A tax credit for health insurance reduces what you owe in federal income taxes

A tax credit for health insurance is money the federal government subtracts from your tax bill when you buy coverage through the Health Insurance Marketplace. Instead of paying the full price of your monthly premiums, you pay a reduced amount, and the credit covers the difference. The credit is based on your household income and the cost of the second-lowest silver plan available in your area.

The credit works in two ways. You can receive it in advance — meaning the government sends it directly to your insurance company each month, and you pay a lower premium. Or you can claim it when you file your taxes the following year. Most people use the advance method because it lowers their out-of-pocket costs right away.

You must buy your plan through the Health Insurance Marketplace (Healthcare.gov or your state's marketplace) to receive the credit. Plans purchased directly from an insurance company, through an employer, or through other channels do not may have access to.

Key Takeaways

  • Tax credits reduce your monthly insurance premiums if you buy coverage through the Health Insurance Marketplace and meet income requirements.
  • The credit amount depends on your household income, family size, and the cost of the second-lowest silver plan in your zip code.
  • You can receive the credit monthly (advance credit) to lower what you pay now, or claim it on your tax return the following year.
  • If your income changes during the year, you must report it to the Marketplace so your credit amount stays accurate.
  • You are responsible for repaying excess credits if your actual income turns out to be higher than what you reported.

How the credit amount is calculated

The Marketplace calculates your credit using three pieces of information: your household income, the number of people in your household, and the cost of the second-lowest silver plan in your area. The government sets a percentage of your income that you are expected to contribute toward premiums — this percentage changes each year and is based on federal poverty guidelines. Any amount above that percentage is covered by the credit.

For example, if the second-lowest silver plan costs $400 per month and the government determines you should pay $150 based on your income, the credit would be $250 per month. If you choose a plan that costs less, you keep the difference. If you choose a more expensive plan, you pay the extra cost yourself.

The credit phases out as your income rises. Once your income exceeds a certain threshold (usually around 400% of the federal poverty level, though this varies by year), you receive no credit. Below that threshold, the credit gets smaller as your income increases.

Advance credits versus claiming credits on your tax return

When you enroll in a Marketplace plan, you can choose to receive your credit in advance. This means the Marketplace estimates your income for the year and sends monthly payments to your insurance company. Your premium bill reflects this reduction immediately. This is the most common choice because it reduces what you pay out of pocket each month.

Alternatively, you can decline the advance credit and claim the full amount when you file your taxes the following year. This approach makes sense only if you expect your income to be lower than your estimate or if you want to avoid the reconciliation process. Most people who are may be able to access use the advance method.

If you receive advance credits, you must reconcile them when you file taxes. This means comparing what you received to what you were actually may have access to to based on your final income. If you received too much credit, you repay the difference. If you received too little, the government sends you the remainder as a refund or credit against other taxes owed.

Income limits and how they affect your credit

To receive any tax credit, your household income must fall between 100% and 400% of the federal poverty level (some states have expanded this to 400% or higher). The exact dollar amount depends on your household size and changes each year. For 2024, the income range for a single person is roughly $15,000 to $60,000, though you should check the current year's guidelines on Healthcare.gov.

If your income is below 100% of poverty level, you do not may have access to for a credit through the Marketplace, though you may may have access to for Medicaid in your state. If your income exceeds 400% of poverty level, you receive no credit, though you can still buy a plan and pay full price.

Your income for credit purposes is your modified adjusted gross income (MAGI), which is usually your adjusted gross income plus any tax-exempt interest. Self-employment income, Social Security benefits, and investment income all count. The Marketplace uses your prior year's tax return to estimate your current year income, but you can update this estimate if you expect a significant change.

What happens if your income changes during the year

If your income changes — because you got a raise, lost a job, got married, or had a child — you should report this to the Marketplace as soon as possible. Changes that affect your credit include income increases or decreases of more than $50 per month, changes in household size, and changes in your filing status.

When you report a change, the Marketplace recalculates your credit for the rest of the year. If your income went up, your credit decreases and your premium increases. If your income went down, your credit increases and your premium decreases. You can also change your plan choice when you report a change in circumstances.

If you do not report an income change and your actual income turns out to be higher than you reported, you will owe back the excess credit when you file taxes. This can result in a smaller refund or a tax bill. Reporting changes promptly helps you avoid this surprise.

Reconciliation: what happens at tax time

When you file your federal income tax return, you must reconcile your advance credits using IRS Form 8962. This form compares the total credit you received during the year to the total credit you were may have access to to based on your actual income. The difference is either added to your refund or subtracted from it.

If you received $3,000 in advance credits but were only may have access to to $2,500, you repay $500 when you file. If you received $2,500 but were may have access to to $3,000, you receive an additional $500 as part of your refund. The reconciliation is automatic if you file electronically; the IRS matches your reported income to your Marketplace records.

To make reconciliation easier, keep records of your monthly premium payments and any notices from the Marketplace about your credit amount. The Marketplace sends you Form 1095-B (health coverage statement) and Form 1095-A (Marketplace statement) by January 31, which you need for your tax return.

Tax credits versus subsidies and cost-sharing reductions

The tax credit is sometimes called a "subsidy," but they are technically different. A tax credit is money applied to your tax bill. A subsidy is a broader term for government financial support. In practice, people use these terms interchangeably when discussing Marketplace help.

Cost-sharing reductions are a separate benefit that lowers your deductible, copays, and coinsurance if your income is below 250% of poverty level. You receive this benefit only if you choose a silver plan. Cost-sharing reductions and tax credits work together — you can receive both at the same time.

A tax credit can be used toward any metal level plan (bronze, silver, gold, or platinum). Cost-sharing reductions apply only to silver plans. If you are may be able to access for both and choose a silver plan, the credit lowers your premium and the cost-sharing reduction lowers your out-of-pocket costs when you use care.

Frequently Asked Questions

Can I get a tax credit if I have insurance through my job?

No. If your employer offers health insurance and you are may be able to access for it, you cannot receive a tax credit for a Marketplace plan. The Marketplace considers employer coverage available and affordable if your employee premium is less than about 8.5% of your household income. However, if your employer's plan is too expensive or does not cover your dependents, you may have other options — contact the Marketplace to discuss your situation.

What if I overestimate my income when I enroll?

If you report higher income than you actually earn, you will receive a smaller credit than you are may have access to to. When you file taxes and reconcile, the IRS will calculate the correct credit and send you the difference as part of your refund. There is no penalty for overestimating, but you will have paid higher premiums than necessary during the year.

Do I have to repay the entire credit if my income goes over the limit?

It depends on how much over the limit you go and when you report the change. If you report an income increase before the end of the year, your credit stops immediately and you do not owe anything back. If you do not report it and your income exceeds the limit, you repay the excess credit at tax time. There are limits on how much you must repay based on your income level.

Can I use a tax credit for a plan outside the Marketplace?

No. The credit is only available for plans purchased through the Health Insurance Marketplace. Plans sold directly by insurance companies, through brokers, or through other channels do not may have access to, even if they are the same plans offered on the Marketplace.

What if I am self-employed or have irregular income?

Self-employed people can receive tax credits based on their estimated income for the year. Use your prior year's tax return or your current year's projected income to estimate. If your income is unpredictable, estimate conservatively and report changes to the Marketplace when you have a clearer picture. You reconcile at tax time based on your actual net self-employment income.