What's Your Income? How to Answer for Obamacare

My column in the Nov. 18 issue of the New York Observer has generated a ton of mail and a lot of questions about the issue many of us are facing: How to estimate income on the Exchange application. From the column: 

The state exchange number put me on hold. I hung up and called Premera. “You can sign up with us directly,” a very helpful rep told me, “but if there’s a chance your income could qualify you for a subsidy, it’s best to go through the state exchange.” 
    So: Back to the exchange website. Enter birth dates, zip code, tobacco use, yadda yadda, monthly income. Stop. Ponder. 
    Which month, brother? For that matter, which year? Do you want gross, net, before SE (self-employment tax, a k a Social Security payments) or after? AGI (adjusted gross income) from last year’s 1040? 

All my fellow freelancers and contract workers wanted to know: What's the number? 

I got ahold of the Washington State Insurance Commissioner's office this morning. They said it's a question they get asked a lot. Their answer came straight from the IRS definition:

For purposes of the premium tax credit, your household income is your modified adjusted gross income plus that of every other individual in your family for whom you can properly claim a personal exemption deduction and who is required to file a federal income tax return.

In other words, it's AGI.* Which is good news for most of us. AGI is the figure that's on the front page of your 1040, it's the number that's arrived at after all SE tax and deductions have been subtracted from your gross income. The trick is to estimate what your AGI is going to be for the year in which you're covered. In other words the AGI figure isn't a lookback; it runs concurrent with your insurance premium. So you're not estimating what your final AGI will be for 2013. You're estimating what it's going to be in 2014. 

Got that? 

Here's an IRS FAQ on the topic. If I hear more or differently, I'll report back. Good luck. 

* Actually, "modified" AGI, which apparently makes a difference to those who receive Social Security or retirement income from tax free bonds. See Jeff Thomas' helpful comment below. And remember: I am not a tax professional. 

Comments

[Keoki McCarthy]

If you figure it out let me know. I am in the exact same boat. I am self employed living in Seattle and I watched my low monthly high deductible go away. I too am trying to figure out what the best way to switch plans is. Until the end of the year I'm splurging on Dr. visits because I met my 6k deductible. I need to start the new plan in January when my plan reverts and hope that it gets figured out or at least easier by mid next month. Thanks for writing this article. Just knowing others are fighting the same fight is empowering.

[Jeff Thomas]

For starters, I'm a fellow freelancer in the Seattle area and I've also spent hours trying to figure out the income problem. I'm also a retired accountant, so I have to take exception with your statement that what counts is adjusted gross income.

Per your quote, the correct number is "modified adjusted gross income." That one word "modified" in front of "Adjusted Gross Income" makes a huge difference for some people. This is the rest of the statement on the IRS website: "Modified adjusted gross income is the adjusted gross income on your federal income tax return plus any excluded foreign income, nontaxable Social Security benefits (including tier 1 railroad retirement benefits), and tax-exempt interest received or accrued during the taxable year. It does not include Supplemental Security Income (SSI)." For people collecting social security or retirement income from tax free bonds, that income must be included in the calculation for the subsidy.

That will alter the equation for many of us.

[R Wisher]

I used your problem to highlight what a number of folks are facing. My friend, a very, very bright man, has a possible solution.

The issue is access, the problem is how to answer a question that can't be answered.

The solution is not to ask it. Instead, use the prior year's tax returns- already on file at the IRS to set the subsidy. Allow for changes with a short form (if you lost your job etc, and that would be verified or disallowed the following tax cycle.)

The only link would be between who sets the subsidies and the IRS (which can be consolidated- seriously its a chart!)

Use the IRS to simply cut a check to the consumer in the form of a tax credit. Let the consumer send the money to the insurance company.

The insurance company creates what amounts to a 1099 and sends it to the IRS and to the consumer. One more short form added to the 1040 stating how much was spent, attach the 1099 and boom you are done.

Any enforcement issues are a one year past situation, like ALL OTHER IRS issues!

Of course that doesn't solve all the other problems but it does get the money into the consumer's hand.

My friend,MENSA bright, who saw the crash coming before it did back in 2005, identified the mortgage fraud spree two years before it was exposed (we were both veteran detectives in Florida) says no one is talking about such a simple solution.

Figured I would pass it along to someone who might have a voice.