Administrative note: We discussed this topic last summer, but I thought it would be worth addressing again, given that this is easily the topic I’ve been asked about most frequently over the last couple of months.
The Affordable Care Act (ACA) creates a new tax credit for certain taxpayers who buy health insurance via one of the new insurance exchanges. The goal of the credit is to subsidize the cost of health insurance for people who might not otherwise be able to afford it.
Qualifying Income Level
To be eligible for the credit, your “household income” must be between 100% and 400% of the federal poverty level. For example, in 2013, 400% of the federal poverty level would be $45,960 for a family of one, or $62,040 for a family of two.
Many people are under the impression that there is still some uncertainty about what is included in “household income.” To be clear: There is no uncertainty. The actual Internal Revenue Code section that provides the rules for the credit (section 36B) is very explicit about how household income is calculated.
“Household income” is defined in 36B(d)(2) as your modified adjusted gross income (MAGI) plus the MAGI of anybody else included in your household (i.e., your spouse and dependents).
The definition of MAGI, however, is what is confusing so many people. They key point to understand here is that there are many different definitions of MAGI. For example, MAGI is calculated one way for the purpose of determining eligibility to make Roth IRA contributions, another way for determining eligibility for claiming education credits, and yet another way for determining eligibility for the ACA subsidy credit.
For the purpose of calculating the ACA subsidy credit, 36B(d)(2) states that MAGI is calculated as:
- Adjusted gross income (that is, the bottom line of the first page of your Form 1040), plus
- Any foreign earned income that was excluded from AGI, plus
- Any tax-exempt interest, plus
- Any Social Security benefits that were excluded from AGI.
In addition to the income requirement, you must meet several other requirements in order to qualify for the health insurance subsidy credit:
- You must have purchased your insurance (or insurance for your spouse or dependent) on one of the ACA-created exchanges.
- If you’re married, you must file a joint return.
- You cannot be claimed as a dependent on anybody else’s tax return.
- You must not be eligible for “minimum essential coverage” through any other source (e.g., your employer, Medicare, Medicaid, etc.). There is, however, an exception to this requirement for people who have employer coverage that is deemed “unaffordable.”
One important point to note is that the credit is calculated on a monthly basis. In other words, you do not have to qualify for the entire year in order to be eligible for the credit. If your annual income is such that you would qualify and you meet the other the requirements for, say, 4 months, then you will be eligible for 4 months worth of the credit.
For details on how the credit is calculated, please see this prior article.