How Does the Tax Credit Work for Health Insurance?

If you’re currently enrolled in an Obamacare health insurance plan, you may be eligible for health care tax credits. These credits lower the cost of health insurance by either paying a portion of the premium or providing a refund on your tax return. Credits are available if you qualify based on your household income and family size. The number of credits you receive can also change due to significant life events, so we recommend updating your health insurance provider about any such changes. If you own a small business with fewer than 25 employees, you can also qualify for government subsidies, which help pay for your employees’ health insurance.

  • What Is a Health Insurance Tax Credit?
  • How Do I Know If I Qualify for a Tax Credit?
  • How Do I Receive the Premium Tax Credit?
  • Health Coverage Tax Credit vs Premium Tax Credit
  • What Is the Small-Business Health Insurance Tax Credit?

What Is a Health Insurance Tax Credit?

A health insurance tax credit, also known as the premium tax credit, lowers your monthly insurance payment either through advance payments to your insurer or through your tax refund. The credit, implemented under the Affordable Care Act (ACA), is designed to help eligible families or individuals with low to moderate income pay for health insurance. Premium tax credits are only available if you are enrolled in a plan through the federal insurance marketplace, or a state health insurance marketplace plan–excluding Catastrophic tier coverage. States do not vary in the number of tax credits that they offer. For example, you would receive the same tax credits in New York when compared to Arizona.

How Do I Know If I Qualify for a Tax Credit?

When applying for health insurance, either the federal exchange or your state marketplace will calculate your eligibility and estimate the number of tax credits you would receive. Health care tax credits are available if your household family income falls between 133% and 400% of the federal poverty level (FPL). If your income is below 133% of the FPL, then you would be eligible to enroll in your state’s Medicaid program, which is a form of low-cost health insurance. Most states have now expanded their Medicaid eligibility to 138% of the FPL, which would change the lower threshold for health care tax credits if your state has passed this legislation.

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 example, if you have a family of three, then your household can earn up to $85,320 and remain eligible. In comparison, your household income can only be $67,640 or less for a family size of two.

In the table below, we have provided the minimum and maximum eligible income limits depending on the size of your household. It is important to note that you would use the current year’s FPL to determine eligibility and apply for next year’s health care tax credits. For 2020, you would compare your household income against the 2019 FPL figures.

Household/Family sizeEligible income range
1$12,490–$49,960
2$16,910–$67,640
3$21,330–$85,320
4$25,750–$103,000
5$30,170–$120,680
6$34,590–$138,360
7$39,010–$156,040
8$43,340–$173,720

How Do I Receive the Health Care Tax Credit?

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

  • Advance premium tax credit
  • Tax refund

The two methods would qualify you for the same number of credits but differ in when you would receive the subsidy and eligibility requirements. You can apply for advance premium tax credits when you apply for health insurance through the marketplace. With advance premium tax credits, the government will send the money directly to the health insurance company every month. The insurer would then credit that money toward your cost of health insurance premiums, decreasing the amount you owe each month.

On the other hand, if you are not eligible for advance premium payments, then the 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.

What Happens If My Family Size or Income Change 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 can include:

  • An increase or decrease in your household income
  • Marriage
  • Divorce
  • Birth of a child
  • Adoption
  • Gaining or losing government sponsored or employer health care coverage

Since the marketplace determines your tax credit, it is important to report changes immediately so your 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 vs Premium Tax Credit

Health coverage tax credits (HCTC) also lower your health insurance costs, but they’re not related to premium tax credits. HCTCs are refundable tax credits that pay 72.5% of the qualified health insurance premiums for eligible individuals and families. The remaining portion of the premium would be paid by you.

Eligibility for the HCTC differs from the health care tax credit mentioned above, as those credits depend on your income and family size. If you decide to claim HCTCs, then you’ll fill out Form 8885. You may be eligible if you are:

  • In a Trade Adjustment Assistance program because of a qualifying job loss.
  • Between 55 and 64 years old and receive payments from the Pension Benefit Guaranty Corporation.

If you receive the HCTC, then you’ll receive a Form 1099-H that outlines your disbursements. You can’t claim both the health coverage tax credit and the premium tax credit for the same health insurance coverage during the same months.

What Is the Small-Business Health Care Tax Credit?

If you own a small business, then you can qualify for a tax credit that provides a subsidy for the health insurance premiums you pay for your employees. 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. You and your business would be eligible for the credit if you:

  • Purchased the coverage through the Small Business Health Options Program (SHOP) marketplace.
  • Have fewer than 25 full-time employees.
  • Pay average wages of less than $50,000 per year.
  • Pay at least half of all employees’ health insurance premiums.

If you qualify, the government would give you a subsidy to help pay for your portion of employee premiums. The size of your business and number of employees that you have would determine the amount of the credit you can receive. For example, if your business had fewer than 10 full-time employees, you can receive the maximum credit possible. A larger business with 25 employees would qualify for a lower tax credit.

Self-Employed Health Care Tax Credit

If you are self-employed, health insurance tax credit eligibility is based on the same FPL guidelines that are outlined for families in the table above. Since self-employed individuals typically purchase a federal ACA plan through their state marketplace, they’re eligible to receive tax credits during the plan year.

However, 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 AGI 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, the 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 with a tax professional or tax preparation company that utilizes software and computers to reconcile this issue.