While the American Health Care Act is still several steps from becoming law, Republicans have begun defining certain aspects of the healthcare reform bill, including the nature of the tax credits the AHCA will offer. The party has also indicated that the AHCA will permit increased access to health savings accounts, which can offer significant tax benefits.

The premium tax credit

Under the Affordable Care Act (also known as Obamacare), anyone who purchases health insurance through a Health Insurance Marketplace may be eligible for a need-based tax credit. A taxpayer who does not have access to an employer-sponsored health insurance plan or can't afford their employer's plan, and who is at or below 400% of the federal poverty line based on family size, may be eligible for the premium tax credit. This credit is refundable (meaning that it can benefit even taxpayers who don't owe any federal income taxes), and it varies based on the taxpayer's income (lower income means a higher credit), cost of available insurance plans, family size, and location.

Because health insurance premiums are nearly always higher for older enrollees, taxpayers become eligible for higher premium tax credits as they age.

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AHCA tax credits

The current version of the AHCA also includes a premium tax credit, but it has a different way of calculating the credit. The new premium tax credit is a flat amount based solely on a taxpayer's age and income level. Taxpayers with an annual income of up to $75,000 (for single filers) or $150,000 (for joint filers) are eligible for the full credit for their age tier. Above that income threshold, the tax credit begins to phase out until finally reaching zero at an income level that varies based on the taxpayer's age. For example, for a single filer in his 20s, the credit would phase out completely at an annual income of $95,000.

AHCA credit tiers

The credit amounts for eligible taxpayers are as follows: http://kff.org/health-reform/issue-brief/how-affordable-care-act-repeal-and-replace-plans-might-shift-health-insurance-tax-credits/

Taxpayer's Age

Full Credit Amount

Up to 29

$2,000

30-39

$2,500

40-49

$3,000

50-59

$3,500

60 and up

$4,000

How the AHCA tax credit compares to the premium tax credit

An analysis by the Kaiser Family Foundation shows that at lower income levels, the current premium tax credit would be significantly higher than the new AHCA credit, especially for older taxpayers. As income level approaches 400% of the federal poverty line -- which is approximately $50,000 per year for a one-person household -- the credit amounts begin to equalize, while the current tax credit drops to $0 above that level.

AHCA and health savings accounts

Health savings accounts (HSAs) already offer significant tax advantages to account holders. Republicans want to expand those tax advantages by expanding health savings accounts and how they can be used. Under the proposed healthcare reform act, health savings accounts will change in several ways:

  • Annual HSA contribution limits will increase to match the health insurance plan's annual deductible and out-of-pocket limits. Since HSA-eligible plans can have annual out-of-pocket limits of up to $6,550 for individuals and $13,100 for families (as of 2018), this would be a potentially major increase in contribution limits.

  • Taxpayers will be able to use money from their HSAs to pay for over-the-counter medications, not just prescriptions.

  • Taxpayers will be able to pay for qualified medical expenses incurred up to 60 days before the HSA is opened.

  • Spouses will be able to make catch-up contributions to a single HSA.

These changes will not only make HSAs more useful for paying medical expenses, but also increase the accounts' tax advantages. For example, contributions made to an HSA are already tax-deductible, but current annual contribution limits are $3,400 a year for individuals and $6,750 for families (account holders over age 55 can make additional catch-up contributions). The AHCA would nearly double these contribution limits, resulting in a much larger potential deduction.

What to expect next

The AHCA still has a long way to go before it becomes law. It's possible that these tax breaks will change in the course of the legislative process. However, as they stand now, seniors and low-income taxpayers should be braced for significant decreases in their upcoming premium tax credits. The AHCA tax changes are slated to take effect in 2020, so you have some time to plan for these changes to your tax bill.

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