If you don't have access to an employer-sponsored health insurance policy, the Premium Tax Credit can make private health insurance far more affordable. However, if you don't provide the right information when you apply for your insurance plan, you might end up with a huge tax bill at the end of the year. Here's how you can avoid this calamity and get the most from your Premium Tax Credit.
What is the Premium Tax Credit?
The Premium Tax Credit is part of the Affordable Care Act, and it pays money to taxpayers buying private health insurance on one of the ACA Marketplaces.
You're eligible for the Premium Tax Credit if you:
- meet the income requirements -- your household income must be between 100% and 400% of the federal poverty line for your family size;
- file a tax return for the year using any filing status except married filing separately;
- can't be claimed as a dependent on someone else's return;
- don't have access to an employer-sponsored health insurance plan; and
- pay the insurance premiums that aren't covered by this credit.
The credit is capped at the amount of the premium for the second-lowest cost silver-level plan available through your state's Marketplace. However, it can never be larger than the premium for whichever plan you end up signing up for. The Premium Tax Credit's amount is also based on your household income; the higher your income, the less you're eligible to receive.
Two options for receiving the Premium Tax Credit
If you qualify for the Premium Tax Credit, you can choose either to receive the credit in advance (in which case it will be applied to your health insurance premiums) or claim it when you file your tax return for the year. If you can't afford your insurance premiums, then advance payments are the best option for you. However, if you can wait for the money, claiming this credit with your tax return is much safer. That's because advance payments are based on your estimated income for the year, and if it turns out that you underestimated how much money you'd have coming in for that year, you'll have to repay the excess credit you received -- which could result in a monster tax bill. If you wait until you file your tax return, you'll have your actual income totals for the year, so you won't risk guessing wrong.
Staying out of trouble with the Premium Tax Credit
If you can't wait for your credit and opt for advance payments, it's important to be careful about the income estimates you provide. While it may be tempting to lowball your household income for the year, this could result in a tax bill that you can't pay (which can be the start of far more financial trouble than you might believe possible). Instead, try to be somewhat optimistic when estimating your income for the year to come. You may end up with a slightly smaller advance credit as a result, but in that case, the credit you missed out on will be applied to your taxes when you file your tax return.
Another way to make health insurance affordable
Private health insurance tends to be staggeringly expensive, and premiums are likely to keep climbing. One way to minimize your insurance premiums is to pick up a high-deductible health insurance plan (HDHP) and pair it with a health savings account (HSA). HDHPs tend to have significantly lower premiums than the average health insurance plan, and contributing to your HSA will get you a nice tax deduction. Plus, you can use the money in the HSA to pay qualified medical expenses.
Sadly, you can't use your HSA to pay for insurance premiums themselves except in special circumstances (for example, you can use HSA money to pay COBRA premiums after you lose your job). But what you can do is use the HSA money to pay regular healthcare expenses like co-pays and prescriptions, and then apply the money you saved on those expenses to your insurance premiums. It's a bit of a roundabout way to reduce your health insurance costs, but hey, it's better than nothing.