to buy an HSA-qualified plan, the cheapest of which is about $6/month in premiums after the subsidy is applied).

That’s an extra $222 per month in subsidies, amounting to $2,664 for the year, just because they opted to make the maximum contributions to their IRAs and HSA. And that’s in addition to the normal tax advantage that goes along with those plans, in terms of not having to pay income tax on the contributions, and tax-free growth in the accounts.

Prior to the ARP, this coupld would not have qualified for any subsidy at all with an income of $80,000, but would have qualified for a substantial subsidy with an income of $58,800 (not quite as large as it is under the ARP, but still very significant).

Younger applicants get smaller subsidies, but the general concept remains the same: Contributing to a 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 (100% of the poverty level in states that haven’t expanded Medicaid, and 138% of the poverty level in states that have expanded Medicaid).

You have until April to make the prior year’s HSA or IRA contributions (for 2020 contributions, this has been extended until May 17, 2021)

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. So if you enroll in a plan through the exchange for 2021, you have until April 15, 2022 to contribute to an IRA and/or an HSA (assuming you have an HSA-qualified health plan) and reduce your MAGI for 2021 (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).

For the 2021 tax year, the filing deadline has been extended until May 17, 2021, as a result of the COVID pandemic and the American Rescue Plan’s changes to the tax code. And the deadlines to make 2020 contributions to your HSA or IRA have also been extended until May 17, 2021.

Other deductions and their impact on MAGI

There are other deductions that will also serve to reduce your MAGI, since they reduce your AGI and don’t have to be added back to calculate the ACA-specific MAGI. These include things like alimony payments (from settlements executed prior to 2019; alimony from a settlement executed in 2019 or later does not count as income), student loan interest, tuition and fees, moving expenses, and the deductible portion of self-employment taxes. The deductions that reduce AGI are found on lines 10 through 22 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.

What if you need to increase your MAGI to qualify for subsidies?

On the other end of the spectrum, people living in states that have not expanded Medicaid may need to increase their MAGI in order to qualify for a subsidy, since Medicaid is available in those states on a very limited basis, and premium subsidies in the exchanges are not available to households with incomes below 100% of federal poverty level (FPL).

Navigators in those states recommend that residents keep track of every penny they earn, even from infrequent jobs. Some residents have been able to cobble together enough income from a variety of sources to get above 100% of poverty, even though the income from their primary job was too low to qualify for subsidies. Things like babysitting, selling extra garden produce, handyman work, and utilizing craft fairs to market a hobby like knitting or woodworking can sometimes make the difference.

But new rules finalized in 2018 require applicants to provide proof of their income if they attest to an income over the poverty level and existing federal data shows that the applicant has income below the poverty level. So people who are scrambling to attain an income of at least the poverty level need to keep careful records of their income sources so that they can provide proof of income if the exchange requests it.


Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for healthinsurance.org. Her state health exchange updates are regularly cited by media who cover health reform and by other health insurance experts.

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Brian T
Brian T
1 year ago

This is a great write-up. Very clear. Thanks so much.

Louise Norris
Louise Norris
1 year ago
Reply to  Brian T

Thank you! I’m glad it was helpful!

sfrye
sfrye
1 year ago

In the example you gave (couple making $80K), if they were self-employed, would they also be able to deduct their health insurance premiums from their ACA MAGI? Also, is there any combined limit based on income when taking ACA MAGI deductions? For example, If I’m self employed (married) and making $14,000 (the rest of my income coming from pensions, savings, etc.) can I take the $14,000 deduction (2020) for IRA contributions AND health insurance premium deductions (since combined would be greater then my self employment income)?

Louise Norris
Louise Norris
1 year ago
Reply to  sfrye

Yes, the health insurance deduction is available to self-employed people, and it reduces MAGI for subsidy-eligibility determination. But that can be a bit of a circular question, since the lower the MAGI is, the higher the subsidy will be… which results in a smaller portion of the premiums being deductible (you can only deduct the after-subsidy portion of the premiums). Here’s more about how that works: https://www.healthinsurance.org/faqs/my-premium-subsidy-is-dependent-on-my-agi-but-im-self-employed-so-my-agi-is-dependent-on-my-premium-help/
Both deductions — IRA contributions and the self-employed health insurance deduction — are limited to no more than your earned income for the year. So you would not be able to use them to deduct more than your self-employment income.

Sally
Sally
1 year ago

I am trying to lower my AGI for my IBR student loan payments to be as low as possible. I was told my income was too high to deduct IRA contributions. My gross pay was 79K and expect that to rise next year to 100K gross. It seems even if I contribute more to my workplace 401K or separate IRA or Roth, I have no way of lowering my AGI for future help. Is my only option to put as much into my HSA, which only would lower so much? Appreciate any insight. Currently at 300K in student loan debt in an IBR program with 7% loans.

Louise Norris
Louise Norris
1 year ago
Reply to  Sally

As is always the case with questions related to a person’s specific tax situation, we advise you to consult with a tax professional who can take a look at all the variables affecting your situation.
But just a few things to keep in mind: The above article pertains to ACA-specific MAGI. The calculation for MAGI under the ACA isn’t the same as the non-ACA MAGI calculations that people are accustomed to, and it’s also not the same as AGI for some people. I’m not familiar with the rules for IBR student loan repayments, but if they use AGI it could be different from the ACA-specific MAGI discussed in this article.
It’s likely true that you cannot deduct your IRA contributions, since you have a 401(k) and your income is above the limits the IRS sets for IRA deductibility for people who also have a retirement plan at work: https://www.irs.gov/retirement-plans/plan-participant-employee/2020-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-covered-by-a-retirement-plan-at-work
HSA contributions are “above the line” which means they’re deducted before AGI is calculated. So they will lower your AGI. If your HSA-qualified high-deductible health plan covers just yourself (ie, no additional family members on the plan), you can contribute up to $3,550 to your HSA in 2020 (if you do have at least one other family member on the HDHP, you can contribute up to $7,100).

Ben
Ben
1 year ago

Could you please clarify ROTH IRA withdrawal during 2020. This will not be considered income when calculating eligibility for Marketplace Healthcare?

Maurie Backman
Maurie Backman
1 year ago
Reply to  Ben

Roth IRA withdrawals do not count as income for Marketplace purposes.

William Ronald Bauer
William Ronald Bauer
1 year ago
Reply to  Maurie Backman

You can only have your traditional IRA reduce your AGI with earned income.

Louise Norris
Louise Norris
1 year ago

It’s correct that IRA contributions have to be traditional (as opposed to ROTH) in order to reduce ACA-specific MAGI. And you do need earned income in order to contribute to an IRA. As noted above, ROTH IRA withdrawals are not considered income, because you already paid taxes on that money before you contributed it to the IRA. Similarly, ROTH IRA contributions do not affect AGI (or ACA-specific MAGI), because the contributions are not tax-deductible.

William Ronald Bauer
William Ronald Bauer
1 year ago
Reply to  Louise Norris

Thank you for this article. I have a part time job with my social security. From what I understand also pre-tax contributions to a 401K also lower your MAGI for the ACA APTC up to what is allowable for the year. My employer allows me to put 90% of my earnings in. Is this correct?.

Louise Norris
Louise Norris
1 year ago

Pre-tax contributions to a 401(k) are subtracted from your wages and the lower wage amount is shown on your W-2. So yes, those contributions will lower your AGI and thus lower your ACA-specific MAGI. People don’t deduct them on their tax returns the way they do with traditional IRAs, but the overall effect is still the same — pre-tax retirement account contributions will result in a lower ACA-specific MAGI.
You mentioned that you’re part-time, so I assume your employer doesn’t also offer you health insurance? But if they do, that would disqualify you from a premium subsidy if the employer’s plan is considered affordable and provides minimum value. Those are explained in more detail in this article: https://www.healthinsurance.org/special-enrollment-guide/an-sep-if-your-employer-plan-doesnt-measure-up/

William Bauer
William Bauer
1 year ago
Reply to  Louise Norris

Thank you again! I need 30 hours or more for health insurance coverage from my employer per week. I only work 10 to 15 hours a week. I am assuming the 1200 dollar Cares Act stimulus is not going to be added into the calculation of the ACA-specific MAGI. I know it is a tax credit and not taxable.

Meredith
Meredith
1 year ago

As a married couple filing jointly in 2019, we paid the full amount for health insurance on the Massachusetts marketplace. We now have an extension through July 15 to make IRA contributions to lower our AGI and file taxes. Assuming that we can get the AGI to an amount that would qualify for a subsidy, where does that money come from? Will it be in the form of a payment from the health insurance company, the state or the federal govt.?

Daniel
Daniel
1 year ago
Reply to  Meredith

Since you paid full price in 2019 (no subsidy), but in 2020 you made a contribution to your 2019 IRA which now allowed you to qualify for a 2019 federal tax subsidy, that money that the federal government would have subsidized your health care for 2019 will be “refunded” to you in the form of a refundable tax credit. This is given to you when you file your 2019 federal taxes in 2020. I.e. lets say you spend 10k in 2019 on health premiums, but now that you lowered your 2019 income to qualify for what would have been 6k in federal subsidy (meaning you pay 4k, feds pay 6k). When you file your 2019 taxes in 2020, when you complete the ACA reconciliation form 8962, it will show that you are entitled to 6k “refund”. Hope this helps.

Louise Norris
Louise Norris
1 year ago
Reply to  Meredith

Daniel’s reply below is correct. The money will come from the IRS, and will either be issued to you as a tax refund, or used to offset income tax that you would otherwise have owed to the IRS based on your tax return.

dmonnig
dmonnig
1 year ago

My understanding is if you need to increase your income to qualify in a state that did not expand Medicaid (ex. Texas), you can roll money from a traditional 401K to.a Roth IRA and that would count as income. Ex. I have 10K in income, if I need to increase my income to 30K, I can roll 20K from my 401K to a Roth IRA and pay that taxes on that. That would take me to 30K in income for the year. I have read other articles on this, can you confirm?

Louise Norris
Louise Norris
1 year ago
Reply to  dmonnig

Money that you convert from a pre-tax retirement account to a Roth account will be added to your taxable income in the year you make the conversion, so this will increase your AGI and your ACA-specific MAGI. But you’ll want to make sure you consult with a tax adviser who can help you understand all of the tax implications, as there’s more to it than just an increased AGI: https://www.investopedia.com/articles/retirement/08/convert-401k-roth.asp

Joni McDonnell
Joni McDonnell
1 year ago

If we (my husband and I both retired) get a brokerage disbursement from an already taxed joint retirement account does that count as income and does it effect our MAGI?

Louise Norris
Louise Norris
1 year ago
Reply to  Joni McDonnell

You should consult with a tax advisor for answers to specific questions about your finances. But in general, qualified withdrawals from a post-tax retirement account will not be counted as income and will thus not affect your ACA-specific MAGI.

Elisa
Elisa
11 months ago

Does the QBI deduction for self-employed people also lower your MAGI? Thank you!

Louise Norris
11 months ago
Reply to  Elisa

No. The QBI deduction works more like an itemized or standard deduction – it’s subtracted after your AGI is calculated. Since your ACA-specific MAGI starts with your AGI and then adds back some additional amounts (if you have them), things that are subtracted after AGI is calculated would not have any effect on ACA-specific MAGI.

Kathleen
Kathleen
11 months ago

very helpful and easy to understand with great examples – thanks!
t

Virginia Lammers
Virginia Lammers
10 months ago

Thank you so much…this is one of the clearest articles on the income limits and subsidy amounts.

Henry Ziobro
Henry Ziobro
10 months ago

Hi, I sold my business and will receive payment of $71,000.00 per year. Long term capital gains. I have no earned income can I and wife contribute to my IRA and HSA to-lower my MAGI? I am married and filing jointly and age of 60.

Louise Norris
Louise Norris
10 months ago
Reply to  Henry Ziobro

Without earned income, you cannot contribute to an IRA. But you can contribute to an HSA without earned income. You would just need to have an HSA-qualified health plan (and no other health plan) in order to make HSA contributions. Here’s more about HSA-qualified health plans: https://www.healthinsurance.org/glossary/high-deductible-health-plan/ and HSAs: https://www.healthinsurance.org/glossary/health-savings-account/

Jim
Jim
8 months ago

Well written article. Thank you. Can you tell me if reimbursements from my HSA for medical expenses affect the ACA-MAGI?

MAURIE BACKMAN
MAURIE BACKMAN
8 months ago
Reply to  Jim

Your HSA contributions don’t count as taxable income, nor do withdrawals or reimbursements for qualified medical purposes. As such, these shouldn’t impact your MAGI. But do keep accurate records of all expenses you’re claiming withdrawals against.

Will Ford
Will Ford
8 months ago

Can I set up an HSA account if I am retired? Can a HSA account lower my MAGI income level?

MAURIE J BACKMAN
MAURIE J BACKMAN
8 months ago
Reply to  Will Ford

Yes, you can set up an HSA if you’re retired. but only if you’re not enrolled in any part of Medicare. An HSA can lower your MAGI, but you need to be on a qualifying high-deductible plan to participate.

Anne
Anne
6 months ago

My situation is different. I am getting insurance through the ACA, but my husband is older and gets Medicare. I have a very small craft business, really more like a hobby business, with very little income. My husband gets SS and the lowest possible RMD from his retirement. It’s not much, and way lower than the $80,000 you used as an example in the discussion above. Yet I don’t think the MAGI for our combined income will come in under the 2021 limit of $51,000. I was told to report the total household income, not just my own. I can only contribute to an HSA for me, as my husband is on Medicare and he can no longer contribute to a HSA. I don’t earn enough to contribute to an IRA. How can we get the MAGI lower?

Louise Norris
Editor
6 months ago
Reply to  Anne

For a household of two, the maximum allowable income for subsidy eligibility in 2021 is $68,960: https://aspe.hhs.gov/system/files/aspe-files/107166/2020-percentage-poverty-tool.pdf (400% of the 2020 poverty level for a household of two). Perhaps that will help, as you don’t need to get it down to $51,000?
But it’s also important to understand that subsidy eligibility is based on the cost of the benchmark plan for family members enrolling through the exchange (in your case, just you) compared with the entire household’s income. So it’s possible that you might not qualify for a subsidy even with an income below 400% of the poverty level. This is explained in more detail here: https://www.healthinsurance.org/faqs/i-thought-subsidies-were-available-for-anyone-with-incomes-up-to-400-percent-of-poverty-level-but-the-calculators-ive-used-say-our-family-doesnt-qualify-why/
If you still need to figure out a way to reduce your MAGI in addition to your HSA contribution, we’d recommend that you speak with an accountant to see if they have any suggestions.

Anne
Anne
6 months ago
Reply to  Louise Norris

Thank you!

Mfs
Mfs
6 months ago

Thank you for such a great and clear explanation.

Would a deductible spousal IRA contribution reduce MAGI for ACA purpose even though the earner already contributes to 403b?

Louise Norris
Editor
5 months ago
Reply to  Mfs

Yes. Pre-tax IRA contributions will reduce MAGI, since subsidy eligibility is based on the whole household’s income. There are income limits for situations like this (where the working spouse has a retirement plan at work), but as long as a spousal IRA is an option and you go with a pre-tax IRA (as opposed to a Roth), it will reduce the household’s total MAGI.

KSG
KSG
3 months ago

I tried increasing MAGI by taking 401k withdrawals but found out if you’re under 65 (I’m 60) 401k income doesn’t count towards ACA MAGI. I ended up on Medi-Cal but my wife is over 65, found not eligible for Medi-Cal nor is she eligible for Medicare & I’m stuck on how to get MAGI up for her to qualify for a subsidy. If 401k income doesn’t count for me, it should for her but the government folks don’t see it that way.

Louise Norris
Editor
3 months ago
Reply to  KSG

We advise that you consult with a tax professional. 401(k) distributions should always count as taxable income, unless it was a Roth 401(k) (ie, funded with after-tax contributions, making the distributions tax-free).
Why is your wife not eligible for Medicare if she’s over 65? If it’s because she’s a recent immigrant, she can enroll in a marketplace plan, with a premium subsidy, regardless of how low her income is. Here’s more about this: https://www.medicareresources.org/faqs/can-recent-immigrants-to-the-united-states-get-health-coverage-if-theyre-over-65/

Scott
Scott
16 days ago

For 2021 my only true income is from unemployment payments. However, due this being my only source of income, I could not pay on a 401K loan taken out 3 years ago prior to becoming unemployed. Because of this, the loan has defaulted.
I know this will be reported as a distribution and will be added as income to be taxed. However, does a defaulted loan count as income for Obamacare…even though I did not actually receive any of this loan money in 2021? I have not seen this specific issue addressed anywhere. It seems you should not have to count a loan default as income for ObamaCare as the money was not received in the year that I am reporting income to the Marketplace.

Louise Norris
Editor
14 days ago
Reply to  Scott

In a normal year, anything that is counted as taxable income during the year would be counted in your ACA-specific MAGI. Here’s how that’s calculated: https://www.healthinsurance.org/glossary/modified-adjusted-gross-income-magi/ For most people, it’s the same as AGI, and it does include things like retirement plan distributions, inheritances, or other one-time amounts

But for 2021 only, the rules are different, thanks to the American Rescue Plan. For a person who receives unemployment compensation in 2021, any income above 133% of the poverty level is disregarded, regardless of how much it is or where it’s obtained: https://www.healthinsurance.org/blog/american-rescue-plan-delivers-0-silver-premiums-to-unemployed/ This means full premium subsidies are available in your situation, assuming you’re not eligible for Medicaid. The subsidies will be available to you throughout 2021, unless you become eligible for Medicare or another employer’s health plan. And when you’re reconciling your 2021 subsidy on your 2021 tax return, they will continue to disregard any income above 133% of the poverty level, since you received unemployment compensation this year.

After the end of 2021, the normal rules will once again apply. But the American Rescue Plan’s additional premium subsidies based on household income will continue to be available in 2022: https://www.healthinsurance.org/blog/how-the-american-rescue-plan-act-would-boost-marketplace-premium-subsidies/

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