What the ACA tax credit does and how it works

The Affordable Care Act (ACA) tax credit is money the federal government sends directly to your health insurance company to lower your monthly premium. You do not pay the full price of the plan—the credit covers part of it. The credit amount depends on your household income, the cost of plans in your area, and how many people you are covering.

The credit works in two ways. You can have the insurance company explore it to your bill each month, so you pay less upfront. Or you can claim the full credit when you file your taxes the following year. Most people use the first method because it reduces what they owe right now, rather than waiting for a tax refund.

The credit is not a loan. You do not pay it back unless your actual income turns out to be higher than what you reported when you signed up. If your income stays the same or goes down, there is nothing to repay.

Key Takeaways

  • The ACA tax credit is a federal subsidy that lowers your monthly health insurance premium, and the amount depends on your household income and local plan costs.
  • You can have the credit applied to your bill each month, or claim it all at once when you file taxes—most people choose monthly payments to save money now.
  • The credit is based on your expected income for the year, and you must report changes in income, family size, or address within 30 days to avoid owing money back at tax time.
  • You can only receive the credit if you buy insurance through the ACA marketplace (Healthcare.gov or your state's marketplace), not through an employer or other source.
  • If your actual income is lower than you reported, you may receive a larger refund when you file taxes; if it is higher, you may owe some of the credit back.

How income determines your credit amount

Your credit amount is calculated using your modified adjusted gross income (MAGI), which is roughly your total household income. The federal government compares your income to the federal poverty line for your household size. The credit is designed so that your share of the premium—the part you pay yourself—stays between 2 and 8.5 percent of your income, depending on your income level.

For example, if you earn $30,000 a year as a single person, your expected contribution might be around $200 per month. If the second-cheapest silver plan in your area costs $450 per month, the credit would cover $250, and you would pay $200. If the same plan costs $600, the credit would still only bring your share down to $200, so the credit would be $400.

The credit phases out as your income rises. Once your income exceeds 400 percent of the federal poverty line (about $55,000 for a single person in 2024, though this varies by year), you no longer receive a credit. Between 200 and 400 percent of the poverty line, the credit gradually decreases.

Monthly payments versus claiming the credit at tax time

When you enroll in a plan through Healthcare.gov or your state marketplace, you can tell the marketplace to send the credit to your insurance company each month. This is called the advance premium tax credit (APTC). Your bill is lower when ready, and you do not have to wait until tax season.

Alternatively, you can decline the advance credit and claim the entire amount when you file your taxes the following year. This method makes sense only if you prefer to keep more money in your paycheck now and do not mind waiting for a refund. Most people choose the monthly option because it reduces their out-of-pocket costs right away.

If you choose monthly payments, the marketplace estimates your income based on what you report. If your actual income at the end of the year is different, the difference is settled when you file taxes. You report the credit you received on Form 8962, which reconciles what you got with what you were may have access to to receive.

What happens if your income changes during the year

You must report changes in income, household size, address, or job status within 30 days. If you do not report a change and your income turns out to be higher than you said, you will owe back some or all of the credit when you file taxes. The amount you owe depends on how much higher your actual income was.

If your income drops—because you lost a job or had hours cut—report it right away. The marketplace will recalculate your credit and may increase it. If you receive a larger credit than you are may have access to to because of an unreported income increase, you will have to repay the difference. There is a cap on how much you owe back: in 2024, single filers owe back no more than $650, and families owe back no more than $1,300, though these amounts adjust yearly.

Life changes like marriage, divorce, birth, or adoption also affect your credit. These changes can increase or decrease the amount you receive. Report them through your marketplace account as soon as they happen.

Who can receive the ACA tax credit

You must buy your plan through the ACA marketplace—Healthcare.gov if you live in most states, or your state's own marketplace if your state runs one. Plans bought directly from an insurance company, through an employer, or through a broker do not may have access to for the credit, even if the plan is otherwise the same.

You must be a U.S. citizen or lawfully present immigrant. You cannot claim the credit if you are incarcerated or claimed as a dependent on someone else's tax return. Your household income must fall between 100 and 400 percent of the federal poverty line (some states allow people below 100 percent to enroll, but they do not receive a credit).

You must not have access to affordable employer coverage. If your employer offers a plan and the employee premium is less than 8.5 percent of your household income, you are not may be able to access for the credit. However, if your employer's plan is unaffordable or does not cover at least 60 percent of medical costs, you may still may have access to.

How to claim the credit when you file taxes

When you file your federal income tax return, you will use Form 8962 (Premium Tax Credit) to reconcile the credit. This form compares the advance credit you received during the year to the credit you were actually may have access to to based on your final income.

You will need the Form 1095-B, which your insurance company sends showing the months you had coverage. You will also need your actual household income for the year. If you received advance payments, the marketplace sends you a Form 1095-A listing the credit amounts applied each month.

If you received less credit than you were may have access to to, the difference becomes part of your refund. If you received more, you owe it back when you file. Many tax software programs walk you through Form 8962 automatically if you enter the information from your 1095-A.

Common mistakes that cost you money

The biggest mistake is not reporting income changes. If you get a raise, start a side job, or have a significant change in household income, tell the marketplace within 30 days. Waiting until tax time means you may owe back a large portion of the credit you received.

Another mistake is estimating your income too low. If you guess low to get a bigger credit, you will owe it back at tax time. Estimate as accurately as you can based on what you expect to earn. If you are unsure, it is better to estimate slightly high and receive a refund than to estimate low and face a bill.

Some people forget to report changes in household size. If you have a baby, get married, or add a dependent, your credit amount changes. These changes can increase your credit significantly, so report them promptly.

Frequently Asked Questions

What is the difference between the ACA tax credit and cost-sharing reductions?

The tax credit lowers your monthly premium. Cost-sharing reductions lower your deductible, copayments, and coinsurance when you actually use medical care. Both are based on income, and both are available only through the marketplace. You can receive both at the same time if your income qualifies.

Can I get the tax credit if I have Medicare or Medicaid?

No. If you are enrolled in Medicare, you cannot use the ACA marketplace or receive the tax credit. If you are on Medicaid, you are not may be able to access for the credit. Some people may have access to for both programs in different months—if you lose Medicaid, you can enroll in a marketplace plan and claim the credit for the months you do not have Medicaid.

What happens if I do not report a big income increase?

When you file taxes, the IRS will compare your reported income to your actual income using tax records. If you received more credit than you were may have access to to, you will owe it back. The amount you owe is capped (around $650 for individuals in 2024), but you still have to repay it. Reporting changes as they happen avoids surprises at tax time.

Can I switch plans during the year and keep my credit?

Yes. You can switch to a different marketplace plan during the open enrollment period or if you have a may have access to life event. Your credit transfers to the new plan. If you switch outside of open enrollment without a may have access to event, you lose coverage and cannot re-enroll until the next open enrollment period.

Do I have to use the credit every month?

No. You can choose to receive the credit some months and not others. If you expect your income to be higher in certain months, you can decline the credit for those months and claim it later. However, most people find it simpler to receive the credit every month and reconcile at tax time.