A: Talking to an accountant is your best bet. They are trained to discover areas where you may be missing out on deductions and tax savings, so hiring one is a good investment.
However, there are some fundamentals to remember. And we can start with the reality that, as a result of the American Rescue Plan, the rules will be very different in 2021 and 2022. This bill eliminates the “subsidy cliff” in 2021 and 2022, allowing Americans to recover from the COVID pandemic. Subsidies are available to persons who earn more than 400 percent of the poverty level (the previous income ceiling for subsidy eligibility) and would otherwise have to spend more than 8.5 percent of their income on the benchmark plan.
This reduces the importance of people bringing their ACA-specific modified adjusted gross income below 400 percent of the poverty level, as subsidies now extend considerably above that income level depending on the circumstances. (Older people and people who live in areas where health insurance is more expensive can have incomes well above 400 percent of the poverty level and still qualify for a subsidy, whereas younger people and people who live in areas where coverage is less expensive may find that they don’t qualify for a subsidy even if their income is a little above 400 percent of the poverty level; this chart illustrates this point.)
Subsidy increases under the American Rescue Plan are only temporary for the time being. However, politicians are debating whether they should be made permanent (the projected impact of that is outlined here).
Regardless of whether the subsidies are made permanent or not, the technicalities of how income is determined under the ACA remain the same. The following is how it works:
The calculation for ACA premium subsidies is based on modified adjusted gross income (MAGI), but it is unique to the ACA (and different from the general MAGI rules) The ACA-specific MAGI is the same as adjusted gross income, or AGI, for most persons (from Form 1040). However, to calculate your MAGI, you must include any tax-exempt Social Security income, tax-exempt interest income, foreign-earned income, or housing expenses for Americans living abroad to your AGI.
Reduce your MAGI with a retirement plan, HSA contributions, and self-employed health insurance premiums
You can lower your MAGI by earning less money, but many people would rather hunt for deductions. Consider the deductions that are available on your tax return above the line that indicates your adjusted gross income (this used to be Line 37 on the ordinary 1040; it is now Line 11). If you don’t already contribute the maximum amount to an individual retirement account (IRA), you should do so to reduce your MAGI (it has to be a traditional IRA; contributions to a Roth IRA are not tax-deductible). You and your spouse can both contribute to an IRA, cutting your household’s MAGI even further. Keep in mind that the amount of deductible contributions you can make to a traditional IRA is determined by your income if you also have a workplace retirement plan.
(Note that you must add back traditional IRA contributions in general MAGI calculations, but the ACA-specific MAGI rules are differentyour deductible traditional IRA contributions do lower your ACA-related MAGI.)
You can contribute to a 401(k) or other employer-sponsored pre-tax retirement plan to reduce your MAGI if you have access to one. You can set up a self-employed retirement plan if you’re self-employed. SEP IRA, SIMPLE IRA, and Solo 401(k) are all viable options; consult with your accountant to determine which is best for you. Keep in mind that these self-employed retirement plans typically have much higher contribution limits than traditional IRAs, making them a good choice if you’re trying to lower your MAGI. You may be eligible to make tax-deductible contributions to a traditional IRA depending on your income.
Contributing to an HSA (health savings account) will lower your MAGI if you have an HSA-qualified high-deductible health plan (HDHP). In 2021, the maximum payment amount is $3,600 if your HDHP only covers you, and $7,200 if it also includes at least one other member of your family. In the year 2020, the contribution limitations were $3,550 and $7,100, respectively. Due to the COVID-19 pandemic, the IRS has extended the 2020 HSA contribution deadline to May 17, 2021, despite the fact that you generally have to make contributions by April 15 of the following year.
Self-employed people can deduct their health insurance premiums to reduce their MAGI, but if that’s the component that qualifies you for a premium subsidy, things get a little more complicated.
Your subsidies might go a long way towards covering the contributions you make to your IRA and HSA
Consider a 55-year-old married couple with HSA-qualified health insurance and a combined family income of $80,000. Prior to the American Rescue Plan, this was substantially beyond the MAGI ceiling for premium subsidy eligibility ($68,960 for a family of two in 20210; based on 400% of federal poverty levels for 2020). Even with a MAGI of $80,000, this couple would be eligible for a subsidy now that the ARP has been adopted. However, we’ll use this example to show how their subsidy grows when they make varied pre-tax contributions.
They can each contribute up to $7,000 to an IRA in 2020 ($6,000 plus a $1,000 catch-up contribution because they’re over 50), and they can contribute up to $7,200 to an HSA if they have earned income (i.e., their income isn’t solely from investments and capital gains). If they made the maximum contributions, their MAGI would drop to $58,800.
Assume this couple is from Norfolk, Virginia. If their MAGI reaches $80,000 in 2021, they will be eligible for a monthly subsidy of $1,105 according to the American Rescue Plan’s subsidy improvements. However, if their income is $58,800, they are eligible for a $1,327 monthly subsidy (in order to contribute to an HSA, they must purchase an HSA-qualified plan, the cheapest of which costs roughly $6/month after the subsidy).
Because they chose to make the maximum contributions to their IRAs and HSAs, they received an extra $222 per month in subsidies, totaling $2,664 for the year. That’s on top of the regular tax benefits that come with those plans, such as not having to pay income tax on contributions and tax-free growth in the accounts.
With an income of $80,000 before the ARP, this couple would have qualified for no subsidy at all, but with an income of $58,800, they would have qualified for a hefty subsidy (not quite as large as it is under the ARP, but still very significant).
Younger applicants receive smaller subsidies, but the general concept remains the same: putting money into a retirement account and/or a health savings account will lower your health insurance premiums as long as your MAGI stays above the lower subsidy threshold (100 percent of the poverty level in states that haven’t expanded Medicaid, and 138 percent of the poverty level in states that have).
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 remember about HSA and IRA contributions is that you can fund them at any point during the year, even the first few months of the next year, as long as you do so before the tax filing deadline. So, if you sign up for 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 lower your MAGI for 2021 (premium subsidies are reconciled on your tax return, so that’s when you’d be working out the details with the IRS about the exact amount of premium subsidy you were supposed to receive during the year).
As a result of the COVID epidemic and the American Rescue Plan’s tax code amendments, the filing date for the 2021 tax year has been delayed until May 17, 2021. Also, the deadlines for contributing to your HSA or IRA in 2020 have been extended until May 17, 2021.
Other deductions and their impact on MAGI
Other deductions will also help you lower your MAGI because they lower your AGI and don’t have to be brought back in when calculating the ACA-specific MAGI. Alimony payments (from before to 2019 settlements; alimony from 2019 or later settlements does not qualify as income), student loan interest, tuition and fees, relocating expenses, and the deductible portion of self-employment taxes are all examples. Lines 10 through 22 of Schedule 1 for Form 1040 contain the deductions that reduce AGI.
After calculating AGI, itemized deductions like as mortgage interest, charitable donations, medical expenditures, and so on (or the standard deduction instead) are removed. As a result, they have no effect on MAGI because they do not lower AGI.
What if you need to increase your MAGI to qualify for subsidies?
People living in states that have not expanded Medicaid, on the other hand, may need to increase their MAGI in order to qualify for a subsidy, as Medicaid is only available on a limited basis in those states, and premium subsidies in the exchanges are not available to households with incomes below 100% of the federal poverty level (FPL).
Residents in such states should keep track of every penny they earn, even from sporadic jobs, according to navigators in those states. Even though the income from their principal work was too low to qualify for subsidies, some residents have been able to scrape together enough money from a variety of sources to rise over the poverty line. Babysitting, selling surplus garden produce, handyman labor, and promoting a hobby like knitting or woodworking at craft fairs can all help.
However, new rules enacted in 2018 require applicants to give proof of their income if they claim to earn more than the poverty line but current federal data shows that they earn less. People who are struggling to make ends meet should keep meticulous records of their sources of money so that they may give proof of income if the exchange asks for it.
Are IRA contributions included in Magi?
Calculating your MAGI is quite basic. To do so, first figure out your adjusted gross income (AGI), then subtract any IRS-approved deductions that pertain to your situation. Income from foreign sources, interest from certain savings bonds, and expenses related to adopting a child are all examples of these deductions. MAGI will always be more than or equal to AGI because it requires adding back these deductions. To figure out your modified adjusted gross income (MAGI), do the following:
- Check the list of “adjustments” to your gross income and add those to your gross income that you qualify for. Schedule 1 of the 1040 form contains the list.
- Add back any deductions you qualified for, which can include student loan interest and IRA contributions.
- Your MAGI is the result of this calculation. It’s not uncommon for it to be identical to your AGI.
How do I reduce my modified adjusted gross income?
You can lower your modified adjusted gross income in a number of ways to help you qualify for Roth contributions:
1. Contribute to a 401(k), 403(b), 457, or Thrift Savings Plan before taxes. In 2017, you can donate up to $18,000, or $24,000 if you’re 50 or older, and the amount is not deducted from your AGI. For further information, see What You Need to Know About Making IRA and 401(k) Contributions in 2017.
2. Make a deposit into a health savings account. You can contribute to an HSA if you have a high-deductible health insurance policy in 2017, with a deductible of at least $1,300 for self-only coverage or $2,600 for family coverage. If you have self-only coverage, you can contribute up to $3,400 in 2017, or $6,750 if you have family coverage, plus a $1,000 catch-up contribution if you’re 55 or older. If you make contributions through your company, they are pretax, and if you make them on your own, they are tax deductible. See Health Savings Accounts: Frequently Asked Questions for further information.
Do retirement contributions reduce Magi?
- Traditional 401(k) contributions cut both adjusted gross income (AGI) and modified adjusted gross income (MAGI) to a significant extent (MAGI).
- Traditional 401(k) contributions offer opportunities to ease tax liability because to the opportunity for tax deferral and reduction of current taxable income.
- The maximum contribution limit will increase to $20,500 in 2022, up from $19,500 in 2021. Those aged 50 and up can contribute an additional $6,500 as a “catch-up” contribution.
- Because Roth 401(k) contributions are made after-tax money, they have no effect on AGI or MAGI.
Do IRA contributions reduce adjusted gross income?
Traditional IRA contributions can reduce your adjusted gross income (AGI) for that year dollar for dollar. Your salary and any employment retirement plan you own may limit the amount by which your AGI can be decreased if you have a traditional IRA.
What deductions are added back for Magi?
Take your AGI and “add-back” certain deductions to get your modified adjusted gross income. Many of these deductions are infrequent, so it’s possible your AGI and MAGI to be identical. For your MAGI computation, different credits and deductions may have different add-backs. Your MAGI, according to the IRS, is your AGI plus the proper deductions, which could include:
Is Magi usually higher than AGI?
It’s common for a person’s MAGI to be close to or identical to their AGI. These computation techniques, on the other hand, may produce little variations that can have a significant impact on a person’s tax return.
How do I decrease my Magi?
Contributions to qualified tuition programs (QTPs, also known as 529 plans) and Coverdell Education Savings Accounts (ESAs) do not qualify you for a federal tax deduction. Many states, however, will allow you to deduct these contributions on your tax return.
It’s worth noting that in many circumstances, there are no restrictions on how many accounts a person can have.
WHAT IS THE MAGI for 2020?
In 2020, the maximum amount will be $6,000 for most people and $7,000 for those over fifty. The amount you can give each year drops if your salary is between $124,000 and $139,000 (or $196,000 and $206,000 for married couples).
What is a backdoor Roth?
- Backdoor Roth IRAs are not a unique account type. They are Roth IRAs that hold assets that were originally donated to a standard IRA and then transferred or converted to a Roth IRA.
- A Backdoor Roth IRA is a legal approach to circumvent the income restrictions that preclude high-income individuals from owning Roths.
- A Backdoor Roth IRA is not a tax shelterin fact, it may be subject to greater taxes at the outsetbut the investor will benefit from the tax advantages of a Roth account in the future.
- If you’re considering opening a Backdoor Roth IRA, keep in mind that the United States Congress is considering legislation that would reduce the benefits after 2021.
Do 401 K contributions affect Roth IRA limits?
A 401(k) plan allows you to contribute up to $19,500 in 2020. If you’re 50 or older, you can contribute up to $26,000 every year. In 2020, you can contribute up to $6,000 to a Roth IRA. If you’re 50 or older, the cost rises to $7,000.
What is the Magi for Roth IRA?
Your MAGI impacts whether or not you are eligible to contribute to a Roth IRA and how much you can contribute. To contribute to a Roth IRA as a single person, your Modified Adjusted Gross Income (MAGI) must be less than $139,000 for the tax year 2020 and less than $140,000 for the tax year 2021; if you’re married and filing jointly, your MAGI must be less than $206,000 for the tax year 2020 and $208,000 for the tax year 2021.
What makes up modified adjusted gross income?
In a nutshell, your MAGI is your adjusted gross income after subtracting any tax-exempt interest income and certain deductions. The IRS uses your MAGI to assess if you’re qualified for various deductions and credits in a variety of ways. Depending on your MAGI, you may be able to: Make a Roth IRA contribution.