With the Affordable Care Act (ACA) going into effect a lot of people are scrambling trying to find health care coverage, and trying to figure out how to pay for it.
Contrary to what many people believed, health care under the ACA is not free, and you will have to find a way to pay for your new premiums. Premiums under new health care plans are going up.
A study by the Manhattan Institute found that “In the average state, Obamacare will increase underlying premiums by 41 percent.” While that is disheartening for a lot of folks, there is one thing that may help some low and middle income folks pay those premiums. The health insurance premium tax credits. Let’s take a look at how they work.
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Health Insurance Premium Tax Credits
The health insurance tax credit is a refundable tax credit (you can receive a tax refund even if the credit is more than your total tax due). It is also a credit that can be paid in advance of filing your taxes, in order to help pay for your premiums up front.
If you do decide to have the credit paid to your insurance company in advance, you’ll need to reconcile the amount paid versus the final credit you are eligible to receive. If you received too much in advance, you’ll need to repay the difference, although there are income limitations on requirements to repay.
Eligibility For The Health Insurance Premium Tax Credit
There are a few requirements to be eligible for the health insurance premium tax credit.
- Household income must be between 100% and 400% of the federal poverty level (FPL).
- Covered individuals must be enrolled in a “qualified health plan” through one of the new insurance exchanges.
- Covered individuals must not be eligible for other qualifying coverage, such as Medicare, Medicaid, or affordable employer sponsored coverage.
- Covered individuals must be legally present in the United States and not incarcerated.
How Much Is The Tax Credit?
So how much is the tax credit? It depends. Your best bet is to go to one of the tax credit calculators in order to figure out what yours will be, however, in general the tax credit will adjust the annual premiums you pay to make sure you don’t pay more than a certain percentage of your household income for your premiums.
If you are eligible for the tax credits (see above for eligibility requirements) Then your health care insurance premiums will not exceed 9.5% of your household’s income.
So for example, if you are at the 400% of the poverty level, and your health insurance premiums on the exchange equal to 10.5% of your household income, your tax credit would pay the 1% difference from the allowed 9.5%.
The percentage that people are to pay for their insurance ranges anywhere from no more than 2% at 100% of the FPL, to no more than 9.5% at 400% of the FPL.
Federal Poverty Level Guidelines
So what are the ranges of household income that are eligible for the tax credit? The following are the ranges for different size households that would fit into the 100%-400% of the federal poverty level:
- Household of 1 person: $12,140-$48,560
- Household of 2 people: $16,460-$65,840
- Household of 3 people: $20,780-$83,120
- Household of 4 people: $25,100-$100,400
- Household of 5 people: $29,420-$117,680
Find out where you fall on the charts on this page.
Dropoff Of The Tax Credit
For the purposes of the credit household income refers to the Modified Adjusted Gross Income (MAGI) you report on your taxes. Currently that would not include tax deferred retirement savings like the 401k.
The reason that’s important is this – there is an immediate dropoff of the tax credit after you go over the 400% of the FPL.
So let’s say that your household of 3 people makes $83,120 – topping out on the range. If you make one more dollar at $83,121 – you get no tax credit. In that situation you’re better off putting some more money into your 401k to ensure you receive the tax credit. So if you’re near the top of the range, keep this in mind so that you don’t lose the credit! If you need to, cut your MAGI by putting money in your 401k, or something else to reduce your income.
Claiming The Tax Credit
Claiming the tax credit means that you’ll have to file your taxes, even if you don’t typically file because you don’t meet the minimums to file. If you’re claiming the tax credit, you need to file.
Whether or not you were given an advance on the tax credit to pay for your insurance up front, or if you’re receiving it at the end of the year, you will need to file. If you got an advance you’ll need to confirm that your received the correct amount – and if not, you’ll need to pay the difference.
Do you qualify for the health care tax credit? Have you been on the exchanges yet to look into buying healthcare? Tell us what your experience has been.
One of the interesting things moving forward will be the possible disaster awaiting for those who have huge swings in income each year who choose to have the credit paid to the insurance company ahead of time. They will then file their taxes only to find out the credit was much less or non existent, as the credit will be calculated based on last year’s taxes.
Politics aside, this is going to be a train wreck to administer, and people will end up paying even more money for basic compliance due to all these changes and the complexity involved.
I think you’re likely going to be right. Just like everything else with this law it’s going to be a train wreck.
Thanks for explaining this, Pete. This gives me confidence that regardless of what I qualify for when applying for a new plan, I’ll be able to true it all up come tax time in 2015.