Who can predict the future? Covered California thinks you can predict your future income. Estimating your income for the Covered California ACA health insurance subsidies is difficult. It is one of the oddest elements of applying for the health insurance help.
Last Year’s Income Is Not Your Future Income Prediction
People mistakenly believe that their past federal income tax return is used for their future income estimate. The past tax return can be a guide to estimating the income, but it is not final determination. One problem with federal tax returns is they usually don’t capture Social Security retirement benefits or tax-exempt interest, both of which are included in the Modified Adjusted Gross Income.
For the income estimate we are looking for income streams that are captured within the adjusted gross income (AGI) on the federal income tax return. The AGI is modified by some other income sources. The MAGI is used to calculate your health insurance subsidy through Covered California.
Modified Adjusted Gross Income Estimate
Gross Wages from an Employer
Net Taxable Income from Self-Employment
Social Security Retirement or Disability Insurance
Unemployment Insurance Benefits
Foreign Earned Income
Tax Exempt Interest
This is the foundation of your best most accurate good-faith income estimate.
Tax Returns Can Guide Your Estimate
Then there is life, which is unpredictable and unforeseen. You don’t know if you will come into a car load of money or debt.
Selling Assets, New Income
You may decide to sell you home or other asset that yields a large taxable capital gain event.
You are your spouse may decided to start taking Social Security retirement benefits. These funds add to your MAGI. Some people need to take a required distribution from an IRA.
Self-Employment Income and Accidents
If you are self-employed, you may have a large unexpected expense. The expense will decrease your forecasted net business taxable income. Conversely, you might acquire a large contract at the end of the year with a large advance of income. Now the income has unexpectedly spike up.
While the loss of a tax dependent doesn’t change your income, the change in the tax household does affect the subsidy calculation. If your young adult dependent leaves the household – enlists in the military, graduates college, gains employer sponsored health insurance – it will impact your subsidies for the year when you reconcile them on your federal tax return.
There are accidents that lead to disability or a short-term loss of income. Essentially, it is impossible to accurately predict what your income will be for the coming year.
All you can do is make your best good-faith estimate of the MAGI. Then, as life and income changes, make appropriate adjustments in your Covered California account for the current year.