The Affordable Care Act (ACA) included an Individual Mandate to obtain Insurance or face tax penalties. The law also provided new tax credits to certain individuals who have to purchase their own insurance in the new State Insurance Exchanges.
The new tax credits are available to individuals who purchase individual insurance in the new state Insurance Exchanges. Tax credits of various levels are available to individuals and families who have incomes from 100% to 400% of the federal poverty level (approximately 24,000 to $94,000 per year for a family of four in 2014).
The tax credits are not available for those who have access to affordable employer-provided insurance Medicare, or Medicaid.
The tax credits will be assessed in the form of premium subsidies in most cases. This means that a “benchmark premium” will be determined based on the area in which an individual lives (and is purchasing the insurance). The tax credit equals the benchmark premium minus what the individual is expected to pay based on their income.
Here is how the calculation might work for a 40-year-old individual making $30,000 a year:
Estimated benchmark premium for a 40-year old = $3,857 per year
(which will vary from area to area)
Person is responsible for paying 8.37% of their income = $2,512
Tax credit = $1,345
The tax credit can be used in any plan offered in the health insurance marketplace, so the person would end up paying less than $2,512 to enroll in the lowest cost silver plan or a lower cost bronze plan, and more to enroll in a higher cost plan.
The tax credit will vary based on income, and the cost of the plans will vary based on age, family size, tobacco use, and the state in which the plan is offered. So the actual cost of the plans after the tax credits is difficult to calculate. However, these credits have the potential to cover a substantial portion of the premiums for many individuals purchasing insurance. Some estimates imply that about half of the people buying new plans would be eligible for a tax credit that completely offsets their premium.