What the ACA tax credit is and who it's for

The Affordable Care Act (ACA) tax credit, officially called the Premium Tax Credit, is money the federal government sends directly to your health insurance company each month to lower what you pay for coverage. You don't claim it on your tax return and wait for a refund—the credit goes to work when ready, reducing your monthly bill.

The credit is available to people who buy their own health insurance through the ACA marketplace (Healthcare.gov or your state's marketplace) and whose household income falls between 100% and 400% of the federal poverty line. The exact amount you receive depends on your income, family size, and the cost of the second-cheapest Silver plan in your area.

You are not required to take the credit if you don't want it. Some people turn it down because they expect a higher income later in the year, or because they have other coverage. But most people who are offered it use it, because it can cut monthly premiums in half or more.

Key Takeaways

  • The Premium Tax Credit reduces your monthly health insurance bill when ready, not at tax time, by paying part of your premium directly to your insurer.
  • You must buy coverage through the ACA marketplace and have household income between 100% and 400% of the federal poverty line to be offered the credit.
  • The amount you receive is based on your income, family size, and the cost of the second-cheapest Silver plan available where you live.
  • You report your expected income when you enroll, and if your actual income differs at tax time, you may owe money back or receive additional credit.
  • The credit is not the same as a tax deduction—it reduces your insurance bill each month, not your taxable income.

How the credit amount is calculated

The government uses a formula that compares your household income to the cost of the second-cheapest Silver plan in your county. If that plan costs $400 a month and the government decides you should pay no more than $100 based on your income, the credit covers the $300 difference.

The income thresholds that determine how much you pay are adjusted each year. For 2024, a single person earning $15,000 a year would be expected to contribute roughly 2% of their income to health insurance. Someone earning $50,000 would be expected to contribute about 8%. These percentages increase with income, but they're capped at 8.5% for people at 400% of the poverty line.

Your family size matters because the poverty line is higher for larger households. A family of four has a higher income threshold than a single person, so they may be offered more credit at the same dollar income.

How to report your income and enroll

When you create an account on Healthcare.gov or your state marketplace, you enter your expected household income for the year ahead. The marketplace uses this number to calculate your credit. You also report how many people live in your household and your filing status.

The marketplace asks for your Social Security number and may verify your income against IRS records. If you're self-employed or expect irregular income, you can estimate conservatively—the marketplace will accept a reasonable estimate even if it's not exact.

Once you enroll in a plan and the credit is approved, the payment goes to your insurance company, not to you. Your monthly bill is already reduced. You don't have to do anything else until the following year, unless your income or family size changes during the year.

What happens if your income changes during the year

If you get a raise, lose a job, get married, or have a child, you can report the change to the marketplace within 60 days. The marketplace will recalculate your credit based on your new situation. If your income goes up, your credit may go down, and your monthly bill will increase. If your income goes down, your credit increases and your bill decreases.

You are not locked into the income you reported at enrollment. Changes in income, family size, or employment status all count as may have access to life events that let you update your information outside the annual enrollment period.

Reconciliation at tax time

At the end of the year, you report the credit you received on your federal tax return using Form 8962. The IRS compares the credit the marketplace paid out to the credit you were actually may have access to to based on your actual income for the year.

If you received more credit than you were may have access to to—because your actual income was higher than you estimated—you owe the difference back when you file your taxes. If you received less credit than you were may have access to to, you get the difference as a refund or credit against taxes owed.

The amount you owe back is capped if your income is below 400% of the poverty line. For 2024, single filers with income under $36,000 owe back no more than $650 if they received too much credit. The cap is higher for married couples and families. This cap protects people from owing back large sums if their income rose unexpectedly.

The difference between the tax credit and other tax benefits

The Premium Tax Credit is separate from the Self-Employed Health Insurance Deduction, which is for self-employed people who don't take the credit. It's also different from the Health Coverage Tax Credit, which is a smaller credit for certain people receiving trade adjustment information or pension benefits.

A tax deduction reduces your taxable income. A tax credit reduces the tax you owe. The Premium Tax Credit is a credit, but it works differently from most credits because it's paid out monthly to your insurer rather than claimed on your return.

When you might not be offered the credit

If your household income is below 100% of the federal poverty line, you don't may have access to for the credit in most states. (Some states have expanded Medicaid, which covers people below the poverty line instead.) If your income is above 400% of the poverty line, you also don't may have access to, though you can still buy coverage on the marketplace and pay the full price.

If you have access to health insurance through an employer and that coverage is considered affordable (your share of the premium is less than about 8.5% of your household income), you generally cannot use the ACA credit. The marketplace will ask whether you have employer coverage and factor that into your decision.

Frequently Asked Questions

Do I have to pay the credit back if my income goes up?

Only if your actual income at tax time was higher than you estimated when you enrolled. If you reported your income accurately or conservatively, and your income rose after enrollment, you can update the marketplace and your credit will adjust going forward. You only reconcile what you actually received versus what you were may have access to to based on your final year income.

Can I get the credit if I'm self-employed?

Yes. Self-employed people report their expected net income from self-employment on the marketplace process. You can use your prior year tax return as a guide, or estimate if your income is expected to change. The marketplace accepts reasonable estimates even if they're not exact.

What if I don't want to take the credit?

You can decline it when you enroll. Some people do this if they expect a much higher income later in the year, or if they have other coverage. If you decline, you pay the full price of the plan, but you won't owe anything back at tax time because you didn't receive any credit.

Is the credit the same as a refund?

No. The credit is paid to your insurance company each month, reducing your bill when ready. A refund is money returned to you after you file taxes. The credit is not a refund, and you don't receive it as cash.

What if the marketplace made a mistake calculating my credit?

You can contact the marketplace to ask them to review the calculation. If they made an error, they can correct it and adjust your bill going forward. If the error affected past months, they may issue a credit or bill adjustment. Keep records of the income you reported so you can explain your situation clearly.