ACA Subsidies: How Your Income is Calculated for Discounts

As you plan for retirement, understanding how your income determines your eligibility for ACA subsidies is crucial. This blog will guide you through the specifics of ACA income measurement so you can make informed decisions about when to retire.

Measuring Income for ACA Subsidies

The ACA uses your Modified Adjusted Gross Income (MAGI) to determine your eligibility for premium tax credits.

MAGI is a modified version of your Adjusted Gross Income (AGI), which is the income you report on your tax return. However, MAGI excludes certain types of income, such as untaxed foreign income and tax-exempt interest.

Income Level Measurement

ACA subsidies are based on your projected household income for the current year. This means that the income you estimate you will earn moving forward is considered, not your historical income.

However, when you file your taxes, you will need to provide your actual household income. This may result in a discrepancy between your projected and actual income, which may impact your subsidy eligibility.

Strategies for Maximizing Subsidies

If you are considering retiring before age 65, timing your retirement to the end of the calendar year can be beneficial. This allows you to minimize your income for the first year of retirement and potentially qualify for higher subsidies.

However, it is important to note that you may need to repay subsidies if your actual income exceeds your projected income. If your income is likely to vary significantly, you should consider updating your income estimates regularly on HealthCare.gov to avoid overpayments or underpayments.

Additional Considerations

Gifting does not affect your ACA subsidies as it does not impact your MAGI.
Qualified dividend income and realized capital gains are counted as part of your MAGI, even if they are taxed at 0%.
If you overestimate your income and receive excessive subsidies, you may need to repay some of the subsidies. However, there is a cap on the amount you can be required to repay.

Conclusion

Understanding how your income is measured for ACA subsidies is crucial for planning your retirement. By carefully considering your estimated and actual income, you can maximize your subsidies and make informed decisions about your financial future. If you have any questions about your eligibility for ACA subsidies or need assistance with your application, we recommend speaking to a licensed agent for personalized guidance.