The ACA tax credit lowers what you pay for health insurance each month

The Affordable Care Act (ACA) tax credit, officially called the Premium Tax Credit, is money the federal government sends directly to your insurance company to reduce your monthly premium. You do not wait until tax time to receive it — the credit works when ready when you enroll in a plan through Healthcare.gov or your state's marketplace.

The credit amount depends on your household income, the cost of the second-cheapest Silver plan in your area, and the number of people on your plan. If your income is between 100 and 400 percent of the federal poverty line, you likely may have access to for some credit. The government assumes you will spend a certain percentage of your income on insurance; anything above that percentage, the credit covers.

When you enroll, you tell the marketplace what income you expect for the year. The marketplace calculates your credit and sends it to your insurer. Your monthly bill drops by that amount. If your actual income turns out different at tax time, you may owe money back or receive a refund — this is why reporting income accurately matters.

Key Takeaways

  • The ACA tax credit reduces your monthly insurance premium when ready, not at tax time, by having the government pay part of it directly to your insurer.
  • You must enroll through Healthcare.gov or your state's marketplace to receive the credit; plans bought outside the marketplace do not may have access to.
  • Your credit amount is based on your household income and the cost of the second-cheapest Silver plan available where you live.
  • You report your expected income when you enroll, and any difference between what you reported and what you actually earned gets settled when you file taxes.

Income thresholds that determine whether you get a credit

The ACA tax credit is available to people whose household income falls between 100 and 400 percent of the federal poverty line. For 2024, the federal poverty line for a single person is about $14,600 per year; for a family of four, it is about $30,000. This means a single person earning between roughly $14,600 and $58,400 may may have access to, though the exact range shifts each year as the poverty line changes.

If your income is below 100 percent of the poverty line, you may be directed toward Medicaid instead, depending on your state. Some states have expanded Medicaid to cover more people; others have not. If your income is above 400 percent of the poverty line, you do not may have access to for the credit, though you can still buy insurance through the marketplace at full price.

The marketplace uses your modified adjusted gross income (MAGI) to calculate your credit, not your total income. MAGI includes wages, self-employment income, investment income, and certain other sources. When you enroll, you report what you expect to earn for the full year ahead. If you change jobs, lose income, or have a major life event, you can update your income estimate and your credit will adjust.

How the credit amount is calculated

The government does not give you a flat dollar amount. Instead, it calculates what you should pay based on your income, then covers the difference between that amount and the actual cost of insurance in your area.

Here is how it works: The marketplace identifies the second-cheapest Silver plan available in your zip code. This plan's monthly premium is the benchmark. The government then says you should pay a certain percentage of your household income toward insurance — this percentage increases as your income rises. For someone at 200 percent of the poverty line, the percentage might be around 6 percent of income; for someone at 400 percent, it might be around 9.5 percent.

The credit covers the gap. If the second-cheapest Silver plan costs $400 per month and you are expected to pay $150 per month based on your income, the credit pays $250. If you choose a cheaper Bronze plan instead, you pay less out of pocket but the credit amount stays the same — you pocket the difference. If you choose a more expensive Gold or Platinum plan, you pay the difference yourself.

What happens at tax time if your income changed

When you file your tax return, you report what you actually earned during the year. The IRS compares this to the income you reported when you enrolled in the marketplace. If you earned less than you predicted, you may be owed a refund — the credit was smaller than it should have been, so you overpaid. If you earned more, you may owe money back.

There is a cap on how much you have to repay if your income was higher than expected. For 2024, if your income was between 100 and 200 percent of the poverty line, you owe back no more than $325 if you are single or $650 if you are married filing jointly. The cap is higher for people with incomes above 200 percent of the poverty line. This means if your credit was much larger than it should have been, you still have some protection.

To avoid surprises, update your income on the marketplace as soon as it changes — if you get a raise, lose a job, or have a major life event. The marketplace lets you change your income estimate at any time during the year. This keeps your monthly credit closer to what you actually owe at tax time.

Plans that may have access to for the credit and plans that do not

You must enroll in a plan through Healthcare.gov or your state's marketplace to receive the ACA tax credit. Plans sold directly by insurance companies, through brokers outside the marketplace, or on the individual market do not may have access to, even if they are ACA-compliant plans. The credit only works with marketplace plans because the marketplace tracks your income and enrollment status.

All four metal levels — Bronze, Silver, Gold, and Platinum — may have access to for the credit. The credit amount does not change based on which metal level you choose; it is always calculated using the second-cheapest Silver plan. Choosing a cheaper Bronze plan means you pay less overall. Choosing a more expensive Gold or Platinum plan means you pay more out of pocket, but you get lower deductibles and copays.

Short-term health plans, medical discount plans, and plans sold outside the marketplace do not may have access to for the credit. If you are considering a plan, check whether it is listed on Healthcare.gov or your state's marketplace. If it is not, the ACA tax credit will not explore.

Life events that let you update your income and credit

You can only change your income estimate outside of the annual open enrollment period if you have a may have access to life event. These include losing health insurance coverage, getting married or divorced, having a baby, adopting a child, moving to a new state, losing a job, getting a significant raise or cut in pay, or becoming a U.S. citizen or national.

When a may have access to event happens, you have 60 days to report it to the marketplace. Once you do, you can update your income and your credit adjusts for the rest of the year. If you do not report the change, your credit stays the same until the next open enrollment period, which could mean you overpay or underpay for months.

Open enrollment typically runs from November through January each year. During this window, anyone can enroll in a plan or change their income estimate without a may have access to event. Outside of open enrollment, you need a may have access to event to make changes.

How to report your income accurately and avoid problems

When you enroll, the marketplace asks you to estimate your household income for the full year. Use your most recent pay stubs, tax return, or income records to make this estimate as accurate as possible. If you are self-employed, use your expected net profit for the year. If your income varies month to month, average it out.

Reporting income higher than you expect is safer than reporting it lower. If you overestimate and earn less, you get a refund at tax time. If you underestimate and earn more, you owe money back — and there is a cap on repayment, but you still owe something. Being conservative with your estimate protects you.

Keep records of any income changes during the year. If you get a raise, lose a job, or have a major life event, update the marketplace within 60 days. This keeps your credit aligned with your actual income and reduces the chance of owing money at tax time. The marketplace will ask you to verify your income with documents like pay stubs or a tax return if the amount seems inconsistent with what you reported before.

Frequently Asked Questions

Can I get the tax credit if I am self-employed?

Yes. Self-employed people use their expected net profit for the year to calculate the credit. Net profit is your total business income minus business expenses. If your income varies, estimate conservatively. You can update your income on the marketplace if your business income changes significantly during the year.

What if I do not file taxes — do I still get the credit?

You can receive the credit each month without filing taxes, but you must reconcile it when you file your return. If you do not file, the IRS cannot verify whether your income was correct, and you may lose the refund you are owed if you earned less than expected. Filing taxes protects you.

Do I have to choose a Silver plan to get the full credit?

No. The credit is calculated using the Silver plan as a benchmark, but you can choose any metal level. If you pick a cheaper Bronze plan, you pay less overall. If you pick a more expensive Gold or Platinum plan, you pay the difference yourself. The credit amount stays the same regardless of which plan you choose.

What happens if I move to a different state during the year?

Moving is a may have access to life event. Report it to the marketplace within 60 days, and your credit will be recalculated based on the second-cheapest Silver plan in your new state. Your new monthly premium may be higher or lower depending on insurance costs in that area.

Can I owe back the entire credit if my income was too high?

No. There is a cap on repayment. For 2024, single filers earning between 100 and 200 percent of the poverty line owe back no more than $325; married filers owe back no more than $650. Higher-income filers have higher caps, but you are always protected from owing back the full amount.