A tax credit for health insurance reduces what you owe the IRS, dollar for dollar

A health insurance tax credit is money the federal government gives back to you through your tax return to help pay for health insurance premiums. Unlike a deduction, which lowers your taxable income, a tax credit directly reduces the amount of tax you owe. If you buy insurance through the Health Insurance Marketplace (also called the ACA marketplace), you may receive this credit based on your household income and family size.

The credit is officially called the Premium Tax Credit. The IRS calculates how much you should receive based on what you earn compared to the federal poverty line for your household. If your actual income turns out to be different when you file taxes, you may owe money back or receive an additional refund.

The credit can be paid in two ways: the government can send it directly to your insurance company each month to lower your premiums, or you can claim the full amount when you file your tax return. Most people choose the monthly route because it makes insurance affordable right away, rather than waiting until tax time.

Key Takeaways

  • The Premium Tax Credit reduces your monthly insurance bill if you buy coverage through the Health Insurance Marketplace and meet income requirements.
  • Your credit amount depends on your household income, family size, and the cost of the second-lowest silver plan in your area.
  • You can receive the credit monthly to lower your premiums now, or claim it all at tax time — most people choose monthly payments.
  • You must report income changes to the Marketplace during the year, because receiving too much credit means you owe money back when you file taxes.
  • The credit is available only for Marketplace plans, not for employer coverage, Medicaid, Medicare, or insurance bought directly from an insurer.

How the credit amount is calculated

The IRS uses a formula that compares your expected household income to the cost of health insurance in your area. The government assumes you should pay a certain percentage of your income toward premiums — this percentage changes each year and is set by law. The credit covers the difference between that amount and the actual cost of the second-lowest silver plan available to you.

Your household income is the key number. The Marketplace uses your most recent tax return to estimate what you will earn this year, but you can update this estimate if you expect a change — a job loss, a new job, marriage, or a child born. The more accurately you report your income, the closer your credit will match what you actually owe at tax time.

Family size also matters. A family of four qualifies for a larger credit than a single person at the same income level, because the cost of covering more people is higher. If your family size changes during the year — a baby, adoption, or marriage — you should report it to the Marketplace so your credit adjusts.

Who can receive the Premium Tax Credit

You must meet three conditions. First, you must buy insurance through the Health Insurance Marketplace for your state — not from an employer, not from an insurer directly, and not through a broker outside the Marketplace system. Second, your household income must fall between 100 and 400 percent of the federal poverty line (this range varies by year and family size). Third, you cannot have access to affordable employer coverage or Medicare.

If your employer offers health insurance and you are may be able to access, you generally cannot use the Marketplace credit — even if the employer plan is expensive. The law assumes employer coverage is available to you. However, if the employer plan costs more than a certain percentage of your household income (usually around 9 percent), you may be able to use the Marketplace instead.

Immigrants who are lawfully present in the United States can receive the credit. Undocumented immigrants cannot. If you are unsure about your immigration status and how it affects your options, contact a local community health center or a legal aid organization.

What happens if your income changes during the year

If you receive too much credit because your actual income was lower than you reported, you will owe the difference back when you file taxes. If you receive too little credit because your actual income was higher, you will not receive a refund — you simply paid the correct amount. This is why reporting changes matters: underestimating your income costs you money at tax time.

Life changes that affect income include a job loss, a raise, a spouse starting or stopping work, self-employment income, or a change in hours. You can update your income estimate on the Marketplace website at any time during the year. The sooner you report a change, the sooner your monthly credit adjusts, and the smaller the surprise at tax time.

If you do not report a change and your actual income is significantly higher than what you reported, the IRS may reduce or eliminate your refund to recover the overpayment. In some cases, there is a cap on how much you have to repay — this cap depends on your household income and changes each year.

The difference between monthly credits and claiming the credit at tax time

When you enroll in a Marketplace plan, you can choose to have the credit sent to your insurance company each month. This lowers your premium bill immediately. Most people choose this option because they cannot afford to pay the full premium out of pocket and wait for a refund later.

Alternatively, you can tell the Marketplace to send you zero credit monthly and claim the entire amount when you file your tax return. This works only if you can afford to pay the full premium yourself for the whole year. You would then receive the credit as a refund or a reduction in taxes owed. This route is rare and usually chosen only by people with very stable, predictable income.

You can also split the difference: receive part of the credit monthly and claim the rest at tax time. This is useful if you want to lower your premium somewhat but expect your income to change and want to avoid a large repayment.

Marketplace plans and plan types

The Premium Tax Credit works with any plan sold through the Health Insurance Marketplace, regardless of the plan's metal level — Bronze, Silver, Gold, or Platinum. However, the credit amount is calculated based on the cost of the second-lowest silver plan in your area. If you choose a Bronze plan, which costs less, your credit stays the same and you pay a lower premium. If you choose a Gold or Platinum plan, which costs more, your credit stays the same and you pay a higher premium.

This structure means choosing a cheaper plan saves you money immediately, while choosing a more expensive plan costs you more out of pocket. The credit does not increase if you pick a pricier plan.

Reconciling the credit when you file taxes

When you file your federal tax return, you will report how much Premium Tax Credit you received during the year. The IRS compares this to how much credit you should have received based on your actual income. Form 8962, Premium Tax Credit, is where this happens.

If you received too much credit, you will owe the difference. If you received too little, you will receive an additional refund. The IRS sends you a statement in the mail (Form 1095-B) showing how much credit your insurance company reported you received. Make sure this matches what you received; if it does not, contact your insurance company or the Marketplace to correct it before filing.

Filing taxes is also when you can claim the credit if you chose not to receive it monthly. You would report zero credit received and claim the full amount on Form 8962.

Frequently Asked Questions

Can I get the tax credit if I have employer health insurance?

Generally no. If your employer offers coverage and you are may be able to access, you cannot use the Marketplace credit. However, if the employer plan costs more than about 9 percent of your household income, you may be able to use the Marketplace instead. Contact the Marketplace to discuss your specific situation.

What if I do not file taxes — can I still get the credit?

You can receive the credit monthly without filing taxes. However, you must reconcile the credit when you file your return the following year. If you do not file, you cannot claim any credit you did not receive monthly, and you may owe back any overpayment.

Does the credit cover the entire cost of my insurance?

Not necessarily. The credit is based on the second-lowest silver plan in your area. If you choose a more expensive plan or if your income is higher, you will pay part of the premium yourself. Even with the credit, you will also have a deductible, copays, and coinsurance when you use care.

What happens if I move to a different state?

You must report the move to the Marketplace. Your credit may change because the cost of insurance varies by state and region. You will need to enroll in a plan in your new state's Marketplace.

Can I use the credit for dental or vision insurance?

No. The Premium Tax Credit covers only major medical health insurance plans sold through the Marketplace. Dental and vision coverage are separate and do not may have access to for this credit.