Health insurance can be a significant expense for many individuals and families. Fortunately, there are tax credits available to help alleviate the cost. These tax credits work by reducing the amount of income tax owed by the individual or family, making health insurance more affordable. In this article, we will discuss how tax credits work with health insurance and provide a comprehensive guide to understanding them.
The Basics of Tax Credits
Before delving into how tax credits work with health insurance, it is important to understand the basics of tax credits. Tax credits are a form of tax relief that reduces the amount of income tax that an individual or business owes to the government. Unlike deductions, which reduce the amount of taxable income, tax credits directly reduce the amount of tax owed.
There are two main types of tax credits: refundable and non-refundable. Refundable tax credits are those that can result in a refund check if the credit exceeds the amount of tax owed. Non-refundable tax credits, on the other hand, can only reduce the amount of tax owed to zero but do not result in a refund.
How Tax Credits Work with Health Insurance
Under the Affordable Care Act (ACA), also known as Obamacare, tax credits are available to help make health insurance more affordable for individuals and families. These tax credits are known as premium tax credits or premium subsidies.
Premium tax credits are based on an individual’s or family’s income and the cost of health insurance in their area. Individuals and families who meet certain income requirements can receive a tax credit that can be applied directly to their health insurance premiums, reducing the amount they owe out of pocket.
To be eligible for premium tax credits, individuals and families must purchase their health insurance through the Health Insurance Marketplace, also known as the Exchange. The Exchange is a website that allows individuals and families to shop for and compare health insurance plans from various insurance providers.
The amount of the premium tax credit is based on a sliding scale. Those with lower incomes will receive larger tax credits, while those with higher incomes will receive smaller tax credits. The tax credit is calculated as a percentage of the individual’s or family’s income and is capped at a certain percentage of the cost of the second-lowest-cost silver plan available in their area.
For example, if the cost of the second-lowest-cost silver plan in an individual’s area is $400 per month, and they have a tax credit of 50%, their premium tax credit would be $200 per month ($400 x 50%). This means that their monthly health insurance premium would only be $200 instead of $400.
It is important to note that premium tax credits are applied directly to an individual’s or family’s health insurance premiums. This means that they do not have to pay the full premium amount upfront and then wait for reimbursement. Instead, the tax credit is applied directly to their monthly premium, reducing the amount they owe out of pocket.
Eligibility Requirements for Premium Tax Credits
To be eligible for premium tax credits, individuals and families must meet certain requirements. These requirements include:
– They must purchase their health insurance through the Health Insurance Marketplace.
– They must not be eligible for other health insurance coverage, such as Medicare, Medicaid, or employer-sponsored coverage.
– They must have income between 100% and 400% of the federal poverty level (FPL). In 2021, the FPL for a single individual is $12,880, and the FPL for a family of four is $26,500.
– They must file a tax return, even if they do not owe any taxes.
If an individual or family meets these requirements, they may be eligible for premium tax credits to help make their health insurance more affordable.
Reconciling Premium Tax Credits
At the end of each tax year, individuals and families who received premium tax credits must reconcile their tax credits on their tax return. This means that they must compare the tax credit they received with the actual amount they were eligible for based on their income.
If an individual or family’s income was higher than they estimated when they applied for the tax credit, they may have to repay a portion of the tax credit. If their income was lower than they estimated, they may be eligible for additional tax credits.
To avoid having to repay a portion of the tax credit, it is important to accurately estimate income when applying for health insurance through the Health Insurance Marketplace. Individuals and families should also update their income information throughout the year if their income changes.
Conclusion
Tax credits can help make health insurance more affordable for individuals and families. Premium tax credits are available to those who purchase their health insurance through the Health Insurance Marketplace and meet certain income requirements. These tax credits are applied directly to an individual’s or family’s health insurance premiums, reducing the amount they owe out of pocket.
