MAGI Medicaid – Income

 

For many applicants, eligibility for Medicaid in Rhode Island is based on their Modified Adjusted Gross Income (MAGI). This article describes how MAGI is counted for Medicaid. For more information on which categories applicants are subject to the MAGI standard, or for information on the income limits for various categories of applicants, see MAGI Medicaid – Eligibility.

MAGI is a tax concept. Determining MAGI for a tax filer is relatively straightforward. For those who do not file tax returns, or for those whose situations have changed substantially since their last tax return, determining MAGI can be more complicated.

For this whole section, keep in mind that Medicaid eligibility is based on current monthly income. This is different from eligibility for tax credits, which is generally based on a projection of annual income for the year in which the credits are received (see APTC & CSR Eligibility – Income & Household Size ).

Constructing MAGI Without a Tax Return

 

There are numerous high-quality national resources on how MAGI is determined, and the rules should not be different in Rhode Island. A useful summary is available at www.healthcare.gov/income-and-household-information/income, and very detailed account can be found in NHeLP’s The Advocates Guide to MAGI. It can helpful to refer to IRS publications on gross income, such as IRS Publication 17 or IRS Publication 525. Nonetheless, below please find some examples of income and deduction types and their treatment under the MAGI standard.

Income INCLUDED in MAGI

  • Taxable Salary and Wages;
    • Note that funds paid for pre-tax deductions are not counted included in income for this purpose. Common pre-tax deductions include health insurance premiums, flex spending accounts, commuter expenses, and retirement accounts.
  • All Social Security Income (even if not taxed), other than Supplemental Security Income (SSI);
    • The Social Security income of children and other dependents is sometimes not counted.  See the section below on “Whose Income Is Included” for more information.
  • Self-Employment Income (profits after expenses, as per rules on IRS Form 1040 Schedule C);
  • Unemployment Benefits;
  • Alimony Received;
  • Interest (even if not taxed);
  • Capital Gains;
  • Rental Income;
  • Taxable Investment Income (e.g. dividends);
  • Foreign Earned Income;
  • Rhode Island Temporary Caregiver Insurance (TCI) Benefits;
  • Military Retirement Pay;
  • Taxable Portion of Private Long-Term Disability Insurance Benefits;
    • Note that some income from private disability insurance policies is taxable and some is not. It depends on how the premiums for the policy were paid. Generally, the benefit is not taxed if the premiums were paid by the individual using after-tax money, and the benefit is taxed if the premiums were paid by the individual’s employer with pre-tax money. The insurance company providing the benefit should know what portion of the benefit is taxable (and therefor included in MAGI) and what portion is not.
  • Any other taxable income (e.g. cancelled debts, court awards, gambling winnings);

Income EXCLUDED from MAGI

  • Child Support Received;
  • Supplemental Security Income (SSI);
  • TANF;
  • Rhode Island Temporary Disability Insurance (TDI) Benefits;
  • Worker’s Compensation;
  • Most Veteran’s Benefits;
  • Gifts;
  • Non-Taxable Portion of Private Long-Term Disability Insurance Benefits;
    • Note that some income from private disability insurance policies is taxable and some is not. It depends on how the premiums for the policy were paid. Generally, the benefit is not taxed if the premiums were paid by the individual using after-tax money, and the benefit is taxed if the premiums were paid by the individual’s employer with pre-tax money. The insurance company providing the benefit should know what portion of the benefit is taxable (and therefor included in MAGI) and what portion is not.
  • Parsonage Income for Clergy, to the extent excluded from AGI (line 37 of Form 1040);

Deductions that Decrease MAGI

  • Alimony Paid;
  • Student Loan Interest Deduction;
  • IRA Contributions (to a “traditional” IRA, not a Roth IRA);
  • Deductible Tuition and Fees;
  • All other deductions listed at Form 1040, lines 23 through 35.

“Deductions” that do NOT Decrease MAGI

  • Mortgage Interest Deduction
  • Other itemized deductions from Form 1040, Schedule A

When in doubt, remember that MAGI is rooted in tax law.  In general:

  • If an element of income is included in taxable Gross Income (lines 7 through 21 of the 1040), then it will be included in MAGI.
  • If a deduction is included among the “above-the-line” deductions accounted for before arriving at AGI (lines 23 through 35 of the 1040), then the deduction will be subtracted out of MAGI.
  • Then there are three “modifications” that convert AGI to MAGI that must be considered (see below).

Determining MAGI from a Tax Return

It is also possible to determine MAGI from a tax.  But Medicaid MAGI is based on current monthly income, so a tax return from last year may not be the best source of information.

To determine MAGI from a tax return, the first step is to identify the applicant’s “Adjusted Gross Income” (or “AGI”). AGI is found on the following lines of a tax return:

Tax FormAGI Line
1040Line 37 (bottom of first page)
1040ALine 21 (bottom of first page)
1040EZLine 4

There are then three “modifications” necessary to convert from AGI to MAGI:

  1. Add all non-taxable social security income, which can be calculated by subtracting line 20b from line 20a on the Form 1040 (or by subtracting line 14b from line 14a on the Form 1040A).
  2. Add all tax-exempt interest, which can be found at line 8b of the Form 1040 (or line 8b of the Form 1040A).
  3. Add all foreign earned income excluded from gross income, which can found by adding lines 45 and 50 of the Form 2555 (or at line 18 of Form 2555-EZ).

This calculation will yield an annual income figure, which then needs to be divided by twelve to get the monthly figure relevant for Medicaid eligibility. This method works for applicants with steady income.

Example 1
John is 64-years old, applying for Medicaid. His income has been steady for years. According to his most recent tax return, he earned $6,000 per year in taxable wages (line 7 of his 1040). He also collects $1,000 per month in Social Security (retirement) benefits, only half of which is taxable (so line 20a reads $12,000 and line 20b reads $6,000). His AGI (line 37) was $12,000 per year.
→ His MAGI is $18,000 per year, or $1,500 per month. His untaxed Social Security benefit (of $6,000 per year) needs to be added back to his AGI of $12,000 to arrive at his MAGI.

Though uncommon, this calculation may also need to be adjusted for applicants with certain types of scholarship or fellowship income, or Native American / Alaska Native income. Please refer to the section below entitled “Differences Between Medicaid MAGI and Premium Tax Credit MAGI.”

Whose Income is Included?

Generally, the income of every member of the applicant’s household must be counted. (For more information on who is included in the applicant’s household, see MAGI Medicaid – Household Size.)

The major exception is the income of children and dependents who are not expected to be required to file their own tax returns. The income of these dependent household members is not included in the household’s MAGI.

Generally, a dependent must file an income tax return when his income exceeds a certain threshold. For example, a dependent under age 65 must file a 2014 return if he had:

  • earned income of $6,200 or more, or
  • unearned income of $1,000 or more.

(Note that the taxable portion of Social Security benefits counts as unearned income for these purposes.) Filing requirements can be tricky, so advocates may want to consult someone with tax expertise before determining whether a dependent will be required to file. IRS Publication 501 is also helpful.

Example 2
David has one minor son, Mark, whom he claims as a tax dependent. Mark collects $600 per month in Social Security (Survivors) benefits and has no other income. His Social Security benefits are not taxable. At that income, Mark is not expected to be required to file a separate income tax return.
→ Mark’s income does not count in David’s household MAGI because Mark’s income is too low for him to be required to file a separate income tax return.

Example 3
Same situation as Example 2 above, except that Mark now earns $7,000 per year in an after-school job. With that income, he is expected to be required to file an income tax return. His Social Security income is still not taxable.
→ 
In this case, Mark’s income counts as part of the David’s household MAGI because Mark is expected to be required to file an income tax return. This will include all of Mark’s income, including the nontaxable Social Security income, because nontaxable Social Security income counts in MAGI.

Differences Between Medicaid MAGI and Premium Tax Credit MAGI

There are five differences between MAGI counting rules for the purposes of Medicaid eligibility as compared to MAGI counting rules for the purposes of PTC eligibility (see APTCs & CSRs – Income and Household Size).

  1. MAGI Medicaid eligibility is based on current monthly income while PTC eligibility is based on a projection of annual income for the relevant tax year.
    • Note on fluctuating income – If changes in income are “reasonably predictable” and can be evidenced in some way, then a prorated portion of those changes in income may be considered when determining eligibility.
  2. For MAGI Medicaid, lump sum income only counts as income in the month received.
  3. For MAGI Medicaid, scholarships, awards, or fellowship grants used for education purposes and not for living expenses are excluded from income, even if that income might be part of AGI.
  4. For MAGI Medicaid, certain types of American Indian / Alaska Native income are excluded from countable income. See 45 C.F.R. § 435.603(e)(3) for a complete list.
  5. For MAGI Medicaid, use the FPLs in effect at the time of application.  For APTCs and CSRs, use the FPLs in effect as of the first day of open enrollment for the relevant coverage year.

Example 4
John has no regular income, but he made a taxable withdrawal from his IRA of $25,000 in January. It is now March and he wants to apply for Medicaid.

→ The $25,000 lump sum income from January does not count against his eligibility when he applies in March. That income only counts against his January eligibility.  (But for the purposes of APTCs and CSRs, the full year income projection is the key, so this January income would need to be accounted for.)

Example 5 
Peter has a landscaping business that only brings income six months out of the year. When the business is working, he earns about $2,000 per month. But he earns nothing in the off-season. Mark is applying for Medicaid during his busy season, when he has earnings.
→ 
Mark can “prorate” his expected fluctuating income and be considered for Medicaid eligibility based on a monthly income of $1,000 per month, his average for the year.

Other Resources:

Author:  Sam Salganik
Date:  July 13, 2015

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