Premium Assistance Tax Credit

What you need to know during open enrollment and throughout the year

  • Premium assistance tax credits were the subject of a recent Supreme Court ruling. On June 25, 2015, the Supreme Court decided that individuals in all states are eligible to receive the premium assistance tax credit to subsidize the cost of monthly health insurance premiums. The New York Times succinctly summarizes the issue: "The question in the case, King v. Burwell, No. 14-114, was what to make of a phrase in the law that seems to say the subsidies are available only to people buying insurance on 'an exchange established by the state.'" The Guardian is live-blogging the court's decision and reaction to the decision.
  • Bottom line: the Supreme Court's decision means that there is no change in the eligibility or administration of the premium assistance tax credits.

An Overview of the Premium Assistance Tax Credit

The premium assistance tax credit can help pay for part of your health insurance premiums.

You may qualify for the tax credit if you don't have access to minimum essential coverage through a government or employer-sponsored health plan, your income falls within the eligibility guidelines, and you purchase your health insurance through a health insurance exchange.

Having health insurance is important from a tax perspective. You are responsible for making sure that you, your spouse, and any dependents you plan to claim on your 2014 and 2015 tax return have health insurance. Otherwise, you will be held responsible for paying the shared responsibility penalty.

What is the Premium Assistance Tax Credit?

  • The premium assistance tax credit helps people pay health insurance premiums. 
  • The premium assistance tax credit can be paid out in advance. The IRS sends money directly to the insurance company, and they apply the credit to your bill. This reduces the amount you have to pay out of your own pocket for monthly premiums.
  • Alternatively, you can have the premium assistance tax credit paid out in full when you file your tax return.  The IRS would then send you the tax credit money along with your tax refund.
  • The amount of the premium tax credit varies depending on the cost of insurance, where you live, and the income of everyone in your household. Larger tax credits go to lower income individuals, and the amount of the credit gets smaller as income increases.
  • You can only get premium assistance if you purchase insurance through a health insurance exchange. Health insurance purchased through an employer's group plan or bought directly from the insurance company won't qualify for the tax credit. There are four additional eligibility criteria.
  • If you experience a change in financial circumstances, updating your information with the exchange will help ensure that your premium assistance is more accurately calculated.

You can only get the premium tax credit if you purchase health insurance through a health insurance exchange. The exchanges have an open enrollment period. You can get health insurance coverage for the full year of 2015 only during the open enrollment period.

  • Open enrollment begins November 15, 2014, for health insurance coverage effective as of January 1, 2015. Open enrollment continues through February 15, 2015.
  • December 15, 2014, is the last day to enroll if you want health insurance coverage to begin on January 1, 2015.

What to Do Before Open Enrollment:

  • Gather your documents.
  • Figure out who in your family needs health insurance for 2015.
  • Estimate your household income for 2015.
  • Figure out if you might be eligible for the premium assistance tax credit.
  • Figure out if you are eligible for an exemption.
  • Figure out what type of health insurance you need
  • Decide whether to get premium assistance in advance throughout the year or at the end when you file your tax return.
  • Seek help from professionals

What to Do Before Filing Your Tax Return:

  • Your insurance company (companies) will send you a 1095 form to report your insurance coverage for 2014.
  • Store any 1095 forms with the rest of your tax documents. You'll need to give this to your tax preparer.
  • Figure out who gets to claim dependents for 2014. And for 2015.

What to Do Throughout the Year

  • Report any changes in your finances or family size to the health insurance exchange.

What to Do Before and During the Open Enrollment Period

1. Figure out who in your family needs insurance

Look at all the people who will be on your tax return next year: yourself, your spouse, your dependents.

Are these people covered by health insurance? If not, are they eligible for an exemption? If not, then you are required to make sure all these people are insured. If any of them need insurance, you can purchase individual health insurance through a health insurance exchange. If you do purchase insurance through an exchange, there's a possibility you might be eligible for a tax credit to help pay for some of the monthly premiums. You are responsible for paying a penalty for any family members who are not covered by health insurance.

2. Gather Your Documents

"Get records together," says Will Wallace, an enrolled agent and navigator in Nebraska. Organizing documents does double-duty; it "will help with open enrollment and for tax season," Wallace mentioned. Specifically, Wallace recommends that people gather the following documents before applying for health insurance during open enrollment:

  • Previous tax return,
  • Current paystubs, 
  • Insurance cards
  • A list of medications
  • Names and addresses of the doctors you want to use
  • Any special medical issues you have
  • Social Security cards for everyone on the health plan

Why these specific documents?

The previous tax return (for 2013) and current paystubs (for 2014) are used to estimate your income for 2015.

A list of medications, doctors and medical issues can help you decide on which health plans provide the coverage you need. "Some health plans classify medications differently, some have a tier structure," for brand name drugs, Wallace mentioned. By having a list of medications, you can evaluate how much of your medication expense a health plan will cover. Similarly, you can check to see if your doctors are within your health plan's network of providers. "Some will cover special medical issues such as diabetes or asthma," says Wallace, in addition to the coverage they are required to offer.

"Both for healthcare and taxes, if the name and Social Security number don't match, the application or return is rejected," notes Wallace. Bringing Social Security cards for everyone who will be on the policy will help ensure that the health insurance application gets accepted.

3. Seek Help from a Professional

"I highly recommend they go to [a] navigator or certified application counselor," says Will Wallace, who is a navigator himself. Some of the questions asked on the health insurance application "can be confusing," Wallace says. He said that navigators and certified application counselors go through training on health insurance and how the exchange works. "We don't sell insurance," Wallace said, "We cannot steer clients to a specific company or plan. We're just impartial [and] help clients work through the application process."

4. Estimate Your Income for 2015

"I think the accuracy of income estimates for credit calculation is the absolute best thing to do to help themselves," says James Mahoney, an enrolled agent in Ohio.  The more accurate an estimate of your 2015 income, the more accurately the health insurance exchange can calculate the amount of premium tax credits you are eligible for in advance. The way the system is set up, the health insurance exchange verifies income from your 2013 tax return. But the actual amount of the credit depends on what your income will be for 2015 – which could be more or less than what your income was two years ago. If too many tax credits are paid out in advance, the taxpayer (not the insurance company) is responsible for paying back some or all of the overpayment to the IRS. The better job you can do to estimate your income for 2015, the greater the likelihood that you will minimize any overpayments.

5. Check out the Suped-Up Silver Plans

Taxpayers who have household income "between 100% and 250% [of the federal poverty line are] eligible for the cost-sharing reduction," notes Will Wallace. This is basically a supped-up silver plan, and the cost-sharing reduction "helps with coinsurance and copayments."

For taxpayers with income in this range, silver plans might be more affordable and offer less out-of-pocket expenses compared to higher-tiered gold and platinum plans. The amount of the cost-sharing reduction also depends on household income.

  • For more information, see: How the Cost-Sharing Health Insurance Subsidy Works.

What to Do Before/During Tax Time

Save any 1095 forms. You'll need them to prepare your taxes.

You may receive Form 1095-A, Form 1095-B or Form 1095-C in the early part of 2015. Save these 1095 forms with the rest of your tax documents. Give them to your tax preparer.  Just like other tax documents, the 1095 forms are required to be mailed out by the end of January 2015 to report health insurance coverage for the year 2014.

Talk to Your Ex about the Dependents

You'll need to figure out who gets to claim the kids in 2014 and in 2015. That's because the parent who claims the child as a dependent is responsible for showing the IRS that the child is insured. "People who have custody of children where an ex-spouse is required to provide medical coverage, need to get a copy of the 1095 from the ex-spouse," advises James Mahoney. This will be a "problem for some people," Mahoney explained, "where there is a non-cooperating atmosphere between the individuals." The person who claims the dependent will be subject to a penalty if they cannot prove that the child was covered by health insurance for the whole year. The person claiming the dependent cannot waive the penalty based on not knowing whether the child was insured or not. So the best thing to do, to protect yourself, is to get proof of insurance from the other parent.

What to Do Throughout the Year

Update your information with the health insurance exchange throughout the year.

"Something that's really important," says Will Wallace, "Report any changes to the marketplace that affect income or family size."

The amount of the premium assistance tax credit that the IRS sends to your insurance company in advance is based on an estimate of your income and family size for the year. The downside? If too much is paid out in advance, you (not the insurance company) are responsible for paying back the excess amount to the IRS. "No matter what we do it won't be exactly right," Wallace says, "At least they can adjust it along the way."

"Changes you should report to the Marketplace," the IRS advises, "include:

  • Birth or adoption
  • Marriage or divorce
  • Moving to another address
  • Changes in household income
  • Incarceration or release from incarceration
  • Gaining or losing health care coverage or eligibility
  • Other changes affecting income and household size."

Publication 5152, (pdf)