By Karen Lynch | American Express Credit Intel Freelance Contributor
6 Min Read | January 24, 2021 in Money
Most Americans spend thousands of dollars on health insurance every year, not to mention deductibles, copays, and other out-of-pocket costs. The health care tax credit, which is officially known as the premium tax credit – since the money you pay for insurance is called a premium – can ease the financial burden of health insurance for many of the people who need it most.
The health care tax credit helps eligible individuals and families with low to lower-middle income afford health insurance purchased through public health insurance marketplaces. Savings from health care tax credits also can reach thousands of dollars per year for those who qualify. Sometimes, the tax credits may cover the entire cost of insurance.1 The credit was created by the 2010 Affordable Care Act (ACA), which rolled out health insurance marketplaces across the country for people to comparison shop and enroll in insurance policies.
But understanding the health care tax credit – which mixes insurance, tax, and policy considerations – can be challenging. This primer unpacks the credit’s requirements, benefits, and current status.
Until recently, you could only qualify for a health care tax credit if you buy insurance on a federal or state marketplace – also known as an exchange – and have a low to lower-middle income. About 11.4 million Americans were enrolled in public health insurance marketplaces in 2020.2 But recent U.S. Census Bureau statistics show that private insurance continues to be prevalent. It was 68% of the insured population in 2019, either directly or through employers’ insurance programs.3
Now, commercial insurers and private exchanges, including those offering ACA coverage under a new government program called “enhanced direct enrollment,”4 may be able to sign you up directly for tax credits. It’s a good idea to check if you’re considering these options, since insurers’ capabilities vary.5
The majority of those enrolled in health insurance marketplaces receive the tax credit.6 The specific household income range to qualify is 100% to 400% of the federal poverty limit, which would amount to $12,880 to $51,520 if you’re single and $26,500 to $106,000 for a family of four.7 About 8% of all Americans, or 26.1 million people, had no health insurance in 2019, according to U.S. Census Bureau data.
The IRS lists additional requirements that must be met, such as ineligibility for employer-sponsored programs, Medicaid, or Medicare.8 Online tools are available, for example, at Healthcare.gov, to determine whether you might qualify.9
Most enrollees receive significant reductions in their monthly premiums, according to the Kaiser Family Foundation.10 Nationwide, premiums for ACA coverage averaged $462 per month for individuals and $1,437 for family plans in 2019,11 but costs vary by household income, family size, location, and choice of plan. Average tax credits per month ranged from $250 to almost $900 in 2019, depending on where you live.12
Tax credits are available on bronze, silver, and gold policies – making gold plans more easily attainable for some and making bronze plans cheaper (or even free) for others. Regardless of which plan you choose, the IRS says your credit will be generally equal to the premium for the second lowest-cost silver plan available for your “coverage family” – all the members of your family who are enrolled – minus a certain percentage of your household income.13
For example, the Kaiser Family Foundation has calculated that the tax credit for a 40-year-old individual making $20,000 would cover the full premium for the lowest-cost bronze plan in 84% of U.S. counties.14
When you apply for health insurance, the marketplace will estimate the tax credit using information you provide about your family, projected household income, and other factors such as whether anyone you are enrolling is eligible for other types of coverage. For example, you will need to provide your modified adjusted gross income plus that of every other member of your family.
Most people use all or some of their tax credits “in advance” to lower their monthly premium. In other words, the marketplace factors the tax credit into their monthly insurance bill when they apply for a policy.
Even though the credit is not usually a lump sum that you apply for at tax time every year, you still have to file a tax return that includes Form 8962: “Premium Tax Credit.” If not, you may not qualify for a tax credit in future years. By mid-February, you should receive an annual form 1095-A in the mail, with the necessary information about your insurance policy, premiums, and advanced payment of tax credits.
The health care tax credit is refundable, meaning if the amount of the credit is more than the amount of taxes you owe, you can receive the difference as a refund.
Additionally, your credit may change if your income or family size changes during the year, and there are online tools to determine those differences, as well.15 It might turn out that you are due for a refund – or that you owe taxes – if you used less or more of the credit than you’re due. Or, you can update your status on the marketplace to adjust your premiums during the year.
Generally speaking, tax credits are worth more than tax deductions. Where tax credits directly reduce the amount of tax you owe, deductions only lower your taxable income. If your tax rate is 25%, for instance, a $1,000 tax deduction would drop your tax bill by only $250 (25% of $1,000), but the same size tax credit would lower your tax bill by $1,000.16
The health care law has been the target of ongoing challenges in Washington, D.C., in various states, and in courts across the country, which could affect the tax credit and other aspects of the marketplaces.17 However, news reports suggest that there won’t be major changes in 2021.18 Meanwhile, in one poll from 2019, only one in five people were even aware of the tax credit.19
The health care tax credit helps lower the monthly premium that people pay on public health insurance marketplaces. Individuals and families with low to lower-middle incomes may qualify, and they can easily find out online whether they do.
1 “How ACA Marketplace Premiums Are Changing by County in 2021,” Kaiser Family Foundation
2 “Health Insurance Exchanges 2020 Open Enrollment Report,” Centers for Medicare & Medicaid Services
3 “Health Insurance Coverage in the United States: 2019,” U.S. Census Bureau
4 “Entities Approved to Use Enhanced Direct Enrollment,” Centers for Medicare & Medicaid Services
5 “Enhanced Direct Enrollment for 2019 FAQs,” Centers for Medicare & Medicaid Services
6 “How Affordable Are 2019 ACA Premiums for Middle-Income People?,” Kaiser Family Foundation
7 “HHS Poverty Guidelines for 2020,” Department of Health and Human Services
8 “The Premium Tax Credit—The Basics,” Internal Revenue Service
9 “Income Levels & Savings,” HealthCare.gov
10 “How ACA Marketplace Premiums Are Changing by County in 2020,” Kaiser Family Foundation
11 “How Much Does Health Insurance Cost Without a Subsidy,” eHealth
12 “Estimated Total Premium Tax Credits Received by Marketplace Enrollees,” Kaiser Family Foundation
13 “Questions and Answers on the Premium Tax Credit,” Internal Revenue Service
14 “How ACA Marketplace Premiums Are Changing by County in 2020,” Kaiser Family Foundation
15 “Premium Tax Credit Change Estimator,” Taxpayer Advocate Service
16 “What is the difference between a tax deduction and a tax credit?,” H&R Block
17 “Suit Challenging ACA Legally Suspect, But Threatens Loss of Coverage for Millions,” Center on Budget and Policy Priorities
18 “Understanding Health Insurance Changes for 2021,” VeryWellHealth
19 “Health Insurance Confusion is Growing in America,” Policygenius