If you wonder what a health insurance tax credit is, you have come to the right place. Health insurance tax credits reduce your monthly health insurance cost and are only available for individuals who purchase insurance through the marketplace. You are also required to meet specific income criteria to qualify.
You can sign up for a health insurance tax credit during open enrollment or whenever you have a life event that qualifies like getting married, having a baby or moving. Small businesses with less than 25 employees can be eligible for government subsidies to help pay for employee health insurance.
What is the Premium Tax Credit?
The premium tax credit is refundable in the United States. It is payable by the IRS to those eligible households that have already obtained healthcare insurance and signed up for a healthcare plan through the Marketplace during the tax year. Premium tax credits can be paid in advance and directly to a healthcare insurance company to offset the cost of monthly health insurance premiums.
Income Levels for the Health Insurance Tax Credit
Between 100% and 400% federal poverty levels (FPL): Eligibility for tax credits is determined by income and household size on either the federal exchange or state marketplace during your health insurance application. Household family income that falls between 100% and 400% of the national poverty level qualifies for healthcare tax credits.
Incomes that fall below this percentage range can enroll in Medicaid. Many states have expanded Medicaid eligibility to 138% of the FPL. This option offers more health insurance choices for anyone with a low income.
Income above 400% FPL: If your income is more than 400% of the FPL, you could still be eligible for health insurance discounts.The subsidy cliff of 400% FPL was eradicated for 2021 and 2022 in part with the American Rescue Plan Act of 2021. Individuals who qualify have health insurance rates capped at 8.5% of income in addition to applicable tax credits to offset the cost.
You can preview your tax credit eligibility using an Affordable Care Act subsidy calculator. If you qualify, the monthly premium cap demonstrates how much you would spend for the second cheapest plan on the marketplace.
Take into consideration that the dollar amount you receive depends on two components: the size of your family and your income. When the number of family members you claim as dependents increases, your income can also increase while you, at the same time, remain eligible for credit. Take a look at this example: if you have a family of three, your household can earn up to $87,840 and remain eligible. On the other hand, your household income can only be $69,680 or less for a family size of two.
Advanced premium credit payments: This federal tax credit reduces the amount paid for monthly health insurance premiums for health insurance on the Marketplace. To better understand this concept, the advanced premium credit payments are often referred to as Obamacare, signed into effect back in March 2010.
To claim the Advanced Premium Tax Credit, you enroll in health insurance coverage through the Marketplace. The tax credit is not automatic. You either apply for it when you sign up for insurance, or you can pay your healthcare premiums each month and then later claim the tax credit back on the tax return when you file the following year.
You must reconcile that actual credit with the amount received on your tax return the following year when you take the monthly discount. IRS Form 8962 Premium Tax Credit is used to claim and reconcile tax credit.
If the discount taken monthly is less than the amount of the credit, you qualify for a refund. Should the discounts be more than the credit amount, this becomes part of your tax liability, and you are accountable to repay the amount when filing your tax return.
Buying health insurance on the marketplace lets you choose how much of your Advanced Premium Tax Credit you would like to apply to your health insurance premiums.
If you aren't sure how much money you will earn over the year, or even if your income isn't steady, you can adjust how much of your tax credit to apply to your premiums. That way, you can avoid a more significant tax liability at the end of the year.
Using Your Premium Tax Credit Wisely
You can take advanced payments each month or use them as a credit on your tax return to increase your refund. Look to either use all, some or none of your premium tax credit in advance to lower your monthly premium. If you use more advance payments of the tax credit than you are eligible for that is based on your final yearly income, you will end up repaying the difference when you file your federal income tax return. If your income turned out to be lower than you anticipated, you would receive the additional tax credits with your tax refund.
Save your money: You could put the extra money in short-term Certificates of Deposit (CDs) or a high yield savings account receiving between 0.90% and up towards 1.5% of interest each year.
Invest in stocks and crypto: Investing in cryptocurrencies is similar to buying stocks. Prices are determined by supply and demand, and transactions can be completed online. Investments can build wealth or lose it. Both of these options could serve as short-term investment opportunities for using your additional premium tax credit.
Compare Health Insurance
The overall goal of having a health insurance tax credit is to help make monthly health insurance premiums more affordable. To successfully do this, individuals can use Health Connector to compare the federal government's amount they should afford for each month based on household size and income. The difference between these numbers will ultimately determine how much money you get as a tax credit. Compare health insurance providers below.
- Best For:Nationwide coveragesecurely through Blue Cross Blue Shield Health Insurance's website
- Best For:No enrollment period health insurancesecurely through Sidecar Health Access Plan's website
Plans referred to above are excepted benefit fixed indemnity insurance products marketed and administered by Sidecar Health Insurance Solutions, LLC and underwritten by Sirius America Insurance Company or United States Fire Insurance Company, depending on the state. As an excepted benefit plan, it does not provide comprehensive/major medical expenses coverage, minimum essential coverage, or essential health benefits. You cannot receive a subsidy (premium tax credit and/or cost-sharing reduction) under the ACA in connection with your purchase of such an excepted benefit fixed indemnity insurance plan. Also, the termination or loss of this policy does not entitle you to a special enrollment period to purchase a health benefit plan that qualifies as minimum essential coverage outside of an open enrollment period. Coverage and plan options may vary or may not be available in all states.
Health Insurance Tax Credit in Summary
With a health insurance tax credit, you set yourself up to use tax credits for saving money on health insurance when you enroll in a plan. Tax credits help lower your insurance premium or payments you make each month for your health plan.
Frequently Asked Questions
Do you have to pay back the tax credit for health insurance?
If you are in a situation where you received too much in premium tax credits, you will likely have to pay some or all of it back. The health policy experts say they are not aware of any provision in the health law or rules that would otherwise excuse someone from repayment if the online marketplace made an error that resulted in a tax credit overpayment.
What is the income limit for the tax credit for health insurance?
Circling back to eligibility, the income limit for the tax credit for health insurance must fall between 100% and 400% of the FPL or Federal Poverty Level. When an income falls below this range, you can enroll in Medicaid. On the reverse end, if your income falls out and above this percentage range, you can still qualify for health insurance discounts. Talk to an insurance provider to find out what, if any, limitations you may have with discounts.