Did you know that if you have health insurance, there could be a tax credit for you? Yes, the IRS is giving taxpayers a tax credit for health insurance. How does it work? If your healthcare costs were greater than 7.5% of your income for the year, then you are eligible for a refund from the IRS. In addition, the amount of this refund is based on how much you spent on health care and how much your income was throughout the year.
In this guide, we find out What Is Tax Credit For Health Insurance, do i qualify for a tax credit for health insurance, what is premium tax credit, and how does the health care tax credit affect my tax return.
What Is Tax Credit For Health Insurance
If you’re like me, it can be difficult to keep track of all the different tax credits and refunds that are available. That’s why I’m here to tell you about another one: A tax credit for health insurance! A tax credit is basically a dollar-for-dollar reduction in the taxes you owe to the federal government. For example, if your annual income is $100,000 and your total healthcare costs were $10,000 during that year, then you would receive a $1,000 refund from the IRS because $1,000 is 10% of $10k.
A tax credit is a dollar-for-dollar reduction in the taxes you owe to the federal government.
A tax credit is a dollar-for-dollar reduction in the taxes you owe to the federal government. Unlike a deduction, which reduces your taxable income, a tax credit directly reduces the amount of taxes owed.
Tax credits can be used to help you afford a health insurance plan if you don’t have coverage through your employer or other source (like Medicare). A qualified health plan provides essential benefits and covers at least 60% of expected costs.
Tax credits are available to people who do not qualify for Medicaid but still need help with premiums and cost sharing (deductibles, co-payments and co-insurance). If you qualify for Advanced Premium Tax Credits (APTCs), they will pay part of your monthly premium directly to your insurance company on behalf of eligible individuals based on their household income percentage determined by their filing status – single or married filing separately; head of household; married filing jointly; qualifying widow(er); tax dependent child related to another taxpayer.*
tax credits can help lower your overall healthcare costs.
Tax credits are a dollar-for-dollar reduction in the taxes you owe to the federal government. These tax credits can help lower your overall healthcare costs, whether you receive coverage through an employer or purchase it on your own.
Tax credits are available to help pay for health insurance premiums, and there is no limit on how many people can claim these tax credits. You can also use these savings to cover other out-of-pocket costs associated with your insurance plan.
do i qualify for a tax credit for health insurance
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.
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?
You can get the health care tax credits in two ways:
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.
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:
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?
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.
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.
what is premium tax credit
Premium tax credits reduce your premium for most Marketplace policies. The amount of the tax credit you may receive depends on your income and the cost of Marketplace health plans in your area.
The Marketplace will determine the expected contribution you are required to pay toward the premium for a mid-range (Silver) benchmark plan. The expected contribution will increase on a sliding scale based on your 2023 income. If your income is between the poverty level and 150% of the poverty level, the expected contribution you would be required to pay toward the benchmark plan is $0. And, once your income reaches 400% of the poverty level, the expected contribution you would be required to pay toward the benchmark plan is 8.5% of your income.
The difference between the premium for the benchmark plan and your expected contribution equals the amount of your tax credit. (You do not have to pay more than the actual premium for the plan.) The Marketplace will tell you what that dollar amount is. You can use that amount to help pay the premium for any Bronze, Silver, Gold, or Platinum plan offered in the Marketplace. The credit cannot be used to pay for a Catastrophic plan.
Premium tax credits may be claimed at the end of the year, or you can apply for an advanced premium tax credit based on your estimated income for the up-coming year. If you elect to receive an advanced credit, the government will pay 1/12 of the credit directly to your insurance company each month and the insurer will bill you for the rest of the premium.
It’s important to keep in mind that when you apply for the premium tax credit during Open Enrollment, you may not know for sure what your income for the coverage year will be, so you will apply based on your best estimate. Later, when you file your tax return, the IRS will compare your actual income to the amount of premium tax credit you claimed in advance. If you underestimated your income and claimed too much premium tax credit, you might have to pay back some or all of the difference. If you didn’t receive all of the premium tax credit you’re entitled to during the year, you can claim the difference when you file your tax return. You should report any changes in your income during the year to the Marketplace, so your credit can be adjusted and you can avoid any significant repayments at the end of the year.
how does the health care tax credit affect my tax return
The health insurance premium tax credit was designed to help lower-income Americans pay for insurance — but, if you’re not careful, you could end up owing money at tax time.
The refundable credit is available to any individual or household that obtains a health insurance policy through one of the health-care exchanges set up as part of the Patient Protection and Affordable Care Act, commonly referred to as Obamacare.
Intended to help people who aren’t insured through an employer-sponsored plan, anyone making less than 400% of the official federal poverty level is eligible for the credit. As of the end of 2019, 11.41 million people had obtained insurance through one of the health-care insurance exchanges, according to data from the Kaiser Family Foundation. Of those people, 8,515,524 people received total annual credits of $52.3 billion, with the average monthly credit being $512 per person.
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The eligible credit for any individual is based on their income, where they live and how large their household is. The less money you make and the larger your family, the larger your credit will be. For 2021, the federal poverty level is $12,280 for single individuals and $26,500 for a family of four living in any of the 48 contiguous states or the District of Columbia. It is $33,130 for a family of four living in Alaska and $30,480 for a family in Hawaii.
“It’s a bit surprising how much money you can make and still qualify for the credit,” said Tom Gibson, a Vero Beach, Florida-based CPA with Tax Saving Professionals. Based on the 2019 poverty threshold of $25,750, a family of four making up to $103,000 was eligible for the credit. The monthly premium for a silver plan purchased on the Florida health insurance exchange was $1380.
Gibson calculated that a family living at the poverty threshold in that year would receive a monthly credit of $1,336 and bear a cost of $44 per month. A family at 390% of the threshold would receive a credit of $575 and be responsible for covering $805 of the monthly premium.
Individuals eligible for the credit can receive the entire annual amount at the end of the year, reducing taxes owed or increasing their refunds. However, when people enroll in the plan, most arrange to have advance payments of the credit applied to their monthly premiums due.
While the advance payments are convenient for plan participants, they can significantly alter your ultimate tax liabilities if your circumstances change during the year.
“If you got a raise, or perhaps your spouse got a part-time job or a dependent left the household, it impacts the amount of credit you’re eligible for,” said Gibson. “If advance payments were applied to your premiums, you could end up owing at the end of the year.”
On the flip side, if you had a child last year, were laid off or otherwise saw your income fall — a significant possibility for many lower-income Americans last year — you may be eligible to receive additional credit on your tax return this year.
Either way, if you don’t like surprises at tax-filing time, it pays to promptly report all changes to your income and family circumstances to ensure that the advance payments accurately reflect your life profile. Any updates can be made through an account at the HealthCare.gov website, by phone with your marketplace call center or in person.
If you received advance payments of the credit through the year, you are required to reconcile the amounts with what you are ultimately eligible for by completing Form 8962 with your tax return.