Are Health Insurance Subsidies Based on This Year’s Income?

Healthcare Writer

Updated on: August 26th, 2020

Reviewed by Frank Lalli

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Nearly 10 million people are eligible for generous subsidies towards comprehensive Affordable Care Act (ACA or Obamacare) health insurance, but they never apply. Don’t be one of those people.

For 2020, you qualify for tax credits to lower your monthly premiums if you are single and earn between $12,490 to $49,960 or you are in a family of three earning between $21,330 to $85,320. In addition, you qualify for cost-sharing subsidies if you are single making up to $31,225 or in a family of three earning up to $53,325. 

In all, more than 85% of ACA members receive tax credits alone that cover around 85% of their premiums, or slightly over $500 a month.

Your health insurance subsidy is based on your income for the current year, so you’ll have to estimate it. In doing that, don’t rely solely on last year’s total. Things change. 

Since you can never be sure what your total income will be at the end of the year, be realistic about your prospects to earn more or less than last year. Use your last year’s tax return as a basis, and specifically, look at income numbers after deductions on lines 37 and 21 on your 1040 or line 4 of your 1040EZ. If you are part of a household, you must include income from your spouse and all your dependents, even if they don’t live with you. 

Know up front that if you are among the seven million who don’t file an income tax return, you don’t qualify for any subsidies. 

What Is a Health Insurance Premium Subsidy?

The potentially large discount on monthly ACA premiums based on your income is called a premium subsidy, or premium tax credit.

Premiums are the monthly payments you make to stay enrolled in an insurance plan. You have to ante up to stay insured.

By contrast, ACA subsidies are discounts paid from the federal government to your health insurer to lower your out-of-pocket maximums for deductibles, coinsurance, and copayments. They are reserved for members making no more than 250% of the national poverty level — for example, under $31,225 for individuals, $53,325 for families of three. 

Where Can I See If I Qualify for Subsidies?

You can easily calculate what sort of subsidies you might qualify for at HealthCare.com. The calculator requires your zip code, household size, and income. (You may read this as annual household income, modified adjusted gross income, or yearly income – they’re all very similar.)

Your subsidy is a single amount that applies across all plans, even though different plans will charge different monthly premiums. 

Once you input all your information, your premium subsidy, if any, will pop up. It is calculated automatically, and you don’t have to do anything further. When you sign up for a specific insurance plan, the subsidy will be sent monthly to your insurance company for the entire year, unless you drop the plan. 

What if My Estimated Income Is Wrong?

If it turns out that you underestimated your income, you’ll have to pay back some or all of the subsidies you got based on your low estimate. This payback will occur when you file your taxes the following year. 

The government calls this a “clawback”. But depending on your income, you may not have to pay back all the money. For example, if you earn between 100% to 199% of the federal poverty level, your maximum payback is $300 for an individual and $600 for a family. If you earn between 300% and 399% of poverty, you will have to pay back up to $1,250 for an individual and $2,500 for a family. Those who end up making 400% or higher than poverty will need to return the entire overpayment. You would make these repayments to the federal government through your tax return. 

On the other hand, if you end up overestimating your income, you’ll receive the subsidies you deserve through your tax return either by lowering what you owe in income tax or as a refund.

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