What Counts as Income for ACA Subsidies? The Early Retiree’s List

Your ACA tax credit, the help that lowers your Marketplace premiums, is based on your household’s income for the year.

But the Marketplace doesn’t use your salary (you may not have one), your spending, or your net worth. It uses a specific number: ACA modified adjusted gross income, or MAGI.

For people retiring before 65, knowing exactly what goes into that number is the single most useful thing you can learn about health insurance.

The formula

ACA MAGI is your adjusted gross income (line 11 of Form 1040), plus three things the tax return leaves out:

• the untaxed part of your Social Security,
• tax-exempt interest, such as municipal bond interest,
• and foreign earned income you excluded, if you live abroad.

It covers everyone in your tax household, so for a married couple it’s your combined income. (To get the credit, married couples generally have to file jointly.)

What counts

• Traditional IRA, 401(k) and 403(b) withdrawals: the taxable amount.
• Roth conversions: the full amount converted.
• Pensions and annuities: the taxable part.
• Social Security: all of it, including the part that isn’t taxed.
• Wages from part-time work, after pre-tax deductions such as 401(k) and HSA payroll contributions.
• Self-employment profit, minus the deductible half of self-employment tax.
• Interest and dividends, including qualified dividends and fund capital gain distributions.
• Tax-exempt municipal bond interest.
• Capital gains from selling investments: the gain only.
• Net rental income.

What doesn’t count

• Spending your cash savings (only the interest the cash earns counts).
• Qualified Roth IRA withdrawals, and taking out your own Roth contributions at any age.
• HSA withdrawals used for medical expenses.
• The original cost of investments you sell. Sell $50,000 of a fund you bought for $35,000, and only $15,000 counts.
• Loans, including a reverse mortgage or a loan against your home.
• Gifts and inheritances you receive (though income they later produce counts).
• Life insurance payouts.

What lowers it

Some contributions reduce your MAGI:

• HSA contributions, if your Marketplace plan is HSA-eligible (no earned income needed),
• deductible traditional IRA contributions, if you or your spouse have earned income,
• SEP or solo 401(k) contributions from self-employment.

Capital losses also help: they offset your gains in full, and up to $3,000 of net loss a year offsets other income.

Three things that catch people out

• Social Security counts in full. Even if none of your benefits are taxed, every dollar counts toward ACA income.
• Fund distributions. Mutual funds in a taxable account can pay out capital gains in December, even if you sold nothing.
• It’s the whole year. The credit is based on your income for the full calendar year. A large sale or conversion in December counts as much as one in January.

Why it matters so much in 2027

For 2026 and 2027 coverage, the ACA has a subsidy cliff again: if your MAGI is above 400% of the poverty line, you get no tax credit at all. For 2027 coverage that’s $63,840 for one person and $86,560 for a couple in most states. Below it, every extra dollar of MAGI also trims your credit.

Because MAGI depends on which accounts you draw from, two retirees who spend the same amount can pay very different premiums. For a real example, see how Roth conversions and IRA withdrawals affect ACA subsidies.

Work out your own MAGI

Our free Bridge to 65 calculator does this for you. Enter where your money will come from, and it shows, line by line, what counts and what doesn’t, then your real Marketplace prices, your tax credit, how far you are from the cliff, and your federal tax.

It’s free, there’s no signup, and nothing you enter is stored.

This article is general information, not tax or insurance advice. Rules shown are for 2026 and 2027 coverage as of October 2026.