The Affordable Care Act (ACA) included an Individual Mandate to obtain health coverage or face tax penalties.
The law also provides federal tax credits to certain low-income individuals who purchase insurance coverage in the State Insurance Exchanges.
Premium Tax Credit
The tax credits are available to individuals and families who are purchasing insurance plans in the new State Insurance Exchanges who have incomes 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, for coverage through a government-sponsored program like Medicare, or Medicaid.
Premium Subsidies
The tax credits are issued in the form of subsidies on the premiums for health plans in the state insurance Exchanges, called Qualified Health Plans.
A “benchmark premium” is determined based on the area in which an individual lives and is purchasing the insurance. The tax credit also varies based on income. The tax credit equals the benchmark premium minus what the individual is expected to pay based on their income.
The Kaiser Family Foundation offers a calculator for subsidy estimates, as well as the following example:
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.
Cost of Plans
The cost of the plans varies 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 credit (subsidy) also varies.
However, these credits (subsidies) have the potential to cover a substantial portion of the premiums for many individuals purchasing insurance in the state exchanges.
Learn More
Learn more about the state insurance Exchanges, the Qualified Health Plans, and Plan Premiums and Pricing.
Additional Information
Affordable Care Act Tax Provisions for Individuals and Families – IRS.gov
Quantifying Tax Credits for People Now Buying Insurance on Their Own – Kaiser Family Foundation
Issue Brief: Cost-sharing and Tax Credit Guide for Assistors– State Health Reform Assistance Network
Issue Brief: Review of Premium Assistance Options– Manatt Health Solutions