One of the central objectives of the Patient Protection and Affordable Care Act — also known as the ACA or “Obamacare” — is to make health care coverage more affordable for millions of Americans who previously couldn’t get, or pay for, health insurance.
The ACA accomplishes this, in part, by offering tax subsidies to lower-income individuals and families.
These are people who make too much money to qualify for Medicaid, but still find most health insurance plans unaffordable.
There are two distinct types of tax subsidies available to qualified Americans under the ACA:
- Premium tax credit
- Cost-sharing subsidies
But first, what are tax subsidies?
A healthcare subsidy lowers the amount you spend on your monthly premium or reduces your out-of-pocket costs for things like copays, coinsurance and deductibles.
Subsidies are granted by the federal government and paid for through taxes.
Premium Tax Credit
The premium tax credit is a credit that lowers the monthly premium for a health insurance plan offered through the federal government’s health insurance marketplace or one of the state-run insurance exchanges.
The amount of the tax credit depends on variables like annual income and household size (number of people in the family).
In general, the premium tax credit is available for taxpayers earning between 100 percent and 400 percent of the federal poverty level for their household size.
How do you know if you qualify for the premium tax credit?
The best way is to apply for an insurance plan through the online marketplace.
After you enter your financial and household information, the system will see how your financial situation matches up with plans available in your area.
If you qualify for the premium tax credit, you can either apply the credit in advance to lower your monthly premiums or claim it on your next tax return to receive it as a refund or reduce a potential tax bill.
Keep in mind your eligibility for the premium tax credit depends on the cost of health insurance plans in your area.
If premiums are relatively inexpensive where you live, you are less likely to receive a tax credit than someone who lives in a more expensive health insurance market.
Specifically, the marketplace uses the cost of the second-least-expensive “silver” plan to make its calculations.
Cost-Sharing Subsidies
Cost-sharing subsidies are for the lowest-income households, those earning between 100 percent and 250 percent of the federal poverty level.
While the tax credits lower the monthly premium for health insurance, cost-sharing subsidies lower the out-of-pocket costs of a health plan.
These include things like copays for doctor visits and deductibles.
Cost-sharing subsidies are paid directly by the government to the insurance provider, not as a tax refund.
Households can be eligible for both premium tax credits and cost-sharing subsidies.