A tax credit for premium costs can lower your health insurance expenses monthly. However, it's only obtainable for those who buy insurance via a state or federal health insurance exchange, and you have to meet income and household size requirements. You will find out if you qualify when applying for health insurance through the exchange. In addition, small businesses with fewer than 25 employees may also be eligible for government subsidies to cover their employees' health insurance.
What is a Health Insurance Tax Credit?
A Health Insurance Tax Credit, also known as a Premium Subsidy, helps to reduce the cost of health insurance for eligible individuals and families with low to moderate incomes. This credit is offered through the Affordable Care Act (ACA) and is applied to the insurance bill monthly or as a refund on federal income taxes.
Individuals must enroll in a qualifying insurance plan through the federal or state marketplace to receive this credit. However, it is important to note that those who choose Catastrophic coverage are not eligible for this credit.
The federal government determines the amount of the Health Insurance Tax Credit, and it is consistent across the nation.
How do I know if I qualify for a tax credit?
If your income is below the FPL (federal poverty level), you may be eligible for Medicaid coverage. Most states have expanded Medicaid eligibility to incomes up to 138% of the federal poverty level, providing more options for those with low incomes.
Premium tax credits are available for those with income between 100% & 400% of the federal poverty level. Even if you earn more than 400% of the federal poverty level, you may still be eligible for health insurance discounts.
In 2021, the "subsidy cliff" at 400% of the federal poverty level was eliminated through the American Rescue Plan Act. This allowed those earning above the 400% threshold to access subsidies that limit health insurance costs to 8.5% of their income. In addition, this benefit has been extended until the end of 2025 through the Inflation Reduction Act.
The amount of the tax credit you can receive depends on your family size and income. As your family size increases, your income can also increase while still remaining eligible for the credit. For example, in 2023, a household of three with an income of up to $92,120 can still be eligible for the credit. On the other hand, a household of two can only earn up to $73,240 or less.
Each year, the Department of HHS (Health and Human Services) sets the income guidelines for the health insurance subsidy. The eligible income ranges are based on household size and are determined using the prior year's federal poverty level.
How does the health insurance tax credit work?
The health insurance tax credit is a way to help lower the cost of health insurance. There are two ways to receive this credit: the Advance Premium Tax Credit (APTC) and the federal tax refund.
The APTC uses estimates to decrease the amount you spend on health insurance each month. You can apply for this credit through the marketplace when you sign up for insurance. The government then sends payments directly to the insurance company, which are applied to your monthly premiums, reducing your monthly expenses.
If you're not eligible for APTC, you can receive the tax credit through a tax refund. You would deduct the full amount of the credit from your taxes owed when you file your tax return. However, during the plan year, you would have to pay more for health insurance since you would be responsible for your share of the premium without the help of the tax credits.
To receive the health insurance tax credit, you must file Form 8962 with your tax return and provide information from Form 1095-A, which outlines the cost of your health insurance policy and the subsidies you received. Your final health insurance tax credit amount is based on your qualifying income reported on your individual tax return.
If you expect to have low disposable income, the APTC could be more beneficial for you if you qualify.
What happens if my family income or size changes during the year?
Life events such as changes in your household income, marriage, divorce, childbirth, adoption, and gaining or losing health insurance coverage can impact your tax credit eligibility. The marketplace calculates your tax credit, and it is essential to report any changes promptly to ensure that your health plan is updated.
Particular attention should be paid if you are using the advance premium tax credit, as reporting life changes immediately will avoid any discrepancies in what you paid versus what you should pay. If you use more credits than you are eligible for, you may have to repay the excess amount when you file your federal income tax return. On the other hand, if you use fewer credits than allowed, you may receive a higher refund. This process is known as "reconciling" your advance premium tax credits.
Health Coverage Tax Credit (HCTC) versus Premium Tax Credit (PTC)
Health Coverage Tax Credit (HCTC) and Premium Tax Credit (PTC) are two tax credits designed to lower the cost of health insurance. HCTCs, which expired on December 31, 2021, covered 72.5% of eligible health insurance premiums. PTCs, on the other hand, can be used by recipients to lower their monthly health insurance premiums when they enroll through the Health Insurance Marketplace. Recipients with income between 100% and 400% of the Federal Poverty Line (FPL) qualify for PTCs, while those earning above 400% FPL may still be eligible.
What is a small business health care tax credit?
The Small Business Health Care Tax Credit is a federal tax credit designed to encourage small business owners with fewer than 25 full-time employees to offer health insurance to their employees. The credit is available to small businesses and tax-exempt firms (e.g., charities) that meet certain qualifications, including purchasing insurance through the Small Business Health Options Program (SHOP) marketplace and paying average wages of less than $56,000 per year. The credit covers up to 50% (35% for nonprofits) of the cost of employee health insurance premiums and is based on the size of the business. To qualify, the business must pay at least half of the employees' insurance premiums and fulfill other eligibility requirements. The credit can be claimed by filing Form 8941 with the tax return. Note that sole proprietorships and non-family dependents are not eligible for the credit.
Self-employment health care tax credit
The eligibility criteria for self-employed individuals to receive the health insurance tax credit is based on the Federal Poverty Line (FPL) guidelines. You will meet the first eligibility requirement if you purchase a plan through the marketplace.
However, calculating the amount of tax credit you are entitled to is more complicated as a self-employed individual. Your adjusted gross income (AGI) is affected by the self-employed health insurance deduction, which in turn affects the premium tax credit and eligible deduction.
The IRS has provided a simplified calculation for self-employed individuals filing taxes independently. Still, this method may result in a lower tax credit than you are eligible for. For the maximum tax credit, consulting with a tax expert or tax preparation company that uses software to accurately calculate this issue is recommended.
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