When you apply for health insurance through the Affordable Care Act (ACA) Marketplace, one of the most important parts of the process is estimating your income for the upcoming year. That number determines whether you qualify for subsidies—also known as premium tax credits—and how much financial assistance you receive. But what happens if you guess wrong?
If you estimate too low, you could end up owing money back at tax time. Estimate too high, and you might pay more in monthly premiums than necessary. The stakes are high, and yet, many people are unsure how to make an accurate projection, especially if their income fluctuates or comes from multiple sources.
This guide will help you estimate your income for ACA subsidies more accurately and show you how to reduce the chances of unpleasant surprises when you file your taxes.
Understand What Counts as Income for ACA Subsidies
Before estimating, you need to know what the ACA considers income. The Marketplace uses something called Modified Adjusted Gross Income (MAGI). This isn’t your total earnings or the number on your last pay stub—it’s your Adjusted Gross Income (AGI) plus a few specific additions.
MAGI includes:
Wages, salaries, and tips
Self-employment income
Unemployment compensation
Social Security benefits (including retirement, but not SSI)
Rental income
Investment income (like interest and dividends)
Retirement account withdrawals (like from a 401(k) or IRA)
Alimony (for divorces finalized before 2019)
MAGI does not include things like:
Child support
Workers’ compensation
Gifts or inheritances
Supplemental Security Income (SSI)
Knowing exactly what goes into MAGI gives you a solid foundation for estimating.
Review Past Income Patterns
One of the smartest starting points is looking at your past tax returns. While the ACA application asks for your projected income for the upcoming year, the previous year’s return can offer a realistic baseline. If your situation hasn’t changed much, that number could be a good indicator.
Look at:
Your total income (line 11 on IRS Form 1040)
Any one-time sources of income you had last year that won’t repeat
Changes in employment, retirement, or benefits that could shift your earnings
For those with more variable income—like gig workers, freelancers, or small business owners—reviewing the last two to three years can help you spot patterns and account for income highs and lows.
Break Down Income Month-by-Month
Instead of coming up with a single number off the top of your head, try building your income projection month-by-month. This method is especially useful if your income changes seasonally or comes from multiple sources.
Start with:
Confirmed monthly income (like Social Security or a salary job)
Anticipated earnings based on contracts, hours worked, or average client volume
Any expected windfalls or disruptions (bonuses, job changes, unpaid time off)
Once you’ve built out your income forecast month-by-month, add it all together to get your annual projection. This approach also makes it easier to adjust your income estimate later in the year if your circumstances change.
Don’t Forget About Spouses and Dependents
ACA subsidies are based on household income, not just your own. That includes the income of your spouse (if filing jointly) and any dependents who are required to file a tax return.
If your spouse works part-time, takes on contract jobs, or pulls from retirement accounts, all of that needs to be factored into your MAGI. The same goes for college-aged dependents with taxable income.
Failing to include income from other household members could lead to underestimating your MAGI—and ultimately owing money back.
Be Cautious with Retirement Withdrawals and One-Time Events
Some types of income aren’t always top of mind when estimating MAGI, but they can make a big impact. For example, pulling money from a traditional IRA or 401(k) counts as taxable income and is included in your MAGI. So if you’re planning a large withdrawal, it could push you over the subsidy threshold.
The same is true for things like:
Capital gains from selling stocks or property
Unemployment benefits (yes, they count)
Business income from side hustles
Even if these events feel like one-offs, they could inflate your income and reduce or eliminate your ACA subsidies. It’s smart to plan the timing of these events carefully—or at least account for them in your estimate.
Use Marketplace Tools—But With a Grain of Salt
The federal Marketplace and many state-based exchanges offer tools or calculators that help estimate income. While these can be helpful starting points, they often oversimplify things.
For example, they might ask only for gross monthly income or ignore certain deductions. Some tools also don’t clearly define what counts as MAGI. Relying solely on these estimates without understanding your income components can lead to mistakes.
Instead, use these tools to validate your own calculations—not replace them.
Report Changes Right Away
If your income changes mid-year—because of a raise, job loss, marriage, or other life event—you don’t have to wait until tax time to adjust your subsidy. In fact, you shouldn’t wait.
The ACA Marketplace allows you to update your application any time your income or household changes. Doing this as soon as possible helps you avoid getting too much (or too little) in subsidies.
If your income goes up, your subsidy may decrease. If it goes down, you could get a bigger subsidy—or qualify when you didn’t before. Adjusting in real time keeps you aligned and avoids the risk of surprise repayment at tax time.
What Happens If You Estimate Too Low?
If you underestimated your income and received too much in subsidies, you’ll have to repay the difference when you file your federal tax return.
This repayment happens through the IRS using Form 8962—the same form used to reconcile your subsidy. Depending on how much your actual income exceeded your estimate, the repayment could be a few hundred dollars—or several thousand.
That’s why accurate estimation is so important. However, there are some built-in protections. If your income stays below 400% of the federal poverty level, your repayment is capped. But if it goes above 400%, you might have to repay the entire subsidy.
Consider “Padding” Your Estimate If You’re Unsure
If your income is unpredictable, you might be tempted to estimate on the low side to maximize subsidies. But this strategy can backfire.
Instead, consider building in a “cushion” if there’s a chance you could earn more than expected. For example, if you think you’ll earn between $38,000 and $42,000, it may be safer to report $42,000. You’ll get slightly smaller subsidies, but you’ll be less likely to owe money back.
It’s a tradeoff between paying a bit more each month and facing a potentially large bill during tax season.
When in Doubt, Talk to a Tax Professional
Estimating income for ACA subsidies isn’t just a healthcare issue—it’s a tax planning issue, too. If your situation is complex or changing (for example, if you’re retiring, self-employed, or recently divorced), it’s worth consulting a tax advisor or Marketplace navigator.
They can help you:
Clarify what counts as income
Factor in deductions or credits
Plan withdrawals or asset sales to minimize MAGI
Adjust subsidies mid-year to avoid surprises
Remember, what you report now affects your financial future—so getting expert advice can help avoid expensive mistakes.
Estimating Accurately Leads to Bigger Benefits Down the Line
Being careful and strategic when estimating your income for ACA subsidies doesn’t just help you avoid repaying tax credits. It also puts you in control of your healthcare costs. By understanding the nuances of MAGI, tracking changes throughout the year, and making timely updates, you can avoid financial stress and ensure you’re getting the coverage you need—at a price that truly fits your budget.
This kind of planning also opens the door to more advanced financial moves down the road—like managing retirement account withdrawals, timing side income, or even using ACA subsidies as part of a larger strategy for early retirement or reduced work.
Estimating accurately today can lead to smarter decisions tomorrow.
