How Does the Premium Tax Credit Work for Health Insurance?
A premium tax credit can help you save on health insurance costs by reducing your monthly bill.
It's only available for those who purchase insurance through a state or federal health insurance marketplace, and your income must fall below a certain threshold to qualify. You'll find out whether you are eligible when you apply for a marketplace health insurance plan.
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If you own a small business with fewer than 25 employees, you may also qualify for government subsidies, which can help pay for your employees' health insurance.
What is a health insurance tax credit?
A premium tax credit, also called a premium subsidy, lowers the cost of your health insurance. You can apply the discount to your insurance bill every month, or you can get the credit as a refund on your federal income taxes.
Catastrophic coverage health plans aren't eligible for premium tax credits.
The credit is part of the Affordable Care Act (ACA), also called "Obamacare." It is designed to help eligible families or individuals with low to middle incomes pay for health insurance. Premium tax credits are only available if you enroll in a qualifying insurance plan through the federal marketplace or a state health exchange.
Health insurance tax credit amounts are set by the federal government, so they're the same nationwide.
How do I know if I qualify for a tax credit?
When you apply for coverage through a health insurance marketplace, also called an exchange, the system will determine your eligibility for tax credits based on your income and household size.
You qualify for premium tax credits if you make less than four times the federal poverty level. And if you earn more than four times the federal poverty level, you may still qualify for health insurance discounts if you spend more than 8.5% of your income on health insurance premiums.
Enhanced subsidies were extended through the end of 2025 as a part of a wide-reaching federal law called the Inflation Reduction Act.
You can preview your tax credit eligibility by using an Affordable Care Act subsidy calculator. If you qualify, then you'll get a quote for the second-cheapest Silver plan available.
The dollar value of your tax credit depends on two factors: the size of your family and your income. In other words, even if your income increases, you can remain eligible for a premium tax credit if your family also gets bigger.
For 2024 health plans, if you have a family of three, then your household can earn up to $99,440 and remain eligible. In comparison, your household income can only be $78,880 or less for a family size of two.
You may be eligible for Medicaid if you are an individual with income at or below $20,120.
What are the income limits for the health insurance subsidy?
The 2024 income limits for the health insurance subsidy are $58,320 for a single person and $120,000 for a family of four. That's four times the federal poverty level (FPL), and the most you can earn and still qualify for premium tax credits (unless you pay more than 8.5% of your income for health insurance).
Premium tax credit eligibility by household size
Family size | Income range |
|---|---|
| 1 | $14,580-$58,320 |
| 2 | $19,720-$78,880 |
| 3 | $24,860-$99,440 |
| 4 | $30,000-$120,000 |
| 5 | $35,140-$140,560 |
| 6 | $40,280-$161,120 |
| 7 | $45,420-$181,680 |
| 8 | $50,560-$202,240 |
If you earn more than the maximum amount, you may still qualify for subsidies based on how your income compares to your cost of health insurance. For example, if you have high monthly health insurance bills because of your age or where you live, those monthly costs could be capped at 8.5% of your income through discounts.
You can claim a premium tax credit even if you don't have your latest tax records on hand. The Centers for Medicare & Medicaid Services (CMS) give you up to 150 days to prove your income level.
Recent changes to premium tax credit eligibility requirements mean you can go without filing your taxes for up to two years and still qualify for health exchange subsidies. Keep in mind that if you miss this deadline, you won't be eligible for advance premium tax credits in the future.
How does the health insurance tax credit work?
You can get the health care tax credits in two ways.
- Advance premium tax credit (APTC): You pay less for health insurance each month based on your estimated tax credit.
- Federal tax refund: You get your health insurance subsidy in a lump sum at the end of the year.
There's no difference in the size of your discount between the two methods, but they differ in when you receive the subsidy.
For the advance premium tax credit, here are the steps:
- Apply for insurance on the marketplace, and get your estimated discount.
- You pay less for health insurance. Your insurance company gets paid directly.
- Report your final tax credit amount when filing your federal income taxes.
You can apply for the advance premium tax credit (APTC) when you apply for health insurance through the marketplace. With this program, the government sends advance payments directly to the health insurance company every month. This lowers the amount you pay each month for health insurance.
On the other hand, you can get a tax refund if you are not eligible for advance premium payments. When filing your taxes, you subtract the full amount of the tax credit from all the taxes you owe. But during the year, you pay more per month for health insurance. In short, either you will get your credit all at once later or it will be spread out over the year.
If money is tight, you should take the advance premium tax credit because it lowers your bills sooner.
Anyone who gets a health insurance tax credit must file Form 8962 (Premium Tax Credit) with their tax return. To complete Form 8962, you'll use the information from Form 1095-A (Health Insurance Marketplace Statement), which is a statement sent to you about your subsidies and health insurance costs.
Your final health insurance tax reduction is based on the income you reported on the Form 1040 individual tax return.
What happens if my family size or income changes during the year?
Life-changing events can impact your tax credit eligibility or change your subsidy amount. For example, getting a divorce might lower your subsidy since your household size will decrease, but the birth of a child will increase your premium tax credit.
Events that impact your premium tax credit
- Gaining or losing health insurance coverage
- Change in your household income
- Birth of a child
- Marriage
- Divorce
- Adoption
It is important to report changes immediately so your health plan eligibility can be updated. And if you're currently using the advance premium tax credit, then it is particularly important to report any life changes to the marketplace as soon as possible.
If you wait to report such changes, there could be a gap between what you pay each month and what you owe. In this case, if you use more advance premium tax credits than you are allowed, you may have to pay more when filing your federal income tax return. On the other hand, if you use fewer premium tax credits than allowed, you may get a refund. This is known as "reconciling" your advance premium tax credits.
What is the small business health care tax credit?
The small business health care tax credit pays for up to half the cost of employee health insurance at qualifying small businesses.
Usually, small business owners are not required to offer health insurance if they have fewer than 50 full-time employees. To encourage small business owners to offer health insurance to their workers, the ACA introduced the small business health care tax credit.
Keep in mind that not everyone qualifies for this tax credit, including owners of sole proprietorships. Nonfamily member dependents and spouses are also excluded.
If a small business or tax-exempt firm (for example, a charity) meets a number of qualifications, it is eligible to receive the federal tax credit for up to two years in a row.
You and your business would be eligible for the credit if you meet all of the following requirements:
- You bought insurance through the Small Business Health Options Program (SHOP) marketplace.
- You have fewer than 25 full-time employees.
- You pay average wages of less than $56,000 per year.
- You pay at least half the cost of your full-time employees' health insurance rates.
If you qualify, the federal government pays for part of the cost of your workers' health insurance. The size of your workforce influences the amount of money you get. For example, if your business has fewer than 10 full-time employees, you can get the maximum amount. A larger business with 24 employees would qualify for a lower tax credit.
The credit covers up to 50% of the costs you pay for your employees' premiums (35% for nonprofits). For example, say a firm qualifies for the full small business tax credit and chooses to pay for 100% of its employees’ rates, which costs the firm $70,000 per year. That firm’s tax return would be credited $35,000 at the end of the year.
Qualifying small businesses can claim this tax credit by filing Form 8941 with their taxes.
Self-employed health care tax credit
If you are self-employed, health insurance tax credit eligibility is based on how much you earn and your family size. The income limits are the exact same between self-employed and employed individuals. For example, a single person can earn up to $58,320 and still qualify for premium tax credits.
But determining your subsidy amount is more complex if you're self-employed. In order to get the most from your tax credit, we recommend talking to a tax professional or tax preparation company that uses software that can address this issue.
Frequently asked questions
What is a tax credit for health insurance?
A tax credit for health insurance lowers the amount you pay on your federal income taxes based on your health insurance costs.
You must purchase your plan through HealthCare.gov or a state marketplace and meet certain income criteria to qualify. Discounts can be applied monthly to reduce your health insurance bill, or you can get the credits as a refund when filing your federal income taxes.
How do I qualify for a tax credit for health insurance?
You'll find out if you qualify for health insurance tax credits when you sign up for health insurance on a federal or state marketplace. After you enter your income information and household size, the marketplace application will show you whether you qualify and the subsidy amount you'll receive.
Do I have to pay back the health insurance tax credit?
No, the tax credits are designed to make health insurance more affordable, and any discounts you receive do not need to be paid back. The only exception is if you fail to report a status update, such as an increase in income. In that case, you would have to pay back any extra money you got.
What are the income limits for the premium tax credit?
For the 2024 tax year, you're eligible for premium tax credits if you make between one and four times the federal poverty limit, which is between $14,580 and $58,320 for a single person. Those with higher incomes may also qualify if they spend more than 8.5% of their income on health insurance.
Sources and methodology
Federal poverty level (FPL) data and limits are from HealthCare.gov. Information pertaining to federal premium tax credit eligibility guidelines is from IRS.gov.
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