IRS Logo
Print - Click this link to Print this page

Tax Credit Helps Make Health Insurance Affordable for Middle-Class Americans

FS-2016-5, January 2016 

The premium tax credit gives middle-class Americans tax benefits to make it easier for them to purchase affordable health insurance.

Key Facts about the Premium Tax Credit: 

Broad Middle-Class Eligibility. The premium tax credit is generally available to individuals and families with incomes of at least 100% but not more than 400% of the federal poverty line ($23,850 - $94,400 for a family of four in 2015 and $24,250 - $97,000 for a family of four in 2016), providing a safety net for the middle class.

Larger Tax Credits for Older Americans who Face Higher Premiums. The amount of the premium tax credit is tied to the amount of the premium, so that older Americans who are not yet eligible for Medicare and face higher premiums will receive a greater credit.

Families Can Choose More Cost-Effective Coverage. The amount of the premium tax credit is generally fixed based on a benchmark plan (which may be age- adjusted within Affordable Care Act limitations), so families that choose to purchase coverage that is less expensive than the benchmark plan will pay less towards the cost of that coverage.

Credit Is Refundable So Families with Modest Incomes Can Benefit. The premium tax credit is fully refundable, so even moderate-income families who may have little federal income tax liability (but who may pay a higher share of their income towards payroll taxes and other taxes) can receive the full benefit of the credit.

Advance Credit Payments Help with Premiums. Since many moderate-income families may not have sufficient cash on hand to pay the full premium, advance payments of the premium tax credit made by the Department of the Treasury directly to the insurance company are available to lower the cost of monthly premiums. These payments will assist families with the cost of the health insurance they need. The advance credit payment amount is based on an estimate of the family’s premium tax credit. Later, the amount of the advance credit payments will be reconciled with the amount of the family’s actual premium tax credit, as calculated on the family’s federal income tax return.

 

How the Premium Tax Credit Works 

Eligibility 

• Household income must be at least  100% but not more than  400% of the federal poverty line.

• Married individuals must file a joint income tax return, with some exceptions for certain victims of domestic violence and spousal abandonment.

 • Individuals who may be claimed by another as a dependent are not eligible for the premium tax credit

• Covered individuals must be enrolled in a “qualified health plan” through an Affordable Insurance Exchange.

• Covered individuals must not be eligible for other qualifying coverage, such as Medicare, Medicaid, or affordable employer-sponsored coverage.

 

Credit Amount 

• The credit amount is generally equal to the difference between the premium for the “benchmark plan” and the taxpayer’s “expected contribution.”

• The expected contribution is a specified percentage of the taxpayer’s household income. The percentage increases as income increases. For tax year 2015, the percentages range from 2.01% of income for families at 100% of the federal poverty line (FPL) to 9.56% of income for families at 400% of FPL. (The actual amount a family pays for coverage will be less than the expected contribution if the family chooses a plan that is less expensive than the benchmark plan.)

• The benchmark plan is the second-lowest-cost plan that would cover the family at the “silver” level of coverage.

• The credit is capped at the premium for the plan the family chooses (so no one receives a credit that is larger than the amount they actually pay for their plan).

 

Special Rules 

• Taxpayers may be allowed to receive the benefit of advance payments of the credit.  Advance credit payments are made directly to the insurance company on the taxpayer’s family’s behalf to lower the cost of their premiums. The advance payments are then reconciled with  the amount of the family’s actual premium tax credit, as calculated on the taxpayer’s federal income tax return. If the amount of the advance credit payments is more than the actual premium tax credit, the taxpayer must repay all or a portion of the difference.  The repayment due from the taxpayer is subject to a cap for taxpayers with household incomes under 400% of FPL. The caps range from $600 for married taxpayers ($300 for single taxpayers) with household income under 200% of FPL to $2,500 for married taxpayers ($1,250 for single taxpayers) with household income from  300% to  less than 400% of FPL.

•The premium tax credit is available to qualified individuals offered (but not enrolled in) employer-sponsored insurance if the employer coverage (a) is “unaffordable” (meaning for 2015 that the self-only premium exceeds 9.56% of household income); or (b) does not provide a minimum level of benefits  (meaning it fails to cover 60% of total allowed costs).

 

Premium Tax Credit Calculation:

Three Examples

 Example 1: Family of Four with Income of $50,000, Purchases Benchmark Plan

The premium tax credit is generally  based on the cost of the benchmark plan. The family’s expected contribution is a percentage of the family’s household income.

• Income as a Percentage of FPL 209%

• Expected Family Contribution: $3,330

• Premium for Benchmark Plan: $9,000

• Premium for Plan Family Chooses: $9,000

• Premium Tax Credit: $5,670 ($9,000 - $3,330)

• Actual Family Contribution: $3,330

 

Example 2: Family of Four with Income of $50,000, Purchases Less Expensive Plan 

If a family chooses a plan that is less expensive than the benchmark plan, the family will generally pay less, thereby creating an incentive to choose a less costly plan and reducing overall health care costs.

• Income as a Percentage of FPL 209%

• Expected Family Contribution: $3,330

• Premium for Benchmark Plan: $9,000

• Premium for Plan Family Chooses: $7,500

• Premium Tax Credit: $5,670 ($9,000 - $3,330)

• Actual Family Contribution: $1,830 ($7,500 - $5,670)

 

Example 3: Family of Four with Income of $50,000, Parents are between the ages of 55 and 64

Because premiums are generally higher for older individuals, the premium tax credit also is higher for these individuals.

• Income as a Percentage of FPL 209%

• Expected Family Contribution: $3,330

• Premium for Benchmark Plan: $14,000

• Premium for Plan Family Chooses: $14,000

• Premium Tax Credit: $10,670 ($14,000 - $3,330)

• Actual Family Contribution: $3,330

Page Last Reviewed or Updated: 28-Jan-2016