Tax credits that reduce health insurance companies may be the biggest draw to exchange-based plans, but exactly how they are calculated may be a bit murky to many. After all, calculator tools on websites such as HealthCare.com make it simpler for consumers to estimate tax credits without much thought. But knowledge is power, isn’t it? And knowing how your premium tax credit is calculated from year to year may make you a savvier shopper at open enrollment time.To take the mystery out of how it all works, we are going to walk through the factors that go into your premium tax credit.
1. Premium tax credits are based on household income and family size. Those who earn between 100 and 400 percent of the federal poverty level may be eligible.
2. Tax credits work on a sliding scale. You are expected to contribute a certain percentage of your income toward health insurance premiums. This percentage depends on your where your family size and household income fall on the federal poverty guidelines.
3. Tax credits are based on the second-lowest cost silver plan available to everyone in your household. This is called the benchmark plan.
To demonstrate how this calculation works, we will use the example of Sarah, a single woman who buys her own health insurance.
In 2014, Sarah decided to buy health insurance through her state’s exchange. Premium tax credits for 2014 coverage were based on 2013 federal poverty guidelines.
- Sarah’s 2013 income: $22,980
- Percentage of poverty level: 200 percent
- Premium as a percent of income: 6.3 percent
At her income level, Sarah is expected to contribute 6.3 percent of her income toward health insurance premiums. That amounts to $1,448, annually.
Next, we look at the second-lowest cost silver plan available to Sarah. It costs $2,832 annually—$236 per month. Since Sarah is expected to pay $1,448 toward her health insurance premiums, she should receive a premium tax credit subsidy of $1,384—that’s $115 per month if she takes it in advance (we will get to that later).
From her state’s exchange, Sarah selected a bronze plan that cost $182 a month. After her tax credit, she paid $67 per month.
You may still prefer to let a tax credit calculator do the math, but now you have a glimpse behind the scenes. Now, we will look at what happens in 2015.
Considering tax credits in the year to come
Some states are touting increased tax credits for their residents in 2015. At face value, this seems like a win. And it might be, if your income and health plan rate stay exactly the same. However, that is unlikely the case.
Not all states have finalized their health insurance premium rates for 2015, but PricewaterhouseCoopers reports that, based on preliminary filings for 38 states and the District of Columbia, the average premium increase is 6 percent—that’s on and away from the state-based and federally facilitated exchanges. Significant fluctuations can occur among metal levels and plans in your region. Some rates nationwide decreased as much as 22 percent and increased as much as 35 percent.
Let’s see what might happen to Sarah if she simply renews her previous health plan in 2015.
After a slight raise, Sarah’s 2014 income remained at 200 percent of the federal poverty level in 2014—$23,340. 2014 federal poverty guidelines will be used to calculate 2015 premium tax credits. As such, Sarah will still be expected to pay 6.3 percent, or $1,470, toward her annual health insurance premium costs.
The premium for the second-lowest cost silver plan available to Sarah increased 4.5 percent—slightly lower than the national average. It now costs $2,959 annually—$246.60 per month. After Sarah’s expected contribution, her premium tax credit subsidy amounts to $1,489—$124 per month. More money, right?
This is where Sarah has to be careful. The premium for the bronze plan she selected in 2014 is going to increase 8 percent. Instead of $182 per month, it will cost $196.56. Sarah will now pay $72.56 per month for the same coverage. That ends up being $66.72 more over the course of the year, even though her subsidy amount increased.
Sarah may be satisfied with her plan and willing and able to pay the extra. She may also consider shopping around. As mentioned above, some plan premiums may have experienced lower increases or even decreases.
It’s important to shop around rather than simply renew your current coverage. Estimate your premium tax credit, using tools such as the HealthCare.com Obamacare tax credit subsidy calculator and compare plans available in your area. Look at premiums and plan details. Will your 2015 premium tax credit allow you to pay less for a plan with a lower deductible or a network that includes providers more conveniently located to where you work and live?
More premium tax credit basics
There are a few additional things you should know about premium tax credits, including eligibility guidelines, the options as far as how to receive yours, and why you need to communicate income and household size changes to your state’s exchange.
Tax credit eligibility — To be eligible for a tax credit, you must meet all of the following criteria:
- Buy health insurance through your state’s exchange
- Be ineligible for an employer-sponsored or government health insurance plan
- Meet income requirements
- File a joint tax return, if married—those who are victims of domestic abuse and spousal abandonment may be able to claim the credit using the Married Filing Separately status
- Cannot be claimed as a dependent by another person
Tax credit options — Here is where we get back to the concept of advanced tax credits, as mentioned above. Like Sarah, in our example, you can get your tax credit in advance through monthly premium reductions. You may also opt to pay your full premium amount and receive the credit later when you file your federal income tax return.
Income and household size changes — If your income or household size changes at any point throughout the year, notify your state’s exchange promptly because these changes can impact your subsidy eligibility. This is very important because failing to do so may mean you owe the IRS money at tax time if your income increased or your family size decreased. On the flip side, it also means you could have reduced your monthly premiums if your income decreased or family size increased. When you file you income tax return, the income you projected when applying for exchange-based health insurance will be compared with the actual income you earned throughout the year.
When considering your options for receiving a premium tax credit, you may want to consider how likely your household size and income are to fluctuate. For instance, someone whose income varies greatly from year to year may be better off deferring their tax credit until tax time.
To find and compare Obamacare qualified health plans in your area and calculate your tax credit, visit HealthCare.com. Need assistance? Call an agent at 977-626-1943.
The Henry J. Kaiser Family Foundation. “Explaining Health Care Reform: Questions About Health Insurance Subsidies.” July 1, 2012. http://kff.org/health-costs/issue-brief/explaining-health-care-reform-questions-about-health/.
Internal Revenue Service. “The Premium Tax Credit.” Sept. 4, 2014.http://www.irs.gov/uac/The-Premium-Tax-Credit.
U.S. Department of Health & Human Services. Office of The Assistant Secretary for Planning and Evaluation. “2013 Federal Poverty Guidelines.” http://aspe.hhs.gov/poverty/13poverty.cfm.
U.S. Department of Health & Human Services. Office of The Assistant Secretary for Planning and Evaluation. “2014 Federal Poverty Guidelines.” http://aspe.hhs.gov/poverty/14poverty.cfm
 PricewaterhouseCoopers LLP. “A Look at 2015 Individual Market Health Insurance Rate Filings.”Sept. 25, 2014. http://www.pwc.com/us/en/health-industries/health-research-institute/aca-state-exchanges.jhtml.
 Internal Revenue Service. “The Premium Tax Credit.”Sept. 4, 2014. http://www.irs.gov/uac/The-Premium-Tax-Credit.