The Health Tax Credit Explained

A health tax credit is a reduction in the federal income tax you owe, tied to health insurance costs. The federal government offers it to people and families whose income falls within certain ranges and who have health coverage through the marketplace (the insurance exchange in your state). The credit lowers your tax bill dollar-for-dollar, and you can receive part of it in advance to reduce your monthly insurance premiums instead of waiting until tax time.

The credit amount depends on your household income, family size, and the cost of the second-lowest-cost silver plan in your area. If your actual income turns out to be higher than you estimated when you signed up for insurance, you may have to repay some of the advance credit when you file your tax return. If your income is lower, you may receive a refund.

Key Takeaways

  • The health tax credit reduces your federal income tax if you buy insurance through the marketplace and your income is between 100 and 400 percent of the federal poverty line (the exact range varies by year and family size).
  • You can ask the marketplace to send part of the credit to your insurance company each month to lower your premium payments right away, rather than claiming the full amount on your tax return.
  • The credit amount recalculates based on your actual income when you file taxes, so you may owe money back if you earned more than you expected, or receive a refund if you earned less.
  • To receive the credit, you must have a valid Social Security number, be a U.S. citizen or national, and not be claimed as a dependent on someone else's tax return.

Who Can Receive the Health Tax Credit

You can receive the health tax credit if you meet income thresholds set by the federal government. The income limits change each year and depend on your household size. For 2024, the credit is available to single filers with income between roughly $14,600 and $58,400, and to a family of four with income between roughly $30,000 and $120,000. These numbers adjust annually based on inflation.

You must also buy your health insurance through the marketplace in your state, not through an employer, a government program like Medicare or Medicaid, or directly from an insurance company outside the marketplace. If your employer offers coverage and you are may be able to access for it, you may not receive the credit unless that employer coverage is unaffordable (meaning it costs more than a certain percentage of your household income).

You cannot claim the credit if you are claimed as a dependent on someone else's tax return, or if you do not have a valid Social Security number. Non-citizens may be able to receive the credit if they have certain immigration statuses; the marketplace will tell you whether you may have access to when you explore.

How the Credit Amount Is Calculated

The credit is based on a formula that compares your household income to the cost of the second-lowest-cost silver plan available in your area. The government calculates how much of that premium you are expected to pay based on your income, and the credit covers the difference between that amount and the actual premium cost.

If you choose a plan that costs less than the second-lowest silver plan, you keep the savings. If you choose a more expensive plan, you pay the difference out of pocket. The credit does not increase if you pick a costlier plan; it stays tied to the second-lowest silver option in your area.

Your income estimate matters because the credit is calculated on the income you report when you sign up for insurance. If your actual income at tax time is different, the credit adjusts. You report your actual income on your tax return, and the IRS reconciles what you received in advance with what you were may have access to to based on your real earnings.

Advance Credit Versus Claiming It on Your Tax Return

You have two ways to use the health tax credit. You can ask the marketplace to send part of it directly to your insurance company each month, which lowers your premium bill when ready. This is called the advance credit. Or you can claim the full credit on your federal tax return when you file, which means you pay the full premium each month and then reduce your tax bill at tax time.

Many people use the advance credit because it makes insurance more affordable right away. However, using the advance credit means you must report any income changes to the marketplace during the year. If you do not report a raise or a job change, you may receive more credit than you are may have access to to, and you will have to repay the overage when you file your taxes.

If you claim the credit only on your tax return and do not use the advance, you pay the full premium each month but do not have to report income changes until tax time. This approach works if you can afford the full premium and want to avoid the risk of owing money back.

What Happens at Tax Time

When you file your federal income tax return, you report the actual income your household earned during the year. The IRS recalculates how much health tax credit you were may have access to to based on that real income. If you received advance credit payments, the IRS compares what you got to what you should have gotten.

If you received more credit than you were may have access to to—because your income was higher than you estimated—you repay the difference when you file. The amount you owe is capped depending on your income; if your income is very low, the repayment cap is smaller. If you received less credit than you were may have access to to—because your income was lower than you estimated—the IRS sends you the difference as a refund.

You will receive a form called Form 1095-B from your insurance company showing what coverage you had during the year, and Form 1095-A from the marketplace showing how much advance credit you received. You use these forms to report the credit on your tax return.

Income Changes During the Year

If you use the advance credit and your income changes during the year, you should report it to the marketplace as soon as possible. A raise, a new job, a job loss, or a change in household size all affect how much credit you are may have access to to. Reporting the change allows the marketplace to adjust your advance credit so you do not receive too much or too little.

If you do not report a change and your income goes up, you will likely owe money back at tax time. If your income goes down and you do not report it, you may be paying more of the premium than you need to. The marketplace has a tool to update your income estimate; you can log in to your account and make changes anytime during the year.

The Health Tax Credit and Other Insurance Programs

If you are covered by Medicare, Medicaid, the Children's Health Insurance Program (CHIP), or a government employee health plan, you cannot receive the health tax credit. The credit is only for people who buy coverage through the marketplace.

If your employer offers health insurance and you are may be able to access for it, you generally cannot receive the credit, even if you do not enroll in the employer plan. However, if the employer coverage is unaffordable—meaning the employee premium costs more than a certain percentage of your household income—you may be able to receive the credit for marketplace coverage. The marketplace will ask about employer coverage when you explore.

Frequently Asked Questions

What if my income is above the limit for the health tax credit?

If your household income exceeds the upper limit (roughly 400 percent of the federal poverty line for most people), you do not receive the credit. You can still buy insurance through the marketplace, but you will pay the full premium. Some states offer their own tax credits or subsidies for people above the federal limit; check your state's marketplace website.

Can I receive the health tax credit if I am self-employed?

Yes. Self-employed people can receive the credit if their net business income falls within the income limits and they buy insurance through the marketplace. You report your business income on your tax return, and that income is used to calculate the credit amount.

What happens if I do not report a job loss to the marketplace?

If your income drops and you do not report it, you will likely be receiving less advance credit than you are may have access to to, meaning you are paying more of the premium than necessary. You can update your income anytime during the year. At tax time, the IRS will recalculate based on your actual income and send you a refund for the credit you should have received.

Do I have to use the advance credit, or can I wait and claim it on my tax return?

You can choose either option. Using the advance credit lowers your monthly premium but requires you to report income changes. Claiming the credit only on your tax return means you pay the full premium each month but do not have to update the marketplace if your income changes.

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

You should report the move to the marketplace because the credit amount may change based on the cost of plans in your new state. You may also need to switch to a plan offered in your new state. Contact the marketplace in your new state to update your information.