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How Does the Tax Credit Work for Health Insurance?

How Does the Tax Credit Work for Health Insurance?

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A premium tax credit can reduce your monthly health insurance cost. It's only available for those who purchase insurance through a state or federal health insurance marketplace, and you must meet income and family size criteria to qualify. You'll learn if you are eligible when you apply for a marketplace health insurance plan.

If you own a small business with fewer than 25 employees, you may also qualify for government subsidies, which can help pay for your employees' health insurance.

What is a health insurance tax credit?

A premium tax credit, also called a premium subsidy, lowers the cost of your health insurance. The discount can be applied to your insurance bill every month, or you can receive the credit as a refund on your federal income taxes.

The credit, implemented under the Affordable Care Act (ACA), is designed to help eligible families or individuals with low to moderate incomes pay for health insurance. Premium tax credits are only available if you enroll in a qualifying insurance plan through the federal marketplace or a state marketplace.

A key exclusion is that those who sign up for Catastrophic coverage do not qualify for health insurance tax credits.

Health insurance tax credit amounts are set by the federal government, so they're the same nationwide.

How do I know if I qualify for a tax credit?

When you apply for coverage through a health insurance marketplace, also called an exchange, the system will determine your eligibility for tax credits based on your income and household size.

If your income is below the federal poverty level (FPL) threshold, you may be eligible to enroll in Medicaid. Most states have now expanded Medicaid eligibility to incomes at or below 138% of the federal poverty level (FPL), providing more health insurance choices for those with low incomes.

Those with income between 100% and 400% of the federal poverty level qualify for premium tax credits. And if you earn more than 400% of the federal poverty level, you may still qualify for health insurance discounts.

The so-called "subsidy cliff" at 400% of the federal poverty level was eliminated in 2021 as a part of the American Rescue Plan Act. Those earning more than the 400% threshold gained access to subsidies that limited health insurance costs to 8.5% of their income.

This benefit was extended through the end of 2025 as a part of a wide-reaching federal law called the Inflation Reduction Act.

You can preview your tax credit eligibility by using our Affordable Care Act subsidy calculator. If you qualify, the monthly premium cap shows how much you would spend for the second-cheapest Silver plan on the marketplace.

The dollar amount you can receive depends on two factors: the size of your family and your income. As the number of family members you claim as dependents increases, your income can also increase while you still remain eligible for the credit. For 2023 health plans, if you have a family of three, then your household can earn up to $92,120 and remain eligible. In comparison, your household income can only be $73,240 or less for a family size of two.

What are the income limits for the health insurance subsidy?

Each year, the Department of Health and Human Services (HHS) determines the income guidelines. Below are the ranges of eligible income based on household size. It is important to note that you would use the prior year's federal poverty level to determine eligibility and apply for the current year's health care tax credits. When you file for the 2023 tax year, you would compare your household income against the 2022 FPL figures shown below.

Household/family size
Eligible income range

If you earn more than these maximum amounts, you may still qualify for subsidies based on how your income compares to the cost of health insurance. For example, someone who has high health insurance rates because of their age or location could see those monthly costs reduced to 8.5% of their income through discounts.

How does the health insurance tax credit work?

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You can get the health care tax credits in two ways:

  • Advance premium tax credit (APTC): Uses estimates to reduce how much you spend on health insurance each month.
  • Federal tax refund: Allows you to receive your health insurance subsidy all at once at the end of the year or to reconcile any differences with your monthly tax credits.

The two methods would qualify you for the same number of credits, but they differ in eligibility requirements and when you receive the subsidy. Here's how advance premium tax credits can reduce your monthly bills.

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  1. Apply for insurance on the marketplace, and get your estimated discount.
tax credit breakdown
  1. You pay a reduced rate for health insurance, and the tax credit is paid to your insurer.
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  1. Reconcile your final tax credit amount when filing your federal income taxes.

You can apply for the advance premium tax credit (APTC) when you apply for health insurance through the marketplace. With this program, the government sends advance payments directly to the health insurance company every month. The insurer then credits that money toward the cost of your health insurance premiums, decreasing your out-of-pocket costs each month.

On the other hand, if you are not eligible for advance premium payments, then a tax refund is available. When filing your taxes, you would subtract the full amount of the tax credit from all the taxes you owe. But during the plan year, you would pay more per month for health insurance since you would be responsible for your share of the premium along with the amount that would have been covered by the tax credits.

Therefore, if you expect to have low disposable income, taking the advance premium tax credit could be more beneficial if you qualify.

Anyone who receives a health insurance tax credit must file Form 8962 (Premium Tax Credit) with their tax return. To complete Form 8962, you'll use the information from Form 1095-A (Health Insurance Marketplace Statement), which is a statement sent to you about how much your health insurance policy cost and the subsidies you received. Your final health insurance tax credits are based on the qualifying income reported on your Form 1040 individual tax return.

What happens if my family size or income changes during the year?

Life-changing events can impact your tax credit eligibility by either increasing or decreasing the amount that you are allowed to claim. Events that can affect your premium tax credits may include:

  • Change in your household income
  • Marriage
  • Divorce
  • Birth of a child
  • Adoption
  • Gaining or losing health insurance coverage

Since the marketplace determines your tax credit, it is important to report changes immediately so your health plan eligibility can be updated. And if you're currently using the advance premium tax credit, then it is particularly important to report any life changes to the marketplace as soon as possible.

If you wait to report such changes, there may be discrepancies between what you paid and what you should pay. In this case, if you used more advance premium tax credits than you are allowed, you may have to pay back money when filing your federal income tax return. On the other hand, if you used less than allowed, you may get an added refund. This is known as "reconciling" your advance premium tax credits.

Health coverage tax credit (HCTC) vs. premium tax credit (PTC)

Health coverage tax credits (HCTCs) expired on Dec. 31, 2021. HCTCs lowered health insurance costs for eligible recipients, paying 72.5% of qualified health insurance premiums.

Premium tax credits (PTCs) are tax credits that recipients can use to lower their monthly health insurance premium when they enroll through the Health Insurance Marketplace. Those with income between 100% and 400% of the FPL qualify for PTCs, and those earning more than 400% may still qualify.

What is the small business health care tax credit?

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Usually, small business owners are not required to offer health insurance if they have fewer than 50 full-time employees. Therefore, the small business health care tax credit, which was created under the ACA, encouraged small business owners to offer health insurance to their employees.

Keep in mind that not everyone qualifies for this tax credit, including owners of sole proprietorships. Nonfamily member dependents and spouses are also excluded.

If a small business or tax-exempt firm (for example, a charity) meets a number of qualifications, it is eligible to receive the federal tax credit for two consecutive taxable years.

You and your business would be eligible for the credit if you fulfill all of the following requirements:

  • You purchased insurance through the Small Business Health Options Program (SHOP) marketplace.
  • You have fewer than 25 full-time employees.
  • You pay average wages of less than $56,000 per year.
  • You pay at least half the cost of your full-time employees' health insurance premiums.

If you qualify, the federal government gives you a subsidy to help pay for your portion of employee premiums. The size of your workforce determines the amount of credit you can receive. For example, if your business has fewer than 10 full-time employees, you can receive the maximum credit possible. A larger business with 24 employees would qualify for a lower tax credit.

The credit covers up to 50% of the costs you pay for your employees' premiums (35% for nonprofits). For example, say a firm qualifies for the full small business tax credit and chooses to pay for 100% of its employees’ premiums, which cost the firm $70,000 per year. That firm’s tax return would be credited $35,000 at the end of the year.

Qualifying small businesses can claim this tax credit by filing Form 8941 with their taxes.

Self-employed health care tax credit

If you are self-employed, eligibility for the health insurance tax credit is based on the same FPL guidelines outlined for families in the table above. Because self-employed individuals typically purchase a marketplace plan, they'll meet the first eligibility criterion to receive health insurance tax credits.

But determining the number of tax credits you should receive is more complex if you're self-employed. Essentially, the self-employed health insurance deduction impacts your adjusted gross income (AGI). Your adjusted gross income then has a direct impact on the premium tax credit you receive, which also affects your eligible deduction.

The IRS has issued statements to reconcile this issue and allows a shortened version of the calculation if you file your taxes on your own. However, that simplified calculation typically yields a tax credit that is smaller than the amount for which you're eligible. If you are self-employed, in order to receive the maximum tax credit, we recommend consulting a tax professional or tax preparation company that uses software that can address this issue.

Frequently asked questions

What is a tax credit for health insurance?

A health insurance or premium tax credit can reduce the amount you spend on insurance plans purchased through HealthCare.gov or a state marketplace. You must meet income criteria to qualify. Discounts can be applied monthly to reduce your health insurance bill, or you can receive the credits as a refund when filing your federal income taxes.

How do I qualify for a tax credit for health insurance?

You'll find out if you qualify for health insurance tax credits when you sign up for health insurance on a federal or state marketplace. After entering your income information and household size, the marketplace application will show if you qualify and the subsidy amount you'll receive.

Do I have to pay back the health insurance tax credit?

No, the tax credits are designed to make health insurance more affordable, and any discounts you receive do not need to be paid back. The only exception is if you fail to report a status update, such as an increase in income. In these cases, you would have to reconcile any underpayment or overpayment when you file income taxes.

What are the income limits for the premium tax credit?

For the 2023 tax year, you're eligible for premium tax credits if you make between 100% and 400% of the federal poverty limit, which is between $13,590 and $54,360 for a single person, and those with higher incomes may also qualify.

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