Calculating MAGIDecember 11, 2013

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Refreshers

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Individuals are eligible for an APTC if they:

1. Enroll in a QHP from the Marketplace

2. Have projected annual income between 100% and 400% FPL (with exception for legal immigrants)

3. Lack access to other coverage that meets some basic standards (“minimal essential coverage”)

4. Meet various tax-based requirements:• Plan to file a federal tax return• If married, plan to file a joint tax return• Not eligible to be claimed as a dependent on someone else’s

tax return

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APTC is Calculated By:

• Determining the amount the family is expected to spend on premiums (expected contribution) given its income.

• Identify the cost of the applicable Silver plan (benchmark plan) for the family.

• Fill the gap- after identifying a family’s expected contribution, determine how much more it needs to purchase the benchmark plan. The APTCs are set at this dollar amount to “fill the gap.”

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MAGI

• For APTC:

AGIForeign Income ,

Tax Exempt Interest and Non-taxable

Social Security Benefits Received

MAGI

• For Medicaid, MAGI with additional modifications:• Exclude certain scholarship and fellowship income • Exclude certain Native American and Alaska Native income • Count lump sum income only in the month received

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Calculating Income (MAGI)

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Why Do We Use MAGI?

• Eligibility for insurance affordability programs (IAPs) falls along a continuum based on income, age, and other eligibility factors.

• On this continuum, income is measured as percent of the federal poverty level, or FPL

• FPL is determined by taking household size and household income

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Whose Income is Counted?

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General Filer Rules: Tax Filer vs. Tax Dependent

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“Tax Filer”Individual plans to file a federal income tax return and does not expect to be claimed as a tax dependent on someone else’s federal income tax return for the year coverage is sought. “Tax Dependent”

Individual expects to be claimed as a “tax dependent” for the year coverage is sought.

Example: a father, who plans to claim his child as a tax dependent, is called the “tax filer.” The child, claimed by his father, is a “tax dependent.”

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Tax Filer Rules

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Construct a tax filer’s household:

A tax filer’s household must include:

The taxpayer; AND

His/her spouse if they live together, regardless of whether or not they intend to file a federal income tax return jointly; AND

Individuals the taxpayer expects to claim as a tax dependent on his/her federal income tax return.

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Whose Income Is Counted?

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Whose income is counted?

Generally, MAGI income of all individuals in a household must be counted toward household income.

Let’s review an example

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Whose Income Is Counted?: Example

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Sam earns$1,000

income/mo.

Susan earns$500

income/mo.

Married

Sam Scenario: Sam and Susan are married, plan to file taxes jointly, and plan to claim their daughter, Sarah, age 6, as a tax dependent. Sam’s monthly income is $1,000, Susan’s monthly income is $500, and Sarah has no income.

Sam and Susan plan to file jointly and

claim Sarah as a tax dependent.

$1,500Sam’s Total Monthly

Household Income for a Family Size of 3

Sam’s $1,000

Susan’s $500Sarah, 6 y/o

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Whose Income Is Counted?: Exceptions

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Usually MAGI income of all individuals in an individual’s household must be counted toward household income, but there are two exceptions:

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Income of most children not expected to be required to file a federal income tax return; and

Income of most tax dependents not expected to be required to file a federal income tax return.

Note: These rules are based on whether or not an individual is “expected” to be required to file taxes for the year coverage is received; it does not matter whether the individual eventually does or does not file taxes. Details to follow . . .

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Exceptions to Whose Income Is Counted: Children

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Exception for the income of children: Child’s income does not count toward household income if child is

included in the household of his or her parent, unless the child is required to file taxes.

Child’s income does not count for evaluating:

─ Child’s eligibility; OR

─ Eligibility of other household members.

Applies to adult children who are tax dependents of their parent.

If a child does not live with his or her parent and is not claimed as a tax dependent by his or her parent, then the child’s household will not include the parent.

In this case, the child’s income will count for his or her own eligibility and the eligibility of the child’s other household members, such as siblings, regardless of whether the child’s income is high enough to require a tax return to be filed.

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Child Income Exception Scenarios 1

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Kelly, 16 y/o,babysits her

neighbor’s child

Kelly Scenario: Kelly, age 16, lives with her mother and babysits on Saturday nights for her neighbor’s child two times/month and earns $50 each night. Kelly is not expected to be required to file taxes.

$

Kelly earns $100 each month

Kelly is not expected to be required to file

taxes.

$Kelly’s income is not

counted in the household income of

herself nor the household income of

her mother.

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Child Income Exception Scenarios 2

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Marty Scenario: Marty claims his adult son, Mark, as a tax dependent. Marty makes $2,500 a month. Mark is a 22-year old college student and makes $400 a month working as a waiter and is not expected to be required to file a tax return.

Marty earns

$2,500/mo.

Mark, 22 y/o, earns $400/mo.

Marty plans to claim Mark as a tax dependent.

Mark does not plan to file

taxes.

$2,500Marty’s Total Monthly

Household Income for a Family Size of 2

Marty’s $2,500

Mark’s $400

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Child Income Exception Scenarios 3

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Sadie Scenario: Sadie, age 55, plans to claim her daughter, Stephanie, age 17, and her granddaughter, Sarah, age 2, as tax dependents. Sadie earns $3,000 a month in wages. Stephanie earns $500 a month in wages. Sadie and Stephanie both plan to file taxes, but Stephanie does not make enough money to be expected to be required to file taxes.

Sadie, 55 y/o, earns $3,000/mo.

Stephanie, 17 y/o, earns $500/mo.

Sadie plans to file taxes and

claim Stephanie and

Sarah as tax dependents.

Sadie’s Total Monthly Household Income for a

Family Size of 3

$3,000 Sadie’s $3,000

Stephanie’s $500

Sarah, 2 y/o Sadie Sarah Stephanie

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Child Income Exception Scenarios 4

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Stephanie Scenario: Sadie, age 55, plans to claim her daughter, Stephanie, age 17, and her granddaughter, Sarah, age 2, as tax dependents. Sadie earns $3,000 a month in wages. Stephanie earns $500 a month in wages. Sadie and Stephanie both plan to file taxes, but Stephanie does not make enough money to be expected to be required to file taxes.

Sadie, 55 y/o, earns $3,000/mo.

Stephanie, 17 y/o, earns $500/mo.

Stephanie does not plan to file

taxes.

Stephanie’s Total Monthly Household

Income for a Family Size of 3

$3,000 Sadie’s $3,000

Stephanie’s $500

Sarah, 2 y/o Sadie Sarah Stephanie

Does not meet any dependent care exceptions

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Exception for the Income of Most Other Tax Dependents

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Scenarios 1-3: Include income of a tax dependent in household income of person who is claiming them, only if the tax dependent is expected to be required to file a tax return.

Scenario 4: Income of a tax dependent is included in household income of any household where both that tax dependent and his/her claiming tax filer are present, only if the tax dependent is expected to be required to file a tax return.

Exception for the income of other tax dependents:

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Household Income

(A) Household incomeThe term ‘‘household income’’ means, withrespect to any taxpayer, an amount equal tothe sum of—(i) the modified adjusted gross income ofthe taxpayer, plus(ii) the aggregate modified adjustedgross incomes of all other individualswho—(I) were taken into account in determiningthe taxpayer’s family size underparagraph (1), and(II) were required to file a return of taximposed by section 1 for the taxableyear.

Definition from tax code

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Step 2: What Income Counts?

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Use IRS measure of MAGI, which defines what counts as income after accounting for selected tax adjustments.

MAGI consists of four types of income that are counted in determining eligibility:

1) Taxable income (described later)

2) Social Security benefits not included in taxable income

3) Tax-exempt interest

4) Foreign earned income

Note: Most individuals eligible for Medicaid/CHIP will only have taxable income and some will have Social Security benefits. Almost none of these individuals will have tax-exempt interest or foreign earned income.

Step 2

What counts as household income?

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Countable Income

Taxable wages/salary (before taxes are taken out)

Self-employment (profit once business expenses are paid)

Social Security benefits

Unemployment benefits

Alimony received

Most retirement benefits

Interest (including tax-exempt interest)

Net capital gains (profit after subtracting capital losses)

Most investment income, such as interest and dividends

Rental or royalty income (profit after subtracting costs)

Other taxable income, such as canceled debts, court awards, jury duty pay not given to an employer, cash support, and gambling, prizes, or awards

Foreign earned income

Note: Pre-tax contributions to dependent care accounts, health insurance premiums, flexible spending accounts, retirement accounts and commuter expenses are NOT included as income

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Non-Countable Income

Temporary Assistance to Needy Families (TANF) and other government cash assistance

Supplemental Security Income (SSI)

Child support received

Veterans benefits

Worker’s compensation payments

Proceeds from life insurance, accident insurance, or health insuranceFederal tax credits and Federal income tax refunds

Gifts and Loans

Inheritances

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Calculating MAGI

• There are two methods for helping customers identify their MAGI income:1. Construct MAGI income2. Use previous tax return

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CONSTRUCTING MAGI

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“Construct” MAGI

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Help the individual construct MAGI using IRS definitions and rules.

This requires gathering detailed information on an individual’s household income from various sources and adjustments.

Use the application questions on income in the paper to construct MAGI, or use the MAGI worksheet

Step 1

• Determine taxable income.

Step 2

• Subtract adjustments from taxable income.

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Income Questions

• The online application asks for projected annual income.

• The paper application walks individuals through the various types of income.

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Income Questions

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Income Questions

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MAGI Worksheet

1

Enter your Taxable wages/salary/tips (before taxes are taken out)

Note: that pre-tax contributions to dependent care accounts, health insurance premiums, flexible spending accounts, retirement accounts and commuter expenses are NOT included as income

1 $2 Enter your Self-employment (profit once business expenses are paid) 2 $

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Enter your Social Security benefits (taxable and non-taxable)

SSDI is included here. SSI income is not included here. If you are receiving SSI, you are automatically eligible for Medicaid in the state of Colorado. You also do not need to include any veterans disability benefits you may receive. 3 $

4 Enter your Unemployment benefits 4 $5 Enter your Alimony received 5 $6 Enter your Retirement benefits (taxable IRA distributions, pensions, and annuities) 6 $

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Enter your Interest (including tax-exempt interest)

Examples of interest are interest on bank accounts, bonds, money market accounts, certificates of deposit, deposited insurance dividends, and seller financed mortgage . Examples of non-taxable interest are 7 $

8 Enter your Net capital gains (profit after subtracting capital losses) 8 $9 Enter your Dividends 9 $

10 Enter your Rental or royalty income (profit after subtracting costs) 10 $

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Enter Other taxable income, such as canceled debts, court awards, jury duty pay not given to an employer, cash support, and gambling, prizes, or awards or farm income. Also include taxable refunds, credits or offsets of local or state income taxes. 11 $

12 Enter your Foreign earned income 12 $13 Add lines 1-12 13 0.00

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Adjustments to taxable income

Tax adjustments must be subtracted from an individual’s taxable income. A list of these adjustments can be found on lines 23-35 of the IRS 1040 Form.

Some of the tax adjustments include:

Certain self-employment business expenses

Penalties on the early withdrawal of savings

Alimony paid Certain educator expenses

Portion of interest on student loans Certain moving expenses related to a job change

Most contributions to individual retirement arrangements (IRAs)

Certain business expenses of performing artists, reservists, and fee-basis government officials

Certain tuition and fees Health savings account contributions

Most common adjustments among individuals likely include certain self-employment expenses, most contributions to IRAs, alimony paid, tuition and student fees, and student loan interest.

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Common adjustments

Most adjustments for self-employed business expenses are included in net income (profit once business expenses are paid).

Additional adjustments can be made for:─ Deductible part of self-employment tax ─ Self-employed SEP, SIMPLE, and qualified plans─ Self-employed health insurance adjustments

Payment to spouse or former spouse under divorce or separation agreement.

Households may be able to deduct most interest they expect to pay on qualified student loans up to $2,500 per year.

Form 1098-E, Box 1, shows interest paid for prior year. This may help project student loan interest that will be paid during the year.

See IRS Publication 334, Tax Guide for Small Business, for more details

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Adjustments/Deductions

• The paper application asks for deductions as follows.

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MAGI Worksheet

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Enter your Self-employment business expenses

Most deductions for self-employed business expenses are included in net income (the profit once business expenses are paid) but additional deductions can be taken for the deductible part of self-employment tax, self-employed SEP, SIMPLE, and qualified plans, and self-employed health insurance deductions. For additional information see IRS Publication 334, Tax Guide for Small Business. 13 $

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Enter your Portion of interest on student loans

Households may be able to deduct a portion of the interest they expect to pay on a qualified student loan. Box 1 of the 1098-E Form shows the interest paid for the prior year, which may be helpful in projecting student loan interest that will be paid during the year

14 $

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Enter your Alimony paid

15 $17 Enter your IRA deduction 16 $18 Enter your Tuition and fees 17 $19 Enter your Health savings account contributions 18 $20 Enter your Educator expenses 19 $21 Enter your Penalties on the early withdrawal of savings 20 $

22 Enter your Certain business expenses of performing artists, reservists, and fee-basis government officials 21 $23 Enter your Moving expenses related to a job change 22 $24 Enter your Domestic Production Activities deduction $25 Add lines 14-24 24 0.00

Subtract line 25 from line 13 ( i.e. Line 13 - Line 25 = MAGI) . This is your Modified Adjusted Gross Income $0.00

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USING PRIOR YEARS TAX RETURN

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Using prior years tax return

A federal tax return may only be used to determine MAGI if the individual’s tax return is available and they want to use it to determine MAGI.

Individuals are NOT required to use a prior year’s tax return. In addition, many individuals eligible for Medicaid/CHIP are not required to file federal income taxes because their income does not meet the tax filing threshold.

A federal tax return is helpful if the individual filed federal taxes last year and his circumstances have not changed notably since last year’s tax filing and income is steady month-to-month.

Allows Medicaid/CHIP agency to use the income and adjustments the individual reported in accordance with IRS rules on last year’s federal income tax return.

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Determine MAGI Using a Prior Year’s Federal Tax Return (cont’d)

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Pull “adjusted gross income” from appropriate line of federal income tax form:

Line 4 on Form 1040EZ Line 21 on Form 1040A Line 37 on Form 1040

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Determine MAGI Using a Prior Year’s Federal Tax Return (cont’d)

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If applicable, add following sources of income from last year’s tax form:

Line 20a on Form 1040 Line 8b on Form 1040 Line 7 on Form 1040

Any social security benefits not already included in taxable income

Tax-exempt interest taxpayer expects to receive or accrue during year

Foreign earned income excluded from taxable income (based on Form 2555, line 26 or Form 2555-EZ, line 17)