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How Taxes and Subsidies Affect Your Health Insurance

Smiling person with short hair wearing a light blue button-up shirt against a plain background.
Written by:
Aaron Garcia

Key Takeaways

  • Premium tax credits and cost-sharing reductions make health insurance more affordable for moderate- to lower-income households.
  • The U.S. government pays a portion of your out-of-pocket costs 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 (ACA) is healthcare reform to reduce the number of uninsured Americans by making coverage more affordable. Also known as The Patient Protection and Affordable Care Act, the ACA also 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 designed to keep them insured.

The potential value of these programs can’t be overstated. In 2020 for example, 87% of people who signed up for insurance through the ACA Marketplace during open enrollment qualified for premium tax credits that averaged $606 in monthly savings.

Do you know whether you qualify for these price breaks, or how to apply for them? If not, it could cost you.

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.

Can I bundle multiple benefits into one plan?

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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 modest incomes 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. You’ll also want to be aware of details like the Federal Poverty Level (more on that below).

What Are Cost-Sharing Reductions?

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 must earn 100%-250% of the Federal Poverty Level.

Have questions about your Medicare coverage?

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Am I Eligible for Premium Tax Credits and CSRs?

To be eligible for a CSR, 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 ACA 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.

Start your Medicare PlanFit CheckUp today.

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FAQs

The IRS allows you to deduct certain medical expenses exceeding 7.5% 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.
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.

Sources

This website is operated by GoHealth, LLC., a licensed health insurance company. The website and its contents are for informational and educational purposes; helping people understand Medicare in a simple way. The purpose of this website is the solicitation of insurance. Contact will be made by a licensed insurance agent/producer or insurance company. Medicare Supplement insurance plans are not connected with or endorsed by the U.S. government or the federal Medicare program. Our mission is to help every American get better health insurance and save money.

Any information we provide is limited to those plans we do offer in your area. Please contact Medicare.gov or 1-800-MEDICARE to get information on all of your options.