Understanding Adjusted Income: A Guide To Estimating For Insurance Purposes

Adjusted gross income (AGI) is an important factor in calculating how much your insurance should cost. It is your total (gross) income from all sources minus certain adjustments such as student loan interest, educator expenses, alimony payments, retirement contributions, and health savings account contributions. When filling out a health insurance application, you will need to estimate your expected income for the year you want coverage. This is calculated by taking your AGI and adding any tax-exempt foreign income and tax-exempt Social Security benefits. It's important to note that Supplemental Security Income (SSI) is not included in AGI. For self-employed individuals, business and personal deductions play a significant role in calculating AGI, as they reduce taxable income.

Adjusted income is based on gross income

Adjusted gross income (AGI) is your total gross income minus specific deductions. It is used to calculate taxable income, which is AGI minus allowances for personal exemptions and itemized deductions. For most individual tax purposes, AGI is more relevant than gross income.

Gross income includes money earned from most sources, such as wages, tips, interest, dividends, rents, and pension income. It also includes net gains from the disposal of assets, including capital gains and capital losses. However, losses on personal assets are not deducted when calculating gross income or AGI.

To calculate your AGI, you can subtract the following from your gross income:

• Educator expenses (books, supplies, equipment)
• Certain business expenses
• Deductible HSA contributions
• Moving expenses for military members
• Deductible self-employment taxes
• Contributions to retirement plans (e.g. SEP, SIMPLE) or health insurance for self-employed people
• Penalties on early withdrawals of savings
• Deductible IRA contributions
• Student loan interest
• Deductible tuition and fees
• Alimony payments

Your AGI is calculated before you take your standard or itemized deduction on Form 1040. You can find your AGI on line 11 of your tax return (IRS Form 1040).

AGI is important because it helps determine your eligibility for certain tax credits and deductions. It is also used as a baseline for the phase-out level of some credits and tax-saving strategies. Additionally, AGI is used by government agencies, banks, and private companies to check if someone meets the criteria for certain programs, benefits, or applications, such as income-driven student loan repayment programs.

It's worth noting that Modified Adjusted Gross Income (MAGI) is your AGI with some otherwise allowable deductions added back in. MAGI determines your eligibility for certain deductions, credits, and retirement plans. For most people, AGI and MAGI are the same.

Minus deductions like student loan interest

When calculating your adjusted gross income (AGI), you can subtract certain payments you've made during the year, such as deductions for student loan interest.

Student loan interest is one of the most common adjustments to income, or "above-the-line" deductions, that can be made when calculating your AGI. This is because the US government deems that this income should not be taxed.

Other common adjustments include:

• Contributions to certain retirement accounts (e.g. traditional IRA)
• Educator expenses (e.g. books, supplies, equipment)
• Self-employed health insurance premiums
• Moving expenses for members of the armed forces
• Early withdrawal penalties on savings
• Business expenses
• Health Savings Account (HSA) deductions
• Self-employment taxes (the deductible portion)

These adjustments are calculated on Schedule 1 and then the result is transferred to line 11 of your tax return form.

It's important to note that rules and limits apply to some of these adjustments. For example, the adjustment for classroom expenses is limited to $250 for individual educators and $500 for married educators filing a joint return.

Plus tax-exempt income, like foreign income

Foreign income is a complex topic, and it's important to understand how the IRS defines it. Here are some key points about tax-exempt foreign income and how it relates to adjusted income for insurance:

Foreign-earned income typically refers to salaries, wages, fees, or other payments received for services or goods provided in a foreign country. The income must originate from a source within the foreign country where the earner works and lives. For example, if an individual moves to another country and works for a foreign company, their income is likely considered foreign-earned. However, if they work overseas for a company based in the United States, their income may not be classified as foreign-earned, even if they are living abroad.

Tax Exemptions for Foreign Income

Foreign-earned income may be exempt from U.S. taxes up to a certain limit, which is adjusted annually for inflation. For the 2023 tax year, the limit was $120,000 per person. This exemption can be claimed using Form 2555 when filing taxes. It's important to note that not all foreign-earned income may be excluded, and certain types of income, such as military or civilian employee pay and pension or annuity payments, are not eligible for the exemption.

Foreign Income and Adjusted Income for Insurance

When calculating adjusted income for insurance purposes, foreign income that is tax-exempt should be included. This is because the calculation of Modified Adjusted Gross Income (MAGI), which is used to determine eligibility for insurance savings, includes untaxed foreign income. Therefore, even though foreign income may be exempt from U.S. taxes, it is still considered part of the household's total income when determining insurance coverage and costs.

Other Considerations

It's worth noting that the treatment of foreign income can vary depending on the individual's country of residence and the specific tax treaties in place. Additionally, the calculation of adjusted income for insurance may have other complexities, such as including the income of dependents and considering changes in employment or income sources. It is always advisable to consult with tax and insurance professionals to ensure accurate reporting and compliance with relevant regulations.

Consider changes to income and household

When estimating adjusted income for insurance, it's important to consider changes to your income and household. This is because your household income and composition can significantly impact your insurance costs and coverage options. Here are some key points to keep in mind:

• Income Changes: If you expect your income to change, it's essential to adjust your estimate. This includes considering new jobs, employment changes, and fluctuations in self-employment income. For self-employed individuals, business deductions play a crucial role in lowering your taxable income.
• Household Adjustments: Changes in your household composition, such as gaining or losing dependents, can significantly impact your savings and coverage options. Be sure to update your insurance application whenever there are changes in your household.
• Income Inclusions: When estimating household income, include income from all household members, including your spouse and tax dependents, even if they don't require insurance coverage. This is because marketplace savings are based on the total household income.
• Income Types: Understand the different types of income included in your estimate, such as taxable wages, self-employment income, unemployment compensation, social security income, retirement income, investment income, and more.
• Income Reporting: Stay proactive in reporting income and household changes to your insurance provider. This ensures you qualify for the appropriate coverage and savings options. Failure to report changes promptly may result in missing out on savings or having to repay subsidies when filing your tax return.
• Income Estimation: If you're unsure about your exact income for the upcoming year, make your best estimate based on your current circumstances. Consider factors such as unemployment benefits, income trends, and potential job changes.
• Income Verification: Your insurance provider may request documentation to verify your income estimates. Be prepared to provide pay stubs, tax returns, or other relevant records.
• Income Adjustments: Remember to adjust your income estimate for any expected changes. This could include adjustments for new jobs, changes in work schedules, fluctuations in investment income, or modifications to your household composition.
• Income and Coverage: Changes in your income or household situation may impact your insurance coverage options. For instance, if someone in your household gains job-based coverage or loses existing coverage, you may need to adjust your insurance plan accordingly.

Remember, it's crucial to stay vigilant in reporting any changes to your income or household to your insurance provider. This ensures you receive accurate coverage and savings while avoiding potential issues with your tax filings.

Use an online calculator to help

Using an online calculator is a straightforward way to estimate your adjusted income for insurance.

The first step is to select your filing status. Are you filing as an individual or jointly with a spouse?

The next step is to gather all your sources of income. This includes your salary, wages, and tips; business, self-employment, or farm income; interest, dividends, and earnings from royalties; social security benefits; spousal support or alimony payments; capital gains; real estate or rental income; unemployment compensation; pensions, IRA distributions, and annuity payouts; prizes and awards; jury duty fees; and any other income not exempted from income tax.

Once you have a total figure for your gross income, you can then input all eligible deductions. These include educator expenses for classroom supplies; contributions to a traditional IRA, SEP IRA, or similar; half of self-employment tax; health savings account contributions; health insurance premiums for self-employed workers; retirement plan contributions for self-employed workers; alimony paid for divorces finalized before 2019; early withdrawal penalties for savings accounts; school tuition, fees, and student loan interest; moving expenses for active-duty military members; business expenses for certain professionals; jury duty pay turned over to your employer; non-taxable portions of medals or prize money won in the Olympics or Paralympics; reforestation expenses and amortization of timber property; and attorney fees and court costs paid to recover a judgment or settlement for a claim of unlawful discrimination against you or in connection with helping the IRS detect tax law violations.

After inputting all your income and deductions, the calculator will determine your adjusted gross income (AGI).

Your AGI is used by the IRS to calculate your taxable income and discover the tax credits and benefits you are qualified to claim. It is also used as a starting point to figure out your modified adjusted gross income (MAGI), which determines your eligibility for other significant tax benefits, such as contributing to a tax-deductible retirement account.

Frequently asked questions