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How Do the Affordable Care Act Subsidies Work?

Healthcare Personal Finance

Under the Affordable Care Act (ACA), you must have a minimum level of health insurance coverage or pay a penalty, unless you meet one of the exceptions.

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That’s easy for people who get coverage through work, or who can afford to pay big premiums for their own plan. It’s also not an issue for people who are already on Medicare or other government programs for health care.

It’s the people in the middle, those who need to buy health insurance themselves but can’t quite make the premiums, who need help.

That’s where the ACA subsidies come in. A health care subsidy is financial assistance kicked in by the government to help make medical coverage affordable.

Here’s how ACA subsidies work in a nutshell

If you think you qualify for subsidies, apply for insurance through the government-sponsored marketplace (commonly referred to as the health insurance exchange). Subsidies are only available through the exchange.

Estimate how much income you think you’ll have for the year and you’ll receive a subsidy based on your income level and other factors. This subsidy is actually an estimated amount that the government pays to the insurance company on your behalf.

Next year when you file your taxes, you may have to pay back some or all of the subsidy if it turns out you made more income than you estimated or otherwise don’t qualify.

Do you qualify for a tax credit or subsidy?

The easiest way to find out if you qualify for an ACA subsidy is to use TaxAct’s Health Care Tax Penalty Calculator.

You may qualify for a subsidy if all of the following are true:

  • Your employer doesn’t offer affordable health insurance to you. In this case, affordable insurance means at least 60 percent of covered benefits or the premiums would cost you no more than 9.5 percent of your annual household income after tax credits are applied.
  • You purchase insurance coverage through a government-sponsored marketplace.
  • Your annual household income is between 100 and 400 percent of the federal poverty level, depending on your specific state’s requirements.

Applying for subsidized health insurance

You can apply for a subsidy when you purchase health insurance through a government exchange. Depending on your state, you may be required to use the state health insurance marketplaces, the federal government’s health insurance marketplace, or a hybrid of the two. As you apply, you’ll be asked questions to help you claim the credit.

When you get insurance, the government pays a subsidy directly to your health insurance provider. You pay your share of the premiums.

Filing next year

When you file your taxes for the year, the amount of your actual subsidy is determined by the annual income you earned. If the subsidy is exactly the same as the amount paid to the insurance company on your behalf, there will be no impact on your taxes.

If you received a larger subsidy than you should have; for example, if you worked more during the last half of the year and made more money, or you received a raise, you have to pay back some or all of the subsidy you received.

On the other hand, if you earned less income than estimated, you may not have received all the subsidy to which you were entitled. In that case, you’ll get a refund of the additional portion of the subsidy you should have received.

Keep in mind that you don’t have to take a subsidy. If you pay the entire premium and it turns out you qualified for a subsidy, you’ll receive it when you file your tax return. The subsidy will then reduce your tax liability or increase your tax refund amount next year.

TaxAct makes preparing and filing your taxes quick, easy and affordable so you get your maximum refund. It’s the best deal in tax. Start free now or sign into your TaxAct Account.

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