How do ACA tax credits work?
What are premium tax credits, and how do they help reduce the cost of my ACA health insurance?
Premium tax credits are a key form of financial assistance available under the Affordable Care Act (ACA) to help individuals and families lower the cost of their health insurance premiums. These credits are based on your income and household size, and they are designed to make health coverage more affordable by reducing the amount you pay each month for your plan. Here’s a breakdown of how premium tax credits work and how they can reduce your health insurance costs:
1. What Are Premium Tax Credits?
Premium tax credits are subsidies that lower the cost of monthly premiums for health insurance purchased through the ACA Marketplace. The amount of the tax credit is determined by your household income and family size, relative to the federal poverty level (FPL). These credits are designed to cap the amount you spend on your health insurance premiums to a certain percentage of your income, making coverage more affordable.
Monthly premiums: The payments you make each month to keep your health insurance active.
Tax credits: A financial subsidy that reduces the amount of your monthly premium.
2. Who Qualifies for Premium Tax Credits?
To qualify for premium tax credits, you need to meet the following criteria:
A. Income Eligibility:
Your household income must be between 100% and 400% of the federal poverty level (FPL).
For 2024, this income range is approximately:
$14,580 to $58,320 for an individual.
$30,000 to $120,000 for a family of four.
Recent changes to the ACA (extended through 2025) allow people with incomes above 400% of the FPL to also qualify for premium tax credits. Under this expansion, no one pays more than 8.5% of their household income for ACA premiums, regardless of income.
B. Household Size:
Your household size includes you, your spouse (if applicable), and any dependents you claim on your tax return. The more people in your household, the higher your income limit for premium tax credits.
C. Other Requirements:
You must not be eligible for Medicare, Medicaid, or affordable employer-sponsored health insurance. If you have access to other affordable coverage options, you may not be eligible for premium tax credits.
3. How Do Premium Tax Credits Work?
A. Reducing Your Monthly Premiums:
Premium tax credits lower the amount you have to pay each month for your health insurance plan. You can apply these credits directly to your monthly premium, reducing the amount you pay out-of-pocket.
For example, if your monthly premium for a Silver plan is $500 and you qualify for a tax credit of $200, you’ll only pay $300 per month.
B. Advance Payment of the Premium Tax Credit:
You can choose to have your premium tax credit applied in advance, reducing the amount you pay each month, or you can receive the tax credit when you file your federal taxes at the end of the year.
Most people choose the advance payment option, which helps make their health insurance premiums more affordable throughout the year.
C. Income and Household Changes:
If your income or household size changes during the year, it’s important to update your information with the ACA Marketplace. This will ensure that your premium tax credits are adjusted accordingly, so you don’t owe money back when you file your taxes or miss out on additional credits.
4. How Much Will I Pay with Premium Tax Credits?
The amount you’ll pay for premiums after applying premium tax credits depends on your household income and the cost of health insurance in your area. The goal of the tax credit is to cap your monthly premium payment at a certain percentage of your household income. This percentage is based on a sliding scale, so lower-income households pay a smaller percentage of their income on premiums than higher-income households.
For most people, the cost of health insurance is capped at 2% to 8.5% of their annual household income.
For example, if your household income is $30,000 and the benchmark plan in your area costs $4,000 per year, your premium tax credit would reduce the amount you pay so that your premium does not exceed 8.5% of your income (about $2,550 per year, or $212 per month).
5. Can Premium Tax Credits Change During the Year?
Yes, premium tax credits can change if your income or household size changes during the year. If you experience significant life changes—such as getting a raise, losing a job, getting married, or having a child—you should report these changes to the ACA Marketplace as soon as possible. The Marketplace will recalculate your premium tax credits based on your new income or household size, ensuring you get the right amount of financial assistance.
6. How to Apply for Premium Tax Credits
A. Apply Through the ACA Marketplace:
To apply for premium tax credits, you must enroll in a health insurance plan through the ACA Marketplace. You can do this by visiting tsunamihealth.com or your state’s ACA Marketplace.
During the application process, you’ll provide information about your household size and income to determine your eligibility for premium tax credits.
B. Choose Your Plan and Apply Credits:
Once your eligibility is confirmed, you can apply the tax credits to any Marketplace plan you choose. The amount of your premium tax credit will depend on the cost of health insurance in your area and your income level.
The Marketplace will show you the estimated premium you’ll pay after the credits are applied, making it easy to compare plans.
7. What Happens at Tax Time?
If you choose to receive advance payments of your premium tax credits, you’ll need to reconcile the amount you received when you file your taxes. This means that if your income or household size changed during the year, you might owe additional taxes or receive a refund, depending on whether you received the correct amount of premium tax credits.
If your income increased during the year and you didn’t update your information, you may owe some of the advance premium tax credits back.
If your income decreased, you might be eligible for additional premium tax credits when you file your taxes.
Key Takeaways:
Premium tax credits help reduce the monthly cost of your ACA health insurance premiums, based on your income and household size.
You may qualify if your income is between 100% and 400% of the federal poverty level (FPL), and expanded subsidies are available for higher incomes.
You can apply the credits directly to your monthly premium or claim them when you file your taxes.
It's important to report any changes in income or household size during the year to ensure you're receiving the correct amount of assistance.
For personalized assistance in determining your eligibility for premium tax credits or to get help applying for coverage, schedule an appointment with a Tsunami Advisor here: Schedule an Appointment.
