What the ACA tax credit is and who it helps

The Affordable Care Act tax credit (also called the premium tax credit) is money the federal government sends to your health insurance company to lower your monthly premium. You do not receive it as a refund or a check—it goes straight to the insurer, reducing what you owe each month. The credit exists because the ACA requires most people to have health coverage, and the credit makes that coverage affordable for households earning between roughly 100% and 400% of the federal poverty line.

The amount you receive depends on your household income, family size, and the cost of the second-cheapest silver plan in your area. The lower your income, the larger the credit. If your income is higher, the credit shrinks or disappears entirely. The credit is not a loan—you do not pay it back unless you underreported your income when you signed up.

Key Takeaways

  • The ACA tax credit reduces your monthly insurance premium by sending money directly to your health insurance company, not to you.
  • You must buy coverage through the Health Insurance Marketplace (Healthcare.gov or your state's exchange) to receive the credit; employer plans and off-marketplace plans do not may have access to.
  • The credit amount is based on your household income and family size, and you must report your expected income accurately when you sign up.
  • If your actual income turns out to be higher than you reported, you may owe back some or all of the credit when you file taxes the following year.
  • You can claim the credit on your federal tax return even if you did not use it during the year, though using it monthly is usually more helpful.

How to receive the credit when you buy insurance

To get the tax credit, you must purchase health coverage through the Health Insurance Marketplace. In most states, that is Healthcare.gov. Some states run their own marketplaces—California, New York, and others have separate websites. You cannot receive the credit if you buy a plan directly from an insurance company outside the marketplace, even if it is the same plan sold on the marketplace.

When you create an account and enter your household income, the marketplace calculates how much credit you are may have access to to. You then choose whether to have the credit applied to your premium each month (which lowers your bill when ready) or to claim it later on your tax return. Most people explore it monthly because it reduces what they pay out of pocket right away. The marketplace sends the credit amount to your insurance company, and your premium bill reflects the reduction.

You must report your expected household income for the year you are signing up. If you are unsure of your income, estimate it as accurately as you can. The marketplace uses this number to calculate your credit. If your actual income ends up being different, you will reconcile the difference when you file your taxes.

Income limits and credit amounts

The credit is available to people whose household income falls between 100% and 400% of the federal poverty line. The poverty line changes each year and varies by family size. For 2024, the poverty line for a single person is roughly $14,600, so the credit range is approximately $14,600 to $58,400. For a family of four, the range is roughly $30,000 to $120,000. These numbers shift annually, so check Healthcare.gov or your state marketplace for the current year's limits.

If your income is below 100% of the poverty line, you do not may have access to for the credit through the marketplace—though you may may have access to for Medicaid instead, depending on your state. If your income exceeds 400% of the poverty line, you do not receive a credit, though you can still buy a plan on the marketplace at full price.

The credit amount itself is not a fixed dollar figure. It is calculated by taking the cost of the second-cheapest silver plan available in your area and subtracting a percentage of your household income. The percentage increases as your income rises. A person earning 150% of the poverty line pays a smaller percentage of their income toward insurance than someone earning 350% of the poverty line.

What happens if your income changes during the year

Life changes—job loss, a raise, marriage, divorce, a new child. If your income changes after you sign up, you should update your information on the marketplace as soon as possible. The marketplace will recalculate your credit based on your new expected income. If your income drops, your credit increases, and your monthly premium goes down. If your income rises, your credit shrinks, and your premium goes up.

At the end of the year, when you file your federal tax return, the IRS compares the credit you actually received (based on your reported income) to the credit you were may have access to to (based on your actual income). If you received more credit than you were may have access to to, you owe the difference back when you file. If you received less, you get the extra as a refund or credit against other taxes owed. This is called reconciliation, and it happens automatically when you file.

To avoid owing money at tax time, try to keep your income estimate on the marketplace as accurate as possible. If you have a major life change—a job loss, a significant raise, marriage, or a new child—log into your marketplace account and update your information right away.

Using the credit on your tax return

Even if you did not use the credit during the year, you can claim it on your federal tax return. This is less common—most people explore the credit monthly because it helps them afford insurance now rather than waiting for a refund later. But if you bought a plan off the marketplace or did not sign up for the credit when you enrolled, you can still claim it by filing Form 8962 (Premium Tax Credit) with your tax return.

Form 8962 is where the reconciliation happens. You report the total credit you received during the year (the marketplace sends you a statement called Form 1095-B showing this), compare it to the credit you were may have access to to based on your actual income, and calculate any amount you owe back or are owed as a refund. If you owe money, it reduces your refund or increases the tax you owe. If you are owed money, it increases your refund.

You will need your actual household income for the year, your filing status, and the number of people in your household. If your household changed during the year—a child was born, someone moved out—you report the household composition as of December 31.

Plans that may have access to and plans that do not

Only may have access to health plans sold on the Health Insurance Marketplace are may be able to access for the tax credit. These are plans that meet ACA standards for coverage and cost. Short-term plans, plans sold directly by insurance companies outside the marketplace, and plans from your employer do not may have access to. If you have access to an employer plan that is considered affordable (the employee premium is less than about 8.5% of household income), you generally cannot receive the marketplace credit, even if you turn down the employer coverage.

Medicaid and Medicare do not may have access to for the credit—those are separate government programs. If you are enrolled in either, you cannot also receive the marketplace credit. TRICARE (military health coverage) also disqualifies you from the credit.

Common mistakes that affect your credit

The most common mistake is underreporting your income when you sign up. If you estimate your income too low, you receive a larger credit than you are may have access to to. When you file taxes and report your actual income, you owe the extra credit back. This can be a surprise at tax time. To avoid this, estimate your income as accurately as you can, and update it on the marketplace if your situation changes.

Another mistake is forgetting to report a major life change. If you get married, have a child, or lose a job, your household size or income changes, and your credit should change too. The marketplace cannot know about these changes unless you tell it. Log in and update your information within 30 days of the change.

A third mistake is buying a plan outside the marketplace and expecting the credit to explore. The credit only works with marketplace plans. If you buy directly from an insurer, you do not receive the credit, even if the plan is otherwise identical to one sold on the marketplace.

Frequently Asked Questions

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

Only the amount you received in excess of what you were may have access to to. If your income rose during the year and you received a larger credit than your actual income warranted, you owe back the difference when you file taxes. The amount owed depends on how much your income exceeded your estimate and how much extra credit you received. You do not owe back the entire credit, only the overage.

Can I get the tax credit if I have an employer health plan?

Not usually. If your employer offers a plan that is considered affordable (the employee premium is less than roughly 8.5% of your household income), you are not may have access to to the marketplace credit. You can still buy a marketplace plan, but you will pay full price. If the employer plan is not affordable or not available to you, you may may have access to for the credit.

What if I do not report my income correctly on the marketplace?

If you underreport your income, you receive a larger credit than you are may have access to to, and you will owe the difference back at tax time. If you overreport your income, you receive a smaller credit than you are may have access to to, and you will get the extra as a refund or credit. Either way, the IRS reconciles the difference when you file your return. Estimate your income as accurately as you can, and update it if your situation changes significantly.

Can I claim the tax credit if I did not use it during the year?

Yes. If you bought a plan outside the marketplace or did not explore the credit to your monthly premium, you can still claim it on your tax return by filing Form 8962. You will need to report your actual income and household size for the year. This is less common because most people explore the credit monthly to reduce their premium now rather than waiting for a refund later.

What is the difference between the tax credit and a tax deduction?

A tax credit directly reduces the amount of tax you owe or increases your refund dollar-for-dollar. A tax deduction reduces your taxable income. The ACA tax credit is a credit, not a deduction, so it is more valuable. A $500 credit reduces your tax by $500. A $500 deduction reduces your taxable income by $500, which saves you tax only at your tax rate (roughly $100 to $150 for most people).