Marketplace Insurance: Are Investments Counted As Income?

When applying for health insurance, you will need to estimate your expected income. This includes income from any source that is not exempt from tax, such as wages, salaries, bonuses, commissions, business income, and investments. Modified Adjusted Gross Income (MAGI) is used to determine eligibility for premium tax credits, most categories of Medicaid, and the Children's Health Insurance Program (CHIP). MAGI includes tax-exempt interest, non-taxable Social Security benefits, and foreign income. It's important to note that Marketplace savings are based on your expected household income for the year you want coverage, not last year's income. Therefore, when applying for health insurance, you must consider all sources of income, including investments, to ensure accurate reporting and eligibility determination.

Modified Adjusted Gross Income (MAGI)

MAGI calculation involves three main steps. First, determine your gross income for the year, which includes income from wages, investments, pensions, rents, and other sources. Then, subtract any allowable deductions to arrive at your Adjusted Gross Income (AGI). Finally, add back certain deductions specific to MAGI, such as student loan interest, foreign income, and Social Security benefits. The specific deductions added back can vary depending on the tax benefit or credit being calculated.

MAGI and Tax Credits/Deductions

MAGI is essential for determining eligibility for specific tax credits and deductions. For example, MAGI affects your ability to deduct contributions to a traditional IRA. If you have a workplace retirement plan and your MAGI exceeds certain thresholds, your deduction may be limited. MAGI also determines eligibility for the premium tax credit, which lowers health insurance costs if you purchase a plan through a state or federal marketplace.

MAGI and Government Programs

In addition to tax credits and deductions, MAGI is used to determine eligibility for government programs like Medicaid and the Children's Health Insurance Program (CHIP). MAGI-based income calculations for these programs may include additional considerations, such as excluding certain Native American and Alaska Native income for Medicaid eligibility.

Strategies for Minimizing MAGI

From a tax planning perspective, it is generally advisable to minimize your MAGI. This can be achieved through various strategies, such as maximizing deductions for mortgage interest, property taxes, charitable contributions, and medical expenses. Contributing to tax-advantaged retirement accounts, such as Traditional IRAs or Health Savings Accounts (HSAs), can also help reduce your MAGI. Additionally, investing in tax-advantaged vehicles like municipal bonds or Roth IRAs can lower your taxable income and, consequently, your MAGI.

In conclusion, understanding and calculating your MAGI is crucial for tax planning and determining eligibility for various tax benefits and government programs. By adjusting your gross income for specific deductions and considerations, you can make informed decisions about your financial situation and maximize your tax advantages.

Taxable and non-taxable income

Income is any compensation received for providing a service, and it can take the form of money, property, or services. Taxable income is the portion of your gross income that the IRS deems subject to taxes. It includes both earned and unearned income.

Taxable Income

Taxable income includes:

• Wages, salaries, and commissions
• Business income/Self-employment income
• Partnership, estate, and S-corporation income
• Compensation for personal services
• Disability benefits (employer-funded)
• Unemployment compensation
• Railroad retirement
• Estate and trust income
• Gains from the sale of property or securities
• Non-employee compensation
• Social Security benefits (a portion may be taxable)
• Supplemental unemployment benefits
• Interest on life insurance dividends
• Taxable scholarships and grants
• Tax-exempt foreign income
• Tax-exempt Social Security benefits (including tier 1 railroad retirement benefits)
• Taxable refunds, credits, or offsets of state and local income taxes
• Alimony received under settlements executed before 2019
• Rental income from personal property
• Royalties from copyrights, patents, and oil, gas, and mineral properties
• Prepaid income for future services
• Fringe benefits
• Income from bartering
• Virtual currency transactions

Non-Taxable Income

Non-taxable income includes:

• Aid to Families with Dependent Children (AFDC)
• Meals and lodging for the employer's convenience
• Child support received
• Payments to the beneficiary of a deceased employee
• Damages for physical injury (other than punitive)
• Payments in lieu of worker's compensation
• Dividends on life insurance
• Rental allowance of clergymen
• Federal Employees' Compensation Act payments
• Sickness and injury payments
• Federal income tax refunds
• Social Security benefits (a portion may be taxable)
• Supplemental Security Income (SSI)
• Inheritance or bequest
• Temporary Assistance for Needy Families (TANF)
• Insurance proceeds (accident, casualty, health, life)
• Veterans' benefits
• Interest on tax-free securities
• Welfare payments (including TANF) and food stamps
• Interest on EE/I bonds redeemed for qualified higher education expenses
• Workers' compensation and similar payments
• Cash rebates on items purchased from a retailer, manufacturer, or dealer
• Alimony payments (for divorce decrees finalized after 2018)
• Most healthcare benefits
• Money reimbursed from qualifying adoptions
• Money from a qualified scholarship (if not used for room and board or personal expenses)
• Life insurance proceeds
• Long-term care insurance income
• Disability and worker's compensation payments
• Supplemental Security Income payments
• Disability compensation or pension payments from the Department of Veterans Affairs
• Municipal bond interest
• Some capital gains and losses
• Qualified distributions from a Roth account
• Child support payments
• Earned income in states with no income tax

Dependents and their income

When it comes to health insurance, dependents and their income are important factors to consider. Here are some detailed information and guidelines regarding dependents and their income in the context of marketplace insurance:

Who is Considered a Dependent?

A dependent typically includes a spouse and children. Children can be biological, stepchildren, or adopted, and they can remain on a parent's health insurance plan until they turn 26 years old, regardless of their marital status, living situation, or eligibility for other coverage. In some cases, unmarried domestic partners can also be considered dependents if they have a child together or if they are claimed as tax dependents.

Income Considerations for Dependents:

• When filling out a health insurance application, it is necessary to estimate the expected income of all household members, including dependents. This includes income from wages, salaries, interest, dividends, unemployment benefits, and other sources.
• For dependents under the age of 65, they are required to file a federal income tax return if they have earned income of at least $13,850 or unearned income (such as from investments or trusts) of at least $1,250.
• The income of dependents who are required to file a tax return must be included in the household income, even if they don't need health coverage themselves. This is an important factor in determining eligibility for premium tax credits and other savings.
• If a dependent is not required to file a tax return, their income is generally not included in the household income. However, if they choose to file a tax return to receive a refund, their income still won't be counted in the household income.
• It is important to note that Supplemental Security Income (SSI) is not included in the dependent's income calculation.

Impact on Premium Tax Credits:

• Eligibility for premium tax credits is based on the Modified Adjusted Gross Income (MAGI) of the household. MAGI includes the tax filer's income, their spouse's income, and the income of any dependent who is required to file a tax return.
• If a young adult is not claimed as a tax dependent by their parents and has their own income, their eligibility for premium tax credits will be based on their income alone. They may be eligible for coverage under their parents' plan until they turn 26, but their income won't affect their parents' eligibility for premium tax credits.
• In some cases, state-run marketplaces may calculate premium tax credits separately for family policies covering two "tax households." However, the federal marketplace has not yet accommodated this, leading many young adults to enrol in separate policies.

Additional Considerations:

• It is important to update the marketplace application promptly if there are any changes in income or household members during the year. This ensures that individuals receive the correct amount of savings and are enrolled in the appropriate insurance plan.
• While marketplace savings are based on the total household income, it is worth noting that not all household members are required to have the same insurance plan. Different household members may be covered by a mix of job-based plans, marketplace plans, or public programs like Medicaid or CHIP.

Changes to income

Income is a key factor in determining eligibility for health insurance coverage and related benefits. The Modified Adjusted Gross Income (MAGI) is the primary measure used to assess a household's income for Marketplace insurance plans, Medicaid, and the Children's Health Insurance Program (CHIP). MAGI is calculated by adjusting an individual's gross income, which includes income from any non-exempt source, by accounting for certain deductions and adjustments.

When it comes to changes in income, it is important to consider adjustments to income from various sources, including investments. Here are some key points to note regarding changes to income:

• Reporting Changes: It is essential to report income and household changes promptly to the Marketplace insurance application. Delays in reporting may result in receiving the wrong amount of savings or enrolling in an inappropriate insurance plan.
• New Jobs or Employment Changes: Any changes in employment status, work schedule, or self-employment income can significantly impact overall income and, consequently, eligibility for Marketplace insurance savings.
• Income from Other Sources: Changes in income from sources other than employment, such as Social Security or investments, can also affect MAGI. This includes fluctuations in investment income, such as dividends, capital gains, or interest earnings.
• Household Changes: Gaining or losing dependents can have a notable impact on your savings and overall income calculation. This may include changes in tax filing status and the inclusion or exclusion of a dependent's income in the household MAGI.
• Unpredictable Income: For those with unpredictable income, such as the self-employed or those on commission, it is advisable to base income estimates on past experiences, recent trends, and expectations of future changes.
• Income Adjustments: When calculating MAGI, certain adjustments are made to gross income. These adjustments include deductions for contributions to individual retirement accounts (IRAs), health savings accounts (HSAs), and student loan interest payments.
• Foreign Income: For Americans living abroad, foreign income and housing expenses may be relevant to their MAGI calculation. This includes foreign income earned by U.S. citizens and resident aliens living outside the U.S. who meet certain residency or physical presence tests.

Household income

A household's income can be calculated in various ways, but the US Census, as of 2009, measured it as the income of every resident of that house over the age of 15, including pre-tax wages and salaries, along with any pre-tax personal business, investment, or other recurring sources of income, as well as any kind of government entitlement such as unemployment insurance, social security, disability payments, or child support payments received. The residents of the household do not have to be related to the head of the household for their earnings to be considered part of the household's income.

When it comes to health insurance, eligibility for premium tax credits, most categories of Medicaid, and the Children's Health Insurance Program (CHIP) is determined using a tax-based measure of income called Modified Adjusted Gross Income (MAGI). MAGI is the total of the following for each member of your household who's required to file a tax return:

• Adjusted Gross Income (AGI) or total (gross) income for the tax year, minus certain adjustments like deductions for conventional IRA contributions, student loan interest, etc.
• Excluded foreign income
• Non-taxable Social Security benefits
• MAGI does not include Supplemental Security Income (SSI)

Marketplace savings are based on your expected household income for the year you want coverage, not last year's income. You must include the income of your spouse and everyone you claim as a tax dependent on your federal tax return, even if they don't need health coverage.

The median household income in the US was $74,580 in 2022, a 2.3% decline from the 2021 estimate of $76,330. The distribution of US household income has become more unequal since 1980, with the income share received by the top 1% trending upward from around 10% or less over the 1953-1981 period to over 20% by 2007. Since the end of the Great Recession, income inequality in the US has gone down slightly, and at an accelerated pace since 2019.

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