312.5 Income Deductions and Disregard

The CAO must allow specific disregards and deductions from the gross income of the MAGI household.

The only income disregard applied in MAGI eligibility determinations is a disregard of 5 percent of the 100 percent FPIG for the budget family size (See Section 312.52, Income Disregard). The 5 percent disregard is applied only if the disregard would make a difference in the eligibility determination.

 

Certain tax deductions reported to the CAO or SBE may be used as deductions from gross income if they are verified by the CAO (See Appendix B). 

312.51 Income Deductions

Certain federal tax deductions may be taken from the MAGI household’s gross income (See Appendix B).  Allowable federal tax deductions are reported on IRS Form 1040 Schedule 1 Part II.

 

Reminder: Individuals whose eligibility is determined using non-filer rules cannot have tax deductions.

 

A tax deduction reported on the MA application by the MAGI household must include a begin date, an end date if applicable, a frequency and an amount.  This information will be used to determine the monthly amount of the deduction.  Any deduction with an end date before the month of the eligibility start date is not an allowable deduction.  A deduction with an end date in the eligibility month, after the eligibility month or with no end date may be an allowable deduction, to be deducted from gross income for as many months as the reported frequency indicates or until eligibility is re-determined, whichever is sooner.  Tax deductions are not applied if there is no countable income. Tax deductions are shared between joint filers.

 

Example:  A MAGI-related application is processed with an eligibility start date of 3/20, the MAGI household reports and verifies student loan interest of $100 expected to occur monthly with a begin date of 1/1 of the same year and no end date.  This is an allowable deduction from the month of March, because it is expected to continue through the eligibility period.

 

Example: An application is processed for MAGI MA with an eligibility start date of 3/20. The MAGI household reports and verifies a one-time educator expense of $400 with a begin date of 2/1 and an end date of 2/3 of the same year. This is not an allowable deduction, because it does not exist within or after the eligibility month (March).

 

Pre-tax deductions:

 

In some situations, pre-tax deductions must also be deducted from MAGI gross income. Pre-tax deductions can be tax-deferred or tax-exempt amounts that are deducted from the gross amount shown on an individual’s paycheck, but will not be shown on the W-2 or IRS form 1040. When an individual has a pre-tax deduction, federally taxable wages will be less than gross wages on the paystub.

 

Common pre-tax deductions include:

 

NOTE:  Medicare Part B premiums are not pre-tax deductions.

 

 

NOTE: Contributions to designated Roth 401(k)s and Roth IRAs are not pre-tax deductions, because they are made with after tax earnings.

 

 

Reminder: The CAO will determine the monthly amount of each pre-tax deduction, enter that amount as an expense on the income screen in eCIS, and make note of the type of deduction in the description.

 

Example:  A client provides a current pay stub showing gross earnings of $400 per week, and a tax-deferred 401K contribution of $24 per week.

 

The caseworker must enter the gross income of $400 per week and use expense code 20 to enter the monthly pre-tax deduction of $96 ($24 per week x 4 weeks) on the Employment and Wages screen in eCIS.  The individual’s monthly countable income for the MAGI MA determination is $1,504.

 

NOTE: Pre-tax deductions are not always identified as pre-tax deductions on an individual’s paystub. 

 

42 CFR 435.603(e)

 

Tax deductions:

 

Allowable tax deductions from the MAGI household’s gross income include:

 

Note:  Income deductions that are not verified will not be counted.

 

Some income tax deductions have a maximum allowable amount. These maximum amounts are listed in Appendix B.

 

If a tax deduction is not listed on the Tax Deduction screen in eCIS, the CAO will choose a listed tax deduction without a maximum amount based on Appendix B and narrate the action in Case Comments.

 

Self-Employment Tax Deduction:

 

Self-employed individuals who earn more than $400 per year are subject to the 15.3% self-employment tax for Medicare and Social Security.  The individual can deduct half of the self-employment tax, 7.65%, on their tax return.  This deduction only applies to MAGI MA.

 

If the self-employed individual files a tax return, the caseworker will use the deduction for the deductible part of self-employment tax listed on line 15 of IRS Form 1040, Schedule 1 Part II.  The caseworker must request the entire tax return when reviewing self-employment income.

 

If the self-employed individual has not yet filed, but intends to file taxes for the current year, the caseworker will manually calculate 7.65 percent of the individual’s net profit and enter the result as the “deductible part of self-employment tax” deduction in eCIS on the Tax Deduction screen.  

 

Example: A self-employed individual who has not yet filed but intends to file taxes for the current year verifies gross monthly income of $2,500 and allowable costs of self-employment of $800 a month. The caseworker will take the following steps to calculate “deductible part of self-employment tax” deduction:

 

1. Calculate the net profit to be $1,700 ($2,500-$800).

 

2. Multiply $1,700 by 0.0765 to get $130.05 per month.

 

Reminder: Tax deductions are not allowed for individuals whose eligibility is determined using non-filer rules.

 

312.52 Income Disregard

When determining financial eligibility for MAGI MA, the income disregard of 5 percent of the 100 percent FPIG is applied after any other allowable deductions. The 5 percent disregard is applied only if the disregard will make an individual eligible for MA.  If income after the disregard is at or below the threshold, the client is income eligible.

 42 CFR 435.603(d)(1)

 

Example: A mother applies for MA for herself and her child age 6.  Their combined monthly gross income exceeds the 133 percent FPIG.  The CAO worker takes allowable tax deductions from gross income, and net income after tax deductions is now below the 133 percent FPIG. The 5 percent disregard will not be applied as the child is eligible for MAGI MA without the disregard.

 

Note: The 5 percent disregard does not apply to MG27 or MG90 categories.

 

312.53 Offsetting Self-Employment Losses

MAGI-related MA rules follow the Internal Revenue Service (IRS) rules regarding self-employment losses, and offsetting of other income reported on the tax return.  A tax filer can claim a net loss from self-employment to offset other income reported on the IRS form 1040, with the exception of countable Retirement, Survivors, and Disability Insurance (RSDI) benefits, non-taxable interest, and foreign earned income. This is not applicable to Cash, SNAP, and non-MAGI MA determinations.

42 CFR 435.603(e)

Example 1:  An individual has two Schedule C businesses, and reports a loss of $12,500 on Business A, and net profits of $24,500 on Business B in the same year on IRS form 1040.  The loss from Business A offsets the net profits from Business B to $12,000 in this MAGI-related MA eligibility determination.

Example 2: An individual reports $40,000 in annual wages from Company A and negative self-employment income of $25,000 annually in the same year on the IRS form 1040.  The net loss from self-employment is used to offset the wages from Company A to $15,000 in the MAGI-related MA eligibility determination.

Example 3: An individual files a joint return with their spouse, and reports their negative self-employment income of $10,000 annually, and their spouse’s wages $30,000 annually in the same year on the IRS form 1040.  The net loss from self-employment is used to offset the spouse’s wages to $20,000 in the MAGI-related MA eligibility determination. 

 

 

Updated April 17, 2024, Replacing February 15, 2022