Q. With my current income, I am not eligible for a premium subsidy – but I’m just barely over the limit. 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. 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, 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 (Line 37 on the regular 1040). 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.
[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 much higher contribution limits than traditional IRAs, making them a good option if you’re trying to reduce your MAGI), and depending on your income, you may also be able to make tax-deductible contributions to a traditional IRA.
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.
If you have an HSA-qualified high-deductible health plan, contributing to an HSA (health savings account) will also lower your MAGI. The maximum contribution amount in 2016 is $3,350 for an individual and $6,750 for a family (the individual amount is the same as it was in 2015, but the family contribution limit was $6,650 in 2015). If you have access to a 401(k) or similar tax-advantaged retirement plan at work, contributing to it will reduce your taxable wages, and thus lower your MAGI.
Business, farming, and capital losses are also deducted above the AGI line on the 1040, but they’re more complicated than HSA and retirement plan contributions; definitely contact an accountant if you have questions, or if you want help looking for other possible ways to lower your MAGI without having to reduce your overall income.
Itemized deductions like mortgage interest, charitable contributions, medical expenses, etc. (or the standard deduction instead) are subtracted after AGI is calculated. They do not do not lower AGI and thus do not have an impact on MAGI.
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 percent 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 percent 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.