[Rewritten on July 5, 2025 after the new 2025 Trump tax law was passed.]
As a result of I’m self-employed and I’m beneath 65, I purchase medical health insurance from a medical health insurance market established beneath the Reasonably priced Care Act (ACA). Each state has one. Some states run their very own. Some states use the federal healthcare.gov platform.
Earlier than ACA got here into impact in 2014, getting healthcare protection was an enormous problem for folks with out employer-provided medical health insurance. Overlook about the associated fee — simply getting a coverage was a problem in itself. ACA modified all that. Now, the self-employed, early retirees, and others who don’t get medical health insurance by way of their jobs can purchase medical health insurance from the ACA market for his or her state.
Not solely can you purchase medical health insurance, however the protection can also be made extra reasonably priced by a subsidy within the type of a Premium Tax Credit score (PTC). How a lot tax credit score you get is calculated off of your modified adjusted gross earnings (MAGI) relative to the Federal Poverty Degree (FPL) to your family dimension. The decrease your MAGI is, the much less you pay for medical health insurance web of the tax credit score.
MAGI for ACA
Your MAGI for ACA is mainly:
- Your gross earnings;
- minus pre-tax deductions from paychecks (401k, FSA, …)
- minus above-the-line deductions, for instance:
- pre-tax conventional IRA contributions
- HSA contributions
- 1/2 of self-employment tax
- pre-tax contributions to SEP-IRA, solo 401k, or different retirement plans
- self-employed medical health insurance deduction
- scholar mortgage curiosity deduction
- plus tax-exempt muni bond curiosity;
Wages, 1099 earnings, rental earnings, curiosity, dividends, capital positive factors, pension, withdrawals from pre-tax conventional 401k and IRAs, and Roth conversions all go into the MAGI for ACA. Muni bond curiosity and untaxed Social Safety advantages additionally rely within the MAGI for ACA.
Tax-free withdrawals from Roth accounts don’t enhance your MAGI for ACA.
Aspect word: There are various totally different definitions of MAGI for various functions. These totally different MAGIs embody and exclude totally different parts. We’re solely speaking concerning the MAGI for ACA right here.
2021-2025: 400% FPL Cliff Modified to a Slope
Your premium tax credit score goes down as your MAGI will increase. Up by way of the 12 months 2020, the tax credit score dropped to zero when your MAGI went above 400% of the Federal Poverty Degree (FPL). In case your MAGI was $1 above 400% of FPL, you’ll pay the complete premium with zero tax credit score. Folks needed to be very cautious in monitoring their MAGI to verify it didn’t go over the cliff.
Legal guidelines modified throughout COVID. This cliff grew to become a slope for 5 years, from 2021 to 2025. The tax credit score continued to drop as your MAGI elevated, nevertheless it didn’t all of the sudden drop to zero when your earnings went $1 over the cliff.
Eradicating the cliff was an enormous reduction to folks with an earnings increased than 400% of FPL ($81,760 in 2025 for a two-person family within the decrease 48 states). The tax credit score additionally elevated at earnings ranges under the cliff throughout these 5 years.
The Cliff Returns in 2026
The brand new 2025 Trump tax legislation — One Huge Lovely Invoice Act — didn’t lengthen the slope remedy or the extra tax credit score after 2025. The 400% FPL cliff is scheduled to return in 2026. The premium tax credit score can even drop again to pre-COVID ranges at incomes under 400% of FPL.
The chart above reveals the ACA premium tax credit score at totally different incomes for a family of two 55-year-olds within the decrease 48 states, with the typical medical health insurance prices throughout all states. The blue line is for 2025 with the slope and the improved tax credit score. The purple line is for 2026 with the cliff and the sundown of the improved tax credit score.
How a lot change you will note in 2026 relies on the place you might be within the chart.
In case your earnings is to the left of the cliff within the chart, your tax credit score will drop barely. It goes down from about $18,900 to about $17,200 for the 12 months at a $50k earnings on this instance. A $1,700 drop within the tax credit score interprets into a rise of about $140/month to your medical health insurance.
In case your earnings is to the far proper within the chart, your tax credit score can even drop, however you’ve the earnings to afford it. At a $200,000 earnings on this instance, the tax credit score drops from about $3,800 to $0, elevating the associated fee to your medical health insurance by a little bit over $300/month.
The drop is precipitous instantly to the correct of the cliff. We’re speaking about receiving over $13,000 in tax credit score in 2025 versus $0 in 2026 for a two-person family with an earnings of $85k.
The information for the chart got here from a calculator created by KFF. You possibly can enter your particular zip code, family dimension, and age on this calculator to see how a lot your premium tax credit score and your web medical health insurance premium will change in 2026.
Know Your Cliff
How do you give you $13,000 additional for medical health insurance with an earnings of $85,000? You will need to handle your earnings to maintain it from going over the cliff. The very first thing to know is the place precisely the cliff is.
For a family of a single particular person within the decrease 48 states, the 400% FPL cutoff is $62,600 in 2026. For a family of two folks within the decrease 48 states, the cutoff is $84,600 in 2026. See Federal Poverty Ranges (FPL) For Reasonably priced Care Act for the place the FPL is to your family dimension. Multiply it by 4 to get your cliff.
Handle Your Revenue
The subsequent most crucial half is to challenge your earnings all year long and to not notice earnings willy-nilly earlier than you do the projection. When you discover your earnings is near the cliff earlier than you notice earnings, you may nonetheless modify. Many individuals are caught without warning solely once they do their taxes the next 12 months. Your choices are far more restricted after the 12 months is over.
If earnings from working will push your MAGI over the cliff, possibly work rather less to maintain it beneath.
Early retirees have some management over staying beneath the cliff once they depend on an funding portfolio for earnings. If you find yourself beneath 59-1/2, you’re primarily spending cash out of your taxable accounts. A big a part of the cash withdrawn is your individual financial savings; the remainder is curiosity, dividends, and capital positive factors. Spending your individual financial savings isn’t earnings. When you withdraw $60k from a taxable account to reside on, your MAGI isn’t $60k. It’s in all probability lower than $30k.
Whenever you’re over 59-1/2, tax-free withdrawals from Roth accounts don’t rely as earnings.
Check out the MAGI definition. Reduce something that raises your MAGI, and maximize all the things that lowers your MAGI.
When you’ve self-employment earnings, you’ve the choice to contribute to a pre-tax conventional 401k and IRA. These pre-tax contributions decrease your MAGI, which helps you keep beneath the 400% FPL cliff.
Select a high-deductible plan and contribute the utmost to an HSA. The brand new 2025 Trump tax legislation made all Bronze plans HSA-eligible beginning in 2026.
Then again, Roth conversions, withdrawals from pre-tax accounts, and realizing capital positive factors enhance your MAGI. You have to be cautious with doing these whenever you’re making an attempt to remain beneath the 400% FPL cliff.
Speed up Revenue to 2025
When you’re vulnerable to going over the cliff in 2026, think about accelerating some earnings to 2025 when the premium tax credit score continues to be a slope. If pulling earnings ahead to 2025 helps you keep beneath the cliff in 2026, the discount within the premium tax credit score out of your extra earnings in 2025 will probably be a lot lower than the steep drop in 2026.
Borrowing
In case your want for additional cash is simply momentary, think about borrowing as a substitute of withdrawing from pre-tax accounts or realizing giant capital positive factors. Spending borrowed cash doesn’t rely as earnings.
As a substitute of promoting shares and pushing your self over the cliff by the realized capital positive factors whenever you purchase a brand new automotive, take a low-APR automotive mortgage to stretch it out. HELOC and security-based lending are additionally good sources for borrowing.
You possibly can repay the mortgage whenever you don’t want as a lot money or whenever you not use ACA medical health insurance.
Revenue Bunching
When you can’t keep away from going over the 400% FPL cliff, think about earnings bunching. Whenever you’re already over the cliff, you would possibly as properly go over massive. Withdraw extra from pre-tax accounts or notice extra capital positive factors and financial institution the cash for future years.
Spending the banked cash doesn’t rely as earnings. Going over the cliff massive time in a single 12 months might aid you keep away from going over once more for a number of years.
100% and 138% FPL Cliff
There may be one other cliff on the low facet, though that one is well overcome when you’ve got pre-tax retirement accounts.
To qualify for a premium subsidy for purchasing medical health insurance from the ACA alternate, you need to have earnings above 100% of FPL. In states that expanded Medicaid, you need to have your MAGI above 138% of FPL. This map from KFF reveals which states expanded Medicaid and which states didn’t.
The minimal earnings requirement is checked solely on the time of enrollment. When you get in, you’re not punished in case your earnings unexpectedly finally ends up under 100% or 138% of FPL. The brand new 2025 Trump tax legislation added necessities to Medicaid for reporting work and neighborhood engagement. You don’t wish to have your earnings fall under 100% or 138% of FPL and be topic to these reporting necessities in Medicaid.
When you see your earnings is vulnerable to falling under 100% or 138% FPL, convert some cash out of your Conventional 401k or Conventional IRA to Roth. That’ll increase your earnings above 100% or 138% of FPL.
Say No To Administration Charges
In case you are paying an advisor a share of your property, you might be paying 5-10x an excessive amount of. Learn to discover an unbiased advisor, pay for recommendation, and solely the recommendation.
