Obamacare – How to Determine Your Income and Household Size
Obamacare expands Medicaid to cover low-income adults and children with incomes up to 133 percent of the poverty line. Millions of low-income parents, non-disabled adults who do not have dependent children (and who are generally ineligible for Medicaid today except in a small number of states) and, in some instances, children now covered through the Children’s Health Insurance Program (CHIP) will become newly eligible for health coverage through Medicaid as a result. In addition, individuals and families who have incomes above the level needed to qualify for Medicaid but below 400 percent of the federal poverty line will receive tax credits to help them purchase coverage in the new health insurance exchanges. People with incomes up to 250 percent of the poverty line receiving premium credits will also get additional assistance with their cost-sharing charges.
To ensure coordination of eligibility and coverage across the different health care programs, the ACA requires states to make major changes in the way that they determine eligibility for Medicaid and CHIP in order to align with the income tax-based rules for premium credits in the exchanges. The biggest change involves how income and household size are defined to determine eligibility for Medicaid and CHIP (as well as the exchange premium credits).
The New Income and Household Size Definitions
The health reform law establishes a new definition of income — called Modified Adjusted Gross Income, or MAGI (basically line 37 on your 1040)— that will be used in determining eligibility for premium credits.
Furthermore, in determining income eligibility for premium credits, an individual’s family size will be based on the number of personal exemptions that an individual claims in his or her tax return. A household’s income thus is the MAGI of the taxpayer, the spouse (if any), and any child or other person whom the individual claims as a tax dependent, including the income of any person who must report his or her income on a separate return but is still claimed as a dependent by the taxpayer. A taxpayer’s family size thus would be four if the taxpayer
claimed himself or herself, a spouse, and two children as exemptions on his or her tax return. In order to be eligible for the premium credit, married couples are required to file a joint tax return.
Starting in 2014, eligibility for most Medicaid and CHIP beneficiaries under age 65 will also be determined using MAGI, and family size will also be based on the tax filing unit. The family’s assets will not be considered in determining eligibility. These new income eligibility rules generally will apply to all children except foster children, who automatically qualify for Medicaid, and to all adults under 65 except those who qualify for Medicaid as a disabled individual. The health reform law does not change Medicaid eligibility rules for beneficiaries who are 65 or older or those in eligibility categories based on disability.
Key differences between income tax and Medicaid rules for what counts as income include the following:
Child support that a family receives: Currently, the child support that a family receives (generally after the first $50 a month, which is excluded) counts as income when Medicaid eligibility is determined. However, federal income tax rules do not count child support in determining the income of the parent receiving it, because the parent who pays the support has already paid tax on that income.
Social Security benefits: Under the tax code, Social Security benefits are fully excluded from income for filers with low or moderate incomes.3 As a result, Social Security survivors and disability benefits generally will not be counted in determining eligibility for Medicaid under the MAGI definition. In contrast, Medicaid currently counts Social Security benefits as income. Consequently, the new rules will broaden Medicaid eligibility for many people under 65 who have a disability but who do not qualify for Medicaid under their state’s Medicaid disability category because their incomes or assets, as determined under current Medicaid rules, exceed their state’s income and/or asset limit for the Medicaid disability category. Thus, many people with disabilities who have begun to receive Social Security benefits but do not yet receive Medicare (since there is a two-year waiting period for Medicare) will become eligible for Medicaid, because their income exclusive of their Social Security benefits will be below 133 percent of the poverty line.
Pre-tax contributions for purposes such as child care costs, retirement savings, certain commuting costs, employee’s share of employer-sponsored health insurance premiums paid through a cafeteria plan, and flexible spending accounts: These portions of an employee’s earnings are not counted as income under income tax rules and hence will also be excluded in determining MAGI. These amounts currently are counted in determining eligibility for Medicaid.
Alimony paid: Medicaid does not deduct from countable income any alimony paid by an individual. Under federal income tax rules, however, amounts paid towards alimony are deducted from income when computing a taxpayer’s Adjusted Gross Income.
Key Differences Between the Medicaid and Income Tax Definitions Related to Family Size
The new rules also change how family size is calculated and how household income is defined. Currently under Medicaid, states take different approaches to determining family size and which family members’ income to count depending on who in the family is applying for benefits. In general, Medicaid programs must consider the incomes of parents and spouses in determining an individual’s eligibility. Income of other family members is counted only if they are also applying for coverage. For example, Medicaid would exclude the income of a grandmother caring for her grandchild in determining eligibility of the child, but if the grandmother was applying for coverage with the grandchild, the grandmother’s income would be counted in determining whether she and her grandchild are eligible. Under the new rules, however, family size and household income will be based on the tax filing unit. All individuals claimed as a dependent on a taxpayer’s return will be included in determining that taxpayer’s family size. The total income of a household will thus equal the MAGI of all individuals in the tax filing unit, including the MAGI reported on a separate tax return for any of these individuals if they were required to file a separate return. For example, if a teen-age child has an after-school job and earns income that exceeds the minimum tax filing threshold, the teen-ager is required to file his or her own tax return even though the teenager’s parents still claim him or her as a dependent on their own return. In determining the family’s eligibility for Medicaid and premium credits, however, the teen-ager’s MAGI will be added to the rest of the family’s MAGI. The following examples illustrate how these rules differ from those now used in Medicaid:
Step-Parents. Assume, for example, that a family includes a taxpayer and the taxpayer’s spouse — both of whom work — their child, and a child of the taxpayer from a previous marriage. The taxpayer’s tax return includes the spouse and both children. Under the health reform law, the family’s MAGI will be determined based on the income of both parents. Under current Medicaid rules, however, most states would initially determine the eligibility of the entire family counting both spouses’ income, but if the family’s income exceeded the Medicaid eligibility limits, the eligibility of the step-child would then be determined considering only her own parent’s income (because the step-parent is not legally responsible for the child). If using just her own parent’s income puts the step-child below the applicable Medicaid income eligibility limit (for a family of two), the child currently is eligible for Medicaid.
Non-Custodial Parents. With the new tax-based definition of family size, a child claimed as a dependent on a non-custodial parent’s tax return will not be counted in determining the family size of the custodial parent’s household. The ACA states that in such cases, a premium credit is not allowed with respect to the child. This means that such a child will not be able to get coverage as part of the custodial parent’s coverage but would be eligible to receive coverage through the non-custodial parent. Since only one parent can claim the child as a dependent, this may result in different choices about which parent claims the child for tax purposes. However, the statutory requirement that a child obtain coverage with the parent claiming that child is specific to the premium credits. It is unclear whether this will apply to Medicaid as well, which should be addressed by federal guidance.
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