To qualify for an Obamacare tax credit, you have to estimate your household income for the following year in your application. You can base this amount on your most recently filed tax return, taking into account any changes you expect for the following year. When you fill out your application, you must use your “modified adjusted gross income” (MAGI).
For the great majority of self-employed individuals, their MAGI is the same as their adjusted gross income (AGI), which is shown on line 37 of your IRS Form 1040. (If you use the shorter Form 1040EZ, your AGI is on line 4.)
Your MAGI consists of all your income minus certain deductions.
What You Add
To determine your MAGI, first add together all the following amounts:
- wages, salaries, tips
- net income from any self-employment or business (generally the amount of money you take in from your business minus your business expenses)
- taxable interest
- taxable amount of pension, annuity, or IRA distributions
- all Social Security benefits, including disability payments
- tax-exempt interest (for example, from government bonds)
- capital gains
- unemployment compensation
- foreign earned income & housing expenses for Americans living abroad (calculated on IRS Form 2555)
- ordinary dividends
- alimony received
- rental real estate, royalties, partnerships, S corporations, trusts, etc.
- taxable refunds, credits, or offsets of state and local income taxes, and
- other income such as prizes, awards, and gambling winnings.
You need not include: Supplemental Security Income, child support, food stamps, Temporary Assistance for Needy Families (TANF), gifts, workers compensation, Veteran’s disability payments, cash withdrawals from savings, qualified withdrawals from Roth IRAs or proceeds from loans (like student loans, home equity loans, or bank loans).
What You Subtract
To determine your final MAGI amount, subtract the following from your above total:
- certain self-employed expenses (deductible part of self-employment taxes; SEP, SIMPLE, and qualified plan contributions; self-employed health insurance deduction)
- student loan interest deduction
- educator expenses
- IRA deduction
- deductible moving expenses
- penalty on early withdrawal of savings
- health savings account deduction
- alimony paid
- domestic production activities deduction, and
- certain business expenses of reservists, performing artists, and fee-basis government officials.
When you file your tax return the following year, you have to reconcile the MAGI you actually earned with the amount of credits you received. If you earned more than you listed on your application, you may have to pay all or part of your credit payments back to the federal government. On the other hand, if you earned substantially less, you may be entitled to additional credits.