The Affordable Care Act, also known as Obamacare, included the premium tax credit at its inception to assist Americans of lower and middle incomes in paying for health insurance obtained through the healthcare marketplace, HealthCare.gov or a state exchange. By using the credit to reduce the cost of health insurance, more people are able to afford it. Additionally, consumers pay less out-of-pocket because the insurer receives the credit advance payments immediately.
You must, however, meet a number of conditions in order to be eligible for the credit. For instance, in order to be eligible for the credit, your household income must fall between 100% and 400% of the federal poverty limit for the size of your family. Additionally, you cannot be included as a dependent on another person’s tax return. And in order to claim the credit if you’re married, you often need to submit a joint tax return.
The American Rescue Plan Act (ARPA), which was passed in reaction to the COVID-19 outbreak in March, 2021 modified the household income criterion for the 2021 and 2022 tax years. Taxpayers with income levels beyond that threshold are permitted to claim the premium tax credit for those two years rather than the federal poverty level cap of 400%, assuming they satisfy all the other eligibility requirements.
Congress has officially approved the Inflation Reduction Act, which would extend the 400% cap’s temporary exception through the 2025 tax year. That will extend the time for three more years that those with household earnings over that amount can collect the premium tax credit, assuming they otherwise qualify. You can get an idea of how many people will be impacted for the following three years once the Inflation Reduction Act is signed into law by noting that 1.1 million Americans are eligible for the 2022 credit who wouldn’t have qualified if the 400% cap hadn’t been lifted.
It can be difficult to figure out how much of a premium tax credit you will receive. Typically, the credit amount is equal to your projected contribution amount, which is determined by your household’s income, less the health insurance premium for the second-cheapest “silver plan” that is available to you. This strategy enables those with lower incomes to obtain more credit.
The ARPA reduced the percentage of annual household income that qualifying taxpayers are expected to contribute toward their health insurance premiums for 2021 and 2022, increasing the credit amount for those taxpayers. Before, the percentages of household income fluctuated from 2% to 9.5%, the higher your income, the higher your percentage. The contribution rates range from 0% to 8.5% for 2021 and 2022.
