What ACA Tax Credits Are and How They Work

An ACA tax credit is money the federal government sends to your health insurance company to reduce what you pay each month for a plan bought through Healthcare.gov or your state's marketplace. You do not wait until tax time to get the money — it goes directly to your insurer, lowering your monthly premium right away. The credit is based on your household income and the cost of the second-cheapest Silver plan in your area.

The credit amount changes if your actual income turns out to be different from what you estimated when you signed up. If you earned less than you predicted, you may owe nothing back and could even receive a refund when you file taxes. If you earned more, you may have to repay some or all of the credit on your tax return. This is why reporting income changes to the marketplace during the year matters — it keeps the credit amount closer to what you will actually owe.

Key Takeaways

  • ACA tax credits are federal payments sent directly to your insurer to reduce your monthly premium, not a refund you receive later.
  • The credit amount is based on your household income and the cost of the second-cheapest Silver plan available in your zip code.
  • If your income changes during the year, you should report it to the marketplace so your credit stays accurate and you do not owe money back at tax time.
  • You must have a plan from the health insurance marketplace to receive the credit — plans bought directly from an insurance company do not may have access to.
  • When you file taxes, you reconcile what you received in credits against what you were actually may have access to to based on your final income.

How Income Determines Your Credit Amount

The marketplace calculates your credit using your household income and compares it to the federal poverty line for your family size. The credit is designed so that your share of the second-cheapest Silver plan premium does not exceed a certain percentage of your income — that percentage increases with income. For example, someone earning 150% of the federal poverty line pays a smaller percentage of the premium than someone earning 300% of the poverty line.

You report your expected income for the year when you sign up or make changes. The marketplace uses this number to set your credit amount. If you think your income will change — a job loss, a new job, a spouse starting work — you can update your information at any time. The marketplace will recalculate your credit and adjust what you receive each month going forward.

Household income includes wages, self-employment income, Social Security, unemployment benefits, and certain other sources. It does not include some benefits like Supplemental Security Income (SSI) or TANF. If you are unsure whether something counts, the marketplace process will ask about specific income sources.

What Happens at Tax Time

When you file your federal income tax return, you report the total amount of ACA tax credits you received during the year. The IRS compares this to the amount you were actually may have access to to based on your final income. This process is called reconciliation. If you received more credit than you were may have access to to, you repay the difference on your tax return — this reduces your refund or increases what you owe. If you received less credit than you were may have access to to, the IRS sends you the difference as part of your refund.

You will receive a Form 1095-B from your health insurance company and a Form 1095-A from the marketplace. The 1095-A shows how much credit you received each month. You use this form to fill out Form 8962, which is where you reconcile your credits. Your tax software or tax preparer will guide you through this form.

The reconciliation can result in owing money back, so it is important to report income changes during the year rather than waiting until tax time. If your income rose significantly and you did not report it, you could owe back a large portion of the credits you received.

Income Changes and How to Report Them

Life changes that affect income — a job loss, a raise, a spouse starting or stopping work, a change in self-employment income — should be reported to the marketplace within 30 days. You can report changes on Healthcare.gov or your state marketplace website by logging into your account and selecting "Report a Life Change" or similar language.

When you report a change, the marketplace recalculates your credit and adjusts your monthly payment. If your income went down, your credit usually increases and your premium goes down. If your income went up, your credit decreases and your premium goes up. These changes take effect the first day of the following month in most cases.

If you do not report a change and your actual income is higher than what you reported, you will owe back credits at tax time. If your actual income is lower, you will receive a refund of the difference. Reporting changes keeps your credit accurate throughout the year and prevents surprises when you file taxes.

Which Plans may have access to for Tax Credits

Only health insurance plans bought through Healthcare.gov or your state's marketplace may have access to for ACA tax credits. Plans bought directly from an insurance company, even if they are ACA-compliant, do not receive the credit. This is why using the marketplace to shop for coverage is important — it is the only way to receive the monthly credit.

You can use the credit toward any plan on the marketplace, not just Silver plans. However, the credit amount is calculated based on the cost of the second-cheapest Silver plan in your area. If you choose a cheaper Bronze plan, the credit covers part of that cost and you pay less out of pocket. If you choose a more expensive Gold or Platinum plan, the credit covers the same amount it would for Silver, and you pay the difference.

Limits on How Much Credit You Can Receive Back

If your income is above 400% of the federal poverty line, you do not receive any ACA tax credit. The credit phases out as income rises, so someone at 350% of poverty receives less credit than someone at 300%. The exact amounts change each year based on the federal poverty line.

There is no cap on how much credit you can receive if your income is below 400% of poverty. Someone earning very little receives a larger credit than someone earning more. The credit is designed to make insurance affordable across the income spectrum.

What to Do If You Owe Money Back at Tax Time

If reconciliation shows you owe back part of your credit, the amount you owe reduces your tax refund or increases what you owe to the IRS. You cannot avoid this by not filing taxes — the IRS will match the 1095-A from the marketplace to your return and will contact you if you do not report the credits.

If you are concerned you will owe back a large amount, you can adjust your credit during the year by reporting income changes to the marketplace. You can also choose to receive less credit each month by changing your estimate on the marketplace — this means a higher monthly premium but a smaller reconciliation bill at tax time. Some people do this if they expect their income to increase.

Frequently Asked Questions

Do I have to repay the entire credit if my income was higher than I estimated?

No. You only repay the amount by which you exceeded your income estimate. If you estimated $40,000 and earned $45,000, you repay based on that $5,000 difference, not the full credit. There are also limits on repayment amounts for lower-income households, though these limits are modest.

What if I did not report a job loss or income drop during the year?

When you file taxes, reconciliation will show you earned less than you reported. The IRS will send you the difference between what you received in credits and what you were may have access to to based on your actual lower income. This usually results in a larger tax refund.

Can I use the credit on a plan I buy directly from an insurance company?

No. The credit only works with plans from the health insurance marketplace. If you buy directly from an insurer, you receive no credit, even if the plan meets ACA standards. You must use Healthcare.gov or your state marketplace to receive the credit.

What happens if my income changes mid-year and I do not report it?

You will reconcile at tax time based on your actual income. If you earned more than you reported, you will owe back part of the credit. If you earned less, you will receive a refund. Reporting changes during the year prevents this surprise and keeps your monthly premium accurate.

Is the ACA tax credit the same as a tax refund?

No. The credit goes to your insurer each month to lower your premium. At tax time, you reconcile what you received against what you were may have access to to. If you received too much, you repay it; if you received too little, you get the difference back as part of your tax refund.