Tax credits on the marketplace reduce what you pay for health insurance each month

A tax credit on the health insurance marketplace is money the federal government sends directly to your insurance company to lower your monthly premium. You do not wait until tax time to get it — the credit works immediately when you enroll, cutting what comes out of your paycheck or bank account each month.

The credit is based on your household income and the cost of the second-cheapest Silver plan in your area. If your income is between 100% and 400% of the federal poverty line, you may receive a credit. The government estimates how much you will earn this year, compares it to that benchmark plan, and pays the difference directly to your insurer.

You do not have to claim the credit on your tax return to use it — it is separate from tax filing. However, you will reconcile it when you file taxes the following year, because if your actual income was different from what you estimated, you may owe money back or receive an additional refund.

Key Takeaways

  • Tax credits pay your insurance company directly each month, not you at tax time, which means your premium is lower from day one of coverage.
  • You must estimate your household income when you enroll, and the credit amount depends on that estimate and the cost of the second-cheapest Silver plan in your county.
  • If you earn more during the year than you estimated, you will owe back some or all of the credit when you file taxes; if you earn less, you may get a refund.
  • You can update your income estimate at any time during the year if your situation changes, which adjusts your credit immediately.
  • The credit only works if you enroll through the official marketplace — Healthcare.gov or your state's marketplace — not through an insurance company directly.

How the credit amount is calculated

The marketplace calculates your credit by comparing two numbers: the cost of the second-cheapest Silver plan available to you, and a percentage of your estimated household income. That percentage starts at 2% for people earning just above the poverty line and rises to 8.5% for people earning close to 400% of the poverty line.

For example, if the second-cheapest Silver plan in your area costs $350 per month and your income means you should pay 4% of your income toward insurance, the credit covers the difference. If 4% of your income equals $100 per month, the credit pays $250 to your insurer, and you pay $100.

You can use the credit to buy any plan on the marketplace — Bronze, Silver, Gold, or Platinum — not just the Silver plan used to calculate the credit. If you choose a cheaper Bronze plan, you pay less out of pocket. If you choose a more expensive Gold plan, you pay more out of pocket, but the credit amount stays the same.

Income estimates and what happens if your income changes

When you enroll, you report your expected household income for that year. The marketplace uses this number to calculate your credit. If your actual income ends up being different — because you got a raise, lost a job, had a child, or got married — you should update your estimate as soon as you know.

Updating your income during the year changes your credit immediately. If you earn more, your credit shrinks. If you earn less, your credit grows. This matters because at tax time, the IRS compares what you actually earned to what you estimated, and you settle up then.

If you underestimated your income and received more credit than you should have, you will owe the difference back when you file taxes. If you overestimated and received less credit than you deserved, you will get a refund. This is why keeping your income estimate current throughout the year reduces surprises at tax time.

What happens at tax time

When you file your federal income tax return, you report how much in tax credits you received during the year. The IRS compares that to how much you should have received based on your actual income, and the difference is either added to your refund or subtracted from it.

You will receive a form called the 1095-B from your insurance company showing that you had coverage, and a form called the 1095-A from the marketplace showing how much in credits you received each month. You use the 1095-A to complete the reconciliation on your tax return.

If you received $3,000 in credits during the year but your actual income means you should have received only $2,400, you will owe back $600. That $600 is added to your tax bill or subtracted from your refund. Conversely, if you should have received $3,200 but only got $3,000, you will receive an extra $200 in your refund.

Who can receive a tax credit

To receive a tax credit, your household income must fall between 100% and 400% of the federal poverty line for your household size. The poverty line changes each year, so the income range that qualifies also changes. A single person earning between roughly $14,000 and $56,000 in 2024 may be in range, though exact numbers vary by year and family size.

You must be a U.S. citizen or lawfully present immigrant. You cannot be claimed as a dependent on someone else's tax return. You must enroll through the official marketplace — Healthcare.gov or your state's marketplace — not through an insurance broker or directly from an insurance company.

If your employer offers health insurance and it is considered "affordable" (meaning it costs less than about 8.5% of your household income), you are not may be able to access for a marketplace credit. The law assumes you have access to coverage through your job.

How to use your credit when you enroll

When you create an account on the marketplace and start shopping for plans, you will be asked to report your household income and family size. The marketplace then shows you what credit you may receive. You can see the credit amount before you choose a plan.

You decide whether to use the full credit, part of the credit, or none of it. Most people use the full credit because it lowers their monthly cost. If you choose to use only part of it, the rest stays with you and becomes a refund when you file taxes — but this is rarely the right move.

Once you enroll in a plan, the credit is applied automatically. Your first month's premium bill will show the credit already deducted. You pay only the difference between the full premium and the credit amount.

What changes your credit during the year

Your credit can change if your income changes, your household size changes (birth, marriage, divorce, death), your address changes to a different county, or your immigration status changes. You can update any of these in your marketplace account at any time.

If you have a may have access to life event — like losing a job, getting married, or having a baby — you may be able to enroll or change plans outside the annual open enrollment period. The marketplace will recalculate your credit based on your new situation.

Some people's income fluctuates throughout the year. If you work seasonal jobs or have variable self-employment income, estimate conservatively to avoid owing money back at tax time. You can always update your estimate upward if you earn more than expected.

Tax credits versus cost-sharing reductions

Tax credits and cost-sharing reductions are two different things, though they often work together. A tax credit lowers your monthly premium. A cost-sharing reduction lowers your deductible, copayments, and coinsurance — the out-of-pocket costs when you actually use care.

Cost-sharing reductions are only available if you enroll in a Silver plan. If you enroll in Bronze, Gold, or Platinum, you get the tax credit but not the cost-sharing reduction, even if you are may be able to access for one.

Many people in the 100% to 250% poverty range benefit most from a Silver plan with both the tax credit and the cost-sharing reduction, because both lower what they pay. People earning above 250% of poverty may find a Bronze or Gold plan more cost-effective, depending on their expected health care use.

Frequently Asked Questions

What if I do not update my income and it changes during the year?

You will owe back the extra credit at tax time. If you earned $5,000 more than you estimated, your credit will be reduced by roughly $425 to $530 depending on your income range. Updating your estimate as soon as your income changes prevents this surprise.

Can I get the tax credit if my employer offers health insurance?

Only if your employer's plan costs more than about 8.5% of your household income, or if the coverage is considered inadequate. You will be asked about employer coverage when you enroll, and the marketplace will tell you whether you are may be able to access.

Do I have to use the full tax credit, or can I use part of it?

You can use any amount from zero to the full credit. Using less than the full credit means a higher monthly premium but a larger refund at tax time. Most people use the full credit to lower their monthly cost.

What if my income drops below 100% of the poverty line?

You will no longer be may be able to access for a marketplace tax credit, but you may be may be able to access for Medicaid instead. When you update your income in your marketplace account, the system will tell you whether Medicaid is available in your state and help you apply.

Can I claim the tax credit on my return if I did not use it when I enrolled?

No. The credit only works if you enroll through the marketplace and let it pay your insurer directly each month. You cannot enroll in a plan without the credit and then claim it on your taxes later.