One of the most frequent questions posed by Californians looking to enroll in a health insurance plan through Covered California is whether the system uses gross income or net income to determine eligibility and premium costs. To put it plainly: Covered California uses neither gross income nor net income. Instead, it relies on Modified Adjusted Gross Income (MAGI) as the basis for its calculations.
Official Guidelines and Documents
According to Covered California’s official guidelines, “Your Modified Adjusted Gross Income is your Adjusted Gross Income (found on your tax return) plus any tax-exempt Social Security, tax-exempt interest, and tax-exempt foreign income you have.”
This is further supported by federal regulations under the Affordable Care Act, which specifies MAGI as the income measurement for healthcare marketplaces. For more detail, you can consult the IRS guidelines on MAGI in the context of the Affordable Care Act, specifically in IRS Publication 974.
Why Not Gross or Net?
As explored in our previous section, gross and net income are simpler calculations that may not take into account various forms of income and certain deductions that can influence your ability to afford healthcare. MAGI, on the other hand, provides a more comprehensive and equitable measurement of your financial resources. This is why Covered California, in line with federal guidelines, opts for MAGI rather than gross or net income for determinations related to eligibility and financial assistance.
Why Does Covered California Use Modified Adjusted Gross Income (MAGI) and How Does It Differ from Gross and Net Income?
The Importance of MAGI in Covered California
When determining eligibility for premium tax credits and cost-sharing reductions, Covered California uses a specific financial metric known as Modified Adjusted Gross Income, or MAGI. Understanding MAGI is critical because it’s the yardstick by which financial assistance is measured and granted. But what exactly is MAGI, and how does it differ from gross and net income?
What is Gross Income?
Gross income is the total income you earn in a year before any deductions or taxes are taken out. This can include wages, salary, tips, bonuses, rents, interest income, and any other form of financial gain. For many people, especially those who don’t own businesses or have multiple sources of income, gross income can usually be found on one’s W-2 form or initial tax documents.
What is Net Income?
Net income, on the other hand, is what’s left after all deductions, taxes, and additional expenses have been subtracted from your gross income. In essence, it’s the amount of money that actually makes it into your bank account and is available for you to spend. For individual consumers, this often means the income that’s left after things like income tax, Social Security contributions, and Medicare contributions have been deducted.
The Role of Modified Adjusted Gross Income (MAGI)
MAGI starts with your Adjusted Gross Income (AGI), a figure found on your tax return. AGI includes not just employment income but also additional income streams such as social security benefits, alimony received, and business income, minus certain “above-the-line” adjustments like student loan interest, alimony paid, and contributions to certain retirement accounts.
The “Modified” part comes in when you add back specific deductions, such as:
- Non-taxable Social Security benefits
- Tax-exempt interest
- Foreign income that is excluded from U.S. taxes
By using MAGI, Covered California aims for a more comprehensive view of an individual’s financial status, which allows for a more equitable distribution of subsidies and assistance.
Why MAGI?
The use of MAGI as opposed to gross or net income helps create a level playing field, ensuring that financial evaluations are as equitable as possible. It takes into consideration various forms of income and adjusts for certain deductions, making it a more nuanced metric for determining eligibility for financial assistance.
