Table of ContentsView AllTable of ContentsUnderstanding MAGISubsidies, Reductions, Medicaid/CHIPHow The Calculation WorksOther MAGI FactorsHow Saving Money Might Help
Table of ContentsView All
View All
Table of Contents
Understanding MAGI
Subsidies, Reductions, Medicaid/CHIP
How The Calculation Works
Other MAGI Factors
How Saving Money Might Help
While most people understand that subsidy eligibility is based on income, people often have questions about how your income is actually defined under the ACA’s version of Modified Adjusted Gross Income (MAGI) and how it’s calculated.
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The ACA uses the term “Modified Adjusted Gross Income” (MAGI) to describe the way income would be calculated for premium subsidy eligibility. That’s accurate terminology—the calculation is a modification of adjusted gross income.
However, the concept of MAGI already exists for other tax-related purposes and is calculated differently, which has resulted in some confusion.
The important takeaway here is to understand that MAGI for premium subsidy eligibility (and in many cases, Medicaid eligibility) is not the same as the MAGI definition that you might already be familiar with. It’s specific to health insurance and has its own rules.
Even within this category, the calculation is a little different forMedicaidand CHIP versus eligibility for financial assistance with private health insurance purchasedin the exchange.
The good news is that it’s calculated in a way that allows you more flexibility to dial in your MAGI in order to optimize your eligibility for premium subsidies.
Premium Subsidies, Cost-Sharing Reductions, Medicaid, and CHIP
ACA-specific MAGI is used to determine eligibility for premium subsidies (the subsidy is actually atax creditthat’s available upfront or on your tax return) andcost-sharing reductionswhen people shop for coverage in their state’shealth insurance Marketplace/exchange. It’s also used to determine eligibility for CHIP andMedicaid.
Medicaid Eligibility and MAGINote that not all Medicaid eligibility is based on MAGI;the ACA switched a large portion of Medicaid eligibility determinations to a MAGI-based system—without asset or resource limits. However, the eligibility criteria for people who are blind, disabled, 65 or older, or dual-eligible for Medicare and Medicaid are different and can still include asset/resource limits rather than just an income-based system.
Medicaid Eligibility and MAGI
Note that not all Medicaid eligibility is based on MAGI;the ACA switched a large portion of Medicaid eligibility determinations to a MAGI-based system—without asset or resource limits. However, the eligibility criteria for people who are blind, disabled, 65 or older, or dual-eligible for Medicare and Medicaid are different and can still include asset/resource limits rather than just an income-based system.
How Does the Calculation Work?
First, it’s important to note that when we talk about income in the context ofhealth insurance subsidies, we’re always talking abouthouseholdincome. This includes the combined income of everyone whose income is reported on your tax return (i.e., your “tax household”) even if some of those people will not be covered under the Marketplace health plan. With that in mind, let’s take a look at how ACA-specific MAGI is calculated.
If you’re familiar with the concept of MAGI that’s used in other settings, you know that it requires you to start with your adjusted gross income and then add back in various things, such as deductions you took for student loan interest and IRA contributions. (Note that AGI is found on your tax return; AGI is currently line 11 onForm 1040, although the placement on the form does sometimes vary from one year to another.)
But when it comes to ACA-specific MAGI, you don’t have to add back either of those amounts—or most of the other amounts that you’d have to add to your income to get your regular MAGI.
Instead, the ACA-specific MAGI formula (defined in26 U.S. Code 36B(d)(2)(B)) starts with adjusted gross income and adds back just three things:
For many people, the amounts of these three things are $0, meaning that their ACA-specific MAGI is the same as the AGI listed on their tax return. But if you do have amounts on your tax return for any of those three items, you need to add them to your AGI to determine your MAGI for premium subsidy and cost-sharing reduction eligibility.
For Medicaid and CHIP eligibility determination, some amounts are either subtracted or counted in a specific manner:
Other MAGI Factors to Keep in Mind
MAGI is based on household income, but there are different rules for how a child’s income is counted towards a family’s household MAGI depending on whether the eligibility determination is forMedicaid/CHIPor for premium subsidies.
If a married couple wants to apply for premium subsidies in the exchange (or claim them on their tax return after paying full price for a plan purchased through the exchange), they have to file a joint tax return.
But if a married couple that lives together applies for Medicaid, their total household income is counted together regardless of how they file their taxes.
Premium subsidies are a tax credit, but they differ from other tax credits in that you can—and most people do—take them upfront instead of having to wait to claim them on your tax return. (Note that the money is paid on your behalf to your health insurer each month; it’s not sent to you.)
That also means when you’re enrolling in a health plan duringopen enrollment(November 1 to January 15 in most states, for coverage that will take effect January 1 or February 1), you’ll be using aprojectedMAGI, based on what you estimate your income to be in the coming year.
If your income is steady from one year to the next, you can reasonably estimate your MAGI for the coming year based on your past year’s tax return. But many people who purchase their own health insurance are self-employed and their income varies from one year to another—which can make it challenging to accurately project the coming year’s MAGI.
Once the year is underway, if you start to notice that your actual income is diverging significantly from what you projected, you can report your updated income to the exchange and they can adjust your premium subsidy amount in real-time (or switch you from a private plan to Medicaid or vice versa, if your changed income results in a change in Medicaid eligibility status).
To account for the fact that premium tax credits are typically paid in advance throughout the year (sent directly to your health insurance company), theyhave to be reconciled on your tax return.
If it turns out that the subsidy amount that was paid on your behalf throughout the year was too small, the IRS will pay you the difference when you file your taxes. But if the subsidy amount that was paid on your behalf was too large, you may have to repay some or all of it.
The details regarding premium tax credit reconciliation are explained in theinstructions for Form 8962. Form 8962 has to be included with your tax return if a premium tax credit was paid on your behalf during the year or if you want to claim the tax credit on your tax return. This is true regardless of whether an adjustment to the subsidy amount is necessary on your tax return.
For the first several years that the health insurance exchanges were in operation, there was an income cap for subsidy eligibility, equal to 400% of the poverty level. That was the maximum amount you could earn and still qualify for a premium tax credit, so people who ended up earning more than this had to repay all of their premium tax credit to the IRS when they filed their tax return.
So through 2025 (and possibly later, if the subsidy enhancements are extended again), subsidies are available to households that earn more than 400% of the poverty level, if the cost of thebenchmark planwould otherwise be more than 8.5% of the household’s income.
How Saving Money Might Make You Eligible for Subsidies
Because of the way ACA-specific MAGI is calculated, there are some actions you can take to reduce your MAGI and qualify for a larger subsidy than you might otherwise receive.
(If the income limit for subsidy eligibility is allowed to take effect again in 2026, this approach will once again be particularly important in order to avoid the “subsidy cliff” when MAGI exceeds 400% of the poverty level.)
Note that for premium subsidy eligibility, the prior year’s poverty level numbers are always used, since open enrollment for a given year’s coverage is conducted before the poverty level numbers for that year are determined. (For Medicaid and CHIP eligibility, current poverty level numbers are used, since enrollment in those plans continues year-round). So premium subsidy eligibility for 2025 is based on how the enrollee’s projected 2025 income compares withthe federal poverty level numbers for 2024.
Premium subsidy eligibility extends well into the middle class, especially with the American Rescue Plan’s subsidy enhancements that are in effect through 2025. But the higher your MAGI is, the lower your subsidy amount will be.
This is where it’s helpful to understand that pre-tax contributions you make to retirement accounts will reduce your MAGI, as will contributions to ahealth savings account(assuming you have an HSA-qualifiedhigh-deductible health planand are eligible to contribute to an HSA).
Depending on your employment situation and the health insurance plan you have, you may be able to set aside a significant amount of money in a pre-tax retirement account and/or a health savings account, and lower your MAGI in the process.
(Note that retirement accounts include traditional IRAs, as well as 401(k)s, SEP-IRAs, SIMPLE-IRAs, and solo 401(k)s, which tend to have higher contribution limits. But contributions to ROTH retirement accounts do not reduce MAGI, as those contributions are not made pre-tax.)
This might mean that you receive a subsidy when you would otherwise have had to pay full price for your coverage, or it might mean that you receive a larger subsidy than you’d have received without the pre-tax contributions.
You should consult with a tax professional if you have questions about your specific situation. Just keep in mind that contributions to things like an HSA or traditional IRA (but not a Roth IRA, since those contributions aren’t pre-tax) will reduce your ACA-specific MAGI, even though they don’t reduce other types of MAGI calculations.
Summary
Under the ACA, eligibility for premium subsidies, cost-sharing reductions, and certain types of Medicaid is based on an ACA-specific version of Modified Adjusted Gross Income (MAGI). This is not the same as MAGI calculations used for other purposes. For many people, ACA-specific MAGI is the same as the AGI that’s listed on their tax return. But there are a few things that have to be added to AGI to get the ACA’s MAGI, if applicable (tax-exempt interest, non-taxable Social Security benefits, and foreign earned income).It’s noteworthy that contributions to an HSA and/or pre-tax retirement account will lower a person’s ACA-specific MAGI, potentially resulting in additional financial assistance with health coverage.
As with any tax-related topic, you should consult with a certified accountant or financial planner when you’re making decisions about your finances. But contributing to an HSA (if you have HDHP coverage) and/or a pre-tax retirement account might end up being a win-win: You’ll have money tucked away for the future, and you might also qualify for more financial assistance when you shop for coverage in the exchange/marketplace.
11 SourcesVerywell Health uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read oureditorial processto learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.Centers for Medicare and Medicaid Services.MAGI 2.0: Building MAGI knowledge.Medicaid.gov.Eligibility policy.Internal Revenue Service.Form 1040.Congressional Research Service.The use of modified adjusted gross income (MAGI) in federal health programs.Cornell Law School, Legal Information Institute.42 U.S. Code § 1396a. State plans for medical assistance.Cornell Law School, Legal Information Institute.42 CFR § 435.603 - Application of modified adjusted gross income (MAGI).Norris, Louise. healthinsurance.org.We claim our son, but not our daughter, on our taxes. How are premium subsidies calculated for families like ours?Internal Revenue Service.Questions and answers on the premium tax credit.Ortaliza, Jared, et al. KFF.Inflation Reduction Act Health Insurance Subsidies: What is Their Impact and What Would Happen if They Expire?July 26, 2024.Congressional Budget Office.The Effects of Not Extending the Expanded Premium Tax Credits for the Number of Uninsured People and the Growth in Premiums. December 5, 2024.Fehr R, Cox C, Levitt L, Claxton G. Kaiser Family Foundation.How affordable are 2019 ACA premiums for middle-income people?Additional ReadingDepartment of the Treasury, Internal Revenue Service.Minimum value of eligible employer-sponsored plans and other rules regarding the health insurance premium tax credit.U.C. Berkeley Labor Center.Modified adjusted gross income under the Affordable Care Act.
11 Sources
Verywell Health uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read oureditorial processto learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.Centers for Medicare and Medicaid Services.MAGI 2.0: Building MAGI knowledge.Medicaid.gov.Eligibility policy.Internal Revenue Service.Form 1040.Congressional Research Service.The use of modified adjusted gross income (MAGI) in federal health programs.Cornell Law School, Legal Information Institute.42 U.S. Code § 1396a. State plans for medical assistance.Cornell Law School, Legal Information Institute.42 CFR § 435.603 - Application of modified adjusted gross income (MAGI).Norris, Louise. healthinsurance.org.We claim our son, but not our daughter, on our taxes. How are premium subsidies calculated for families like ours?Internal Revenue Service.Questions and answers on the premium tax credit.Ortaliza, Jared, et al. KFF.Inflation Reduction Act Health Insurance Subsidies: What is Their Impact and What Would Happen if They Expire?July 26, 2024.Congressional Budget Office.The Effects of Not Extending the Expanded Premium Tax Credits for the Number of Uninsured People and the Growth in Premiums. December 5, 2024.Fehr R, Cox C, Levitt L, Claxton G. Kaiser Family Foundation.How affordable are 2019 ACA premiums for middle-income people?Additional ReadingDepartment of the Treasury, Internal Revenue Service.Minimum value of eligible employer-sponsored plans and other rules regarding the health insurance premium tax credit.U.C. Berkeley Labor Center.Modified adjusted gross income under the Affordable Care Act.
Verywell Health uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read oureditorial processto learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Centers for Medicare and Medicaid Services.MAGI 2.0: Building MAGI knowledge.Medicaid.gov.Eligibility policy.Internal Revenue Service.Form 1040.Congressional Research Service.The use of modified adjusted gross income (MAGI) in federal health programs.Cornell Law School, Legal Information Institute.42 U.S. Code § 1396a. State plans for medical assistance.Cornell Law School, Legal Information Institute.42 CFR § 435.603 - Application of modified adjusted gross income (MAGI).Norris, Louise. healthinsurance.org.We claim our son, but not our daughter, on our taxes. How are premium subsidies calculated for families like ours?Internal Revenue Service.Questions and answers on the premium tax credit.Ortaliza, Jared, et al. KFF.Inflation Reduction Act Health Insurance Subsidies: What is Their Impact and What Would Happen if They Expire?July 26, 2024.Congressional Budget Office.The Effects of Not Extending the Expanded Premium Tax Credits for the Number of Uninsured People and the Growth in Premiums. December 5, 2024.Fehr R, Cox C, Levitt L, Claxton G. Kaiser Family Foundation.How affordable are 2019 ACA premiums for middle-income people?
Centers for Medicare and Medicaid Services.MAGI 2.0: Building MAGI knowledge.
Medicaid.gov.Eligibility policy.
Internal Revenue Service.Form 1040.
Congressional Research Service.The use of modified adjusted gross income (MAGI) in federal health programs.
Cornell Law School, Legal Information Institute.42 U.S. Code § 1396a. State plans for medical assistance.
Cornell Law School, Legal Information Institute.42 CFR § 435.603 - Application of modified adjusted gross income (MAGI).
Norris, Louise. healthinsurance.org.We claim our son, but not our daughter, on our taxes. How are premium subsidies calculated for families like ours?
Internal Revenue Service.Questions and answers on the premium tax credit.
Ortaliza, Jared, et al. KFF.Inflation Reduction Act Health Insurance Subsidies: What is Their Impact and What Would Happen if They Expire?July 26, 2024.
Congressional Budget Office.The Effects of Not Extending the Expanded Premium Tax Credits for the Number of Uninsured People and the Growth in Premiums. December 5, 2024.
Fehr R, Cox C, Levitt L, Claxton G. Kaiser Family Foundation.How affordable are 2019 ACA premiums for middle-income people?
Department of the Treasury, Internal Revenue Service.Minimum value of eligible employer-sponsored plans and other rules regarding the health insurance premium tax credit.U.C. Berkeley Labor Center.Modified adjusted gross income under the Affordable Care Act.
Department of the Treasury, Internal Revenue Service.Minimum value of eligible employer-sponsored plans and other rules regarding the health insurance premium tax credit.
U.C. Berkeley Labor Center.Modified adjusted gross income under the Affordable Care Act.
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