(by Slava Darozhkin)
What Is MAGI?
Before we can hope to understand its importance, let's examine its very definition, which is: Modified Adjusted Gross Income.
Is Modified Adjusted Gross Income Important?
The answer to this question is very simple and straightforward. Yes! MAGI is very important yet so complicated.
Mention MAGI anywhere, and it is likely that you will be bombarded with a myriad of questions.
What is MAGI? Who is it for? How is it calculated? All these are valid questions you should know the answers to.
But what if your business can't afford to provide a traditional group health insurance? In that case, you are underpaying your employees and only giving them a fraction of their deserved premiums. If this is your case scenario, then it is necessary for you to understand more about this important topic.
Why should you as an employer know about MAGI?
Employees tend to ask for information from their employers on matters concerning health insurance. Indeed, they’ll likely ask you how to calculate MAGI to find out if they are eligible for premium tax credits. It’s up to you to explain to them how MAGI works so they can make an informed decision.
Modified Adjusted Gross Income is an income calculation formula that was developed by the federal government. This formula is used to determine if a person is eligible for tax credits or any assistance program.
So, what is the relationship between MAGI and individual health insurance?
If your employees have individual health coverage, then it is crucial for you to learn about this topic.
Once you understand what MAGI is you get to gain more knowledge about the eligibility of tax credits, adoption credits, education tax credits, retirement savings deductions, and medicaid eligibility.
How do you calculate Modified Adjusted Gross Income?
There are two critical components of the Modified Adjusted Gross Income. These components include income counting and household composition.
The first step of calculating MAGI is calculating the income according to federal tax laws. The next step is calculating the family size and household composition. The results are then compared to the Federal Poverty Level to determine if a person is eligible for exemptions.
To calculate if an employee is eligible for advance premium tax credits and cost-sharing reductions, the annual income is calculated. Monthly income is used to calculate eligibility of Medicaid and CHIP.
Knowing how to calculate MAGI is very helpful, especially in determining tax credits. As an employer you should know what MAGI is for the benefit of your employees.