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Question: I’m purchasing health care coverage through my state’s exchange and wonder if I’ll be eligible for a tax credit that reduces my premium. Who qualifies for it?
Answer: The premium tax credit is available to eligible individuals who buy health insurance through an exchange. More people qualify for this tax break these days and bigger credits remain in place for many.
Congress extended 2021 and 2022 expansions of the credit for three more years, through 2025, in time for open enrollment that began in November.
Who is eligible for the credit?
Prior to 2021, the credit was available only to people with incomes ranging from 100 percent to 400 percent of the federal poverty level, who bought health coverage through an exchange and who met other rules. For 2023, individuals with incomes over 400 percent of the poverty level can also get credits to the extent the cost of the benchmark silver health plan exceeds 8.5 percent of income.
Individuals eligible for Medicare or other federal insurance don’t qualify. Nor do people who can get affordable health coverage from their employers. Employer coverage is treated as affordable if the employee’s share of annual premiums for self-only health coverage doesn’t exceed 9.12 percent of household income.
How does the credit work?
It’s estimated when you go on an exchange to buy insurance. The estimated credit for 2023 is based on expected 2023 income. Begin with your 2021 modified adjusted gross income—AGI plus tax-free interest, nontaxable Social Security benefits and tax-exempt foreign earned income. Then add or subtract any income changes you expect to have for 2023. The lower your modified AGI, the bigger the credit.
Once you enroll in coverage, let the exchange know of any income changes that could affect the credit amount. Most people who qualify for the credit opt to have it paid in advance directly to the health insurance company to lower their monthly payments. If you choose this route, you must file a federal income tax return, even though your income may be below the filing threshold or you expect a refund.
You’ll have to compute the credit, list any advance payments made to the insurer, and reconcile the two figures. If your credit exceeds the premium advances, you can claim the excess as a refundable credit on the 1040 form. If the credit is less than the advances, most people will need to repay all or part of the excess.
Erroneous reporting of the health premium credit is an audit red flag. IRS’ computers flag returns showing modified AGIs above the limit to take the credit. So double-check that you qualify for the credit and that you accurately report it.
(Joy Taylor is editor of The Kiplinger Tax Letter. For more on this and similar money topics, visit Kiplinger.com.)
