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Defining Line Between Medi-Cal, Exchange Policy

San Francisco Chronicle, October 28, 2013

 By Kathleen Pender

Today I will answer more reader questions about the Affordable Care Act, especially about how to calculate income to see whether you qualify for a tax credit and what happens if you are on the border between Medi-Cal and a subsidized exchange policy.

But first, this refresher: If your modified adjusted gross income (known as MAGI) is between 138 and 400 percent of the federal poverty level for your household size, you generally will get a federal tax credit (a.k.a. subsidy) if you purchase a policy on a state health care exchange such as Covered California. For poverty levels, see http://bit.ly/GSLy7M.

If your MAGI is below 138 percent of poverty, you qualify for Medi-Cal, California's version of Medicaid. If you qualify for Medi-Cal, Medicare or qualifying health coverage at work, you cannot get a tax subsidy for health insurance.

To figure your MAGI, take the adjusted gross income as reported on your tax return and add in nontaxable Social Security benefits, tax-exempt interest and, if you worked abroad, any foreign-earned income and housing expenses.

To figure out if you qualify for Medi-Cal, do the same calculation and subtract a few uncommon items such as certain scholarships and payments to Native Americans.

For details on this calculation, see http://bit.ly/1758QAr.

Q: Steve M. asks, "What year is the income determination based upon? Is it 2012, the last year I filed a return? Or 2013? Or a person's estimate of 2014?"

A: Your tax credit for health care purchased in 2014 will be based on your actual 2014 income.

Because 2014 and 2013 tax returns have not been filed yet, Covered California will ask for your 2012 MAGI, and projected income for 2013 and 2014.

"Once the application is submitted, the information is transmitted to a federal data hub where it is matched up, or pinged, with that person's tax returns from 2012. If the 2013/2014 income projections are more than 10 percent more or less than 2012 returns, the enrollee is notified and has 90 days to submit documentation as evidence of the inconsistency," Covered California spokeswoman Anne Gonzales said in an e-mail. "If at any time during 2014, an enrollee believes his/her income could change to a point that subsidy eligibility would be affected, they should inform Covered California within 30 days."

If you qualify for a tax credit, you can have it applied directly to your health insurance premiums, thus reducing your monthly cost.

When you do your 2014 taxes in early 2015, if it turns out you have received too much or too little tax credit, you will repay the excess or get the shortage refunded when you file your return.

Q: Frank H. asks, "Next year my income will be close to the Medi-Cal cutoff (138% of poverty) and it's hard to know whether it will ultimately end up slightly above or below the cutoff. What should I do if I don't know, and what happens if I end up guessing wrong?"

A: Unlike the tax credit, your eligibility for Medi-Cal is based on your actual monthly income at the time you apply. If you enroll, but your income later rises, you must notify Medi-Cal. If you no longer qualify for Medi-Cal, but do qualify for a tax credit, you can switch to a subsidized policy through Covered California.

Conversely, if it looks like your 2014 income will be above 138 percent of poverty, you can apply for a Covered California policy. If your income dips below that threshold during the year, you can switch over to Medi-Cal.

If you stay in Covered California and discover late in 2014 (or early 2015) that you should have been in Medi-Cal, you will not be penalized or have to repay the subsidies.

However, California "won't just accept the applicant's self-attested projected income," Gonzales says. "We will verify the applicant's attested projected annual household income against Internal Revenue Service and Social Security Administration data and will only accept their attested income if there is no inconsistency/incompatibility from the data we obtain from the federal and state data hubs or if they can resolve any inconsistency by submitting satisfactory paper documentation (such as pay stubs or a letter from an employer) to prove their attested income for the benefit year."

Q: Jackie P. asks, "I am just over the income cutoff for getting a tax credit. If I contribute to a Health Savings Account next year and purchase an HSA policy on the exchange, will the contribution to the account reduce my MAGI?"

A: Yes, says Mark Luscombe, principal analyst with CCH Tax and Accounting. In 2014, the limits on the HSA deduction will be $3,300 for self-only coverage and $6,550 for family coverage.

Q: Janine N. asks, "I had to take an early distribution from my Roth IRA that puts me over the top of the income limit. Do I count that as income? If I make a contribution to a traditional IRA, does that count as a reduction of income for MAGI?"

A: If you take an early distribution from a Roth, that will be included in your adjusted gross income (and therefore in MAGI) in the year of the distribution, Luscombe says.

If you make a contribution to a traditional IRA, that will reduce your adjusted gross income (and thus MAGI), assuming your adjusted gross income is below the limit for making deductible IRA contributions.

Q: Gary F. asks, "My spouse receives Social Security Disability Insurance. Is this part of MAGI? My spouse also receives an annual payment from a disability insurance policy. Is this part of MAGI?"

A: Social Security Disability Insurance or SSDI is like Social Security: If your adjusted gross income is more than a certain amount, some of it is taxable. The taxable portion of SSDI is included in adjusted gross income, therefore it will already be in MAGI. However, you must add the untaxed portion to your MAGI, just like you add nontaxable Social Security to MAGI, Luscombe says.

As for the disability insurance policy, if it was provided by her employer, her payments are taxable and will be part of her adjusted gross income, and thus part of MAGI.

If she purchased the disability insurance herself, the payments are not taxable and do not have to be included in MAGI, Luscombe says.

Q: Gary F. has a second question: "We believe that in a few years we'll be in a higher tax bracket. Therefore we're considering moving some money from one of our traditional IRAs over to a Roth IRA. Will any money we move from a traditional IRA over to a Roth be included in our MAGI?"

A: Yes, unless your traditional IRAs had both deductible and nondeductible contributions. In that case, a prorated part of the amount converted would not be included in MAGI, Luscombe says.

 

Original Article

 

 
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