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How Taxes and Subsidies Affect Your Health Insurance

A guide to Premium Tax Credits and Cost-Sharing Reductions that’ll make cents for you

Written by: Aaron Garcia.

Two women review charts and paperwork at a coffee shop.

Key Takeaways

  • Premium Tax Credits and Cost-Sharing Reductions (CSR) make health insurance more affordable for moderate- and low-income customers.

  • The U.S. government pays a portion of your out-of-pocket and monthly premium payments if you qualify.

  • You’ll find out which savings you qualify for when you apply for a health insurance plan through the ACA MarketplaceThe Health Insurance Marketplace is a virtual space where you can shop and enroll in health insurance. Marketplaces can be run by the government, your state or private companies. Marketplaces can be accessed online, by phone, or in-person.

The Affordable Care Act Made Health Insurance More Affordable

Before the Affordable Care Act (ACA)The Affordable Care Act is a healthcare reform bill from 2010 aimed at reducing the amount of uninsured Americans by making coverage more affordable. Also known as The Patient Protection and Affordable Care Act, the ACA requires insurance companies to cover preventive care and other essential health benefits. Also known as "Obamacare." passed in 2010, health insurance was costly for many Americans. To make health coverage more affordable, the ACA established several programs to lower costs and help customers pay their insurance bills. Now, individuals and families can qualify for income-based Premium Tax Credits and Cost-Sharing Reductions (CSR) designed to keep them insured.

But do you know whether you qualify for these price breaks, or how to apply for them? If not, it could cost you; More than 8.3 million people signed up for insurance in 2020 through the ACA Marketplace. Of those, 87% (or 7.2 million people) qualified for Premium Tax Credits and received an average of $606 per month. [1] Within that group, 71% also were eligible for a Cost Sharing Reduction, or “extra savings.”

If you’re looking into health insurance options for your next enrollment period, make sure you understand the cost-saving options you have. While both Premium Tax Credits and Cost-Sharing Reductions help you afford health insurance, they work in very different ways.

What Are Premium Tax Credits, or Tax Subsidies?

A Premium Tax Credit, also known as a tax subsidy, is an amount the U.S. government will pay toward your monthly health insurance payment or premium. Your income determines this portion. Subsidies help individuals and families with moderate income and work with any plan in their area.

Because it’s a tax credit, the Internal Revenue Service (IRS) determines who’s eligible and issues the payments. There’s a long list of guidelines to consider at IRS.gov. [2] You’ll also want to be aware of details like the Federal Poverty Level [3] (more on that below).

What Are Cost-Sharing Reductions (CSRs)?

Cost Sharing Reductions (CSRs) decrease out-of-pocket costs like deductibles, copayments and coinsurance. A CSR is paid directly to the insurance company to reduce your out-of-pocket price. A CSR, though, can only be used on Silver-level health insurance plans. You must meet the same guidelines, but you must earn 100%-250% of the Federal Poverty Level.

Am I Eligible for Premium Tax Credits and CSRs?

To be eligible for a Cost Sharing Reduction, you must:

  • be within 100-250% of the Federal Poverty Level
  • lack affordable coverage through an employer
  • be ineligible for Medicaid or Children’s Health Insurance Program (CHIP)
  • be a U.S. Citizen (or proof of legal residency)
  • file taxes jointly, if married

To be eligible for a Premium Tax Credit, you must:

  • be within 100-400% of the Federal Poverty Level
  • lack affordable coverage through an employer
  • be ineligible for Medicaid or Children’s Health Insurance Program (CHIP)
  • be a U.S. Citizen (or proof of legal residency)
  • file taxes jointly, if married

Other factors that weigh into your eligibility include:

  • Cost of available insurance coverage
  • Where you live
  • Your address
  • Your family size

How Do I Apply for a Premium Tax Credit or CSR?

When you apply for a health insurance plan, the Marketplace, will show you eligible reductions. Make sure to report your income accurately; any mistakes are usually caught at tax time and may result in a surprise bill.

Or, contact a GoHealth licensed insurance agent to help you check for all the subsidies that you are eligible for — our consultations are free.

Mistakes to Avoid

Avoiding pitfalls will reduce your risk of extra costs. Here are three examples:

Be truthful about your income

Under-reporting or overestimating your income could cause you to receive the wrong tax subsidy amount. The error could mean paying back part–or all–of your subsidy when you file your taxes.

 

Communicate changes in income when they happen

Tell your carrier about increases or reductions in your income. Your subsidy will be adjusted to avoid receiving incorrect tax credits.

 

Find someone you trust

Applying for tax subsidies can seem just as confusing as filing your taxes. Connect with an advisor you trust to guide you through the process.

FAQs

What if I don’t qualify for a Premium Tax Credit or CSR?

The IRS allows you to deduct certain medical expenses exceeding 10% of your Adjusted Gross Income (AGI).

Deductible medical expenses may include but aren’t limited to the following:

  • Payments to doctors, dentists, chiropractors, psychologists, etc.
  • Payments for inpatient hospital care.
  • Payments for insulin and for drugs that require a prescription.
  • Payments for false teeth, prescription glasses, contact lenses, hearing aids, crutches, wheelchairs, etc.
  • Payments for transportation primarily for and essential to medical care that qualify as medical expenses.

For a full list of deductible medical expenses, visit the IRS website.

Do I get paid for a Premium Tax Credit or CSR?

You can receive your credit upfront, when you file your income tax return, or receive a potion upfront and claim the rest when you file your taxes. Upfront payment usually goes directly to the insurance company. CSRs are always paid directly to your insurance company.

What's Next?