The Democrats latest stimulus bill includes a $36 billion temporary expansion of tax credits for Obamacare, making it easier for middle-class earners to qualify for subsidies on their monthly premiums in 2021 and 2022. The legislation also boosts the amount of these subsidies, and does away with a rule that can lead to a nasty surprise during tax season. Here’s what you need to know.
Wait, there are monthly healthcare subsidies?
Yes, indeed. Millions of Americans already don’t take advantage of the Premium Tax Credit (PTC) applicable to Affordable Healthcare Act plans purchased through the Health Insurance Marketplace. The PTC is a significant monthly discount—$512 on average—that allows you to qualify for better coverage.
Currently, qualification is based on whether your income falls between 100% and 400% of the poverty line (just over $51,000 for an individual in 2020), your age, household size, and where you live. The credit is on a sliding scale that pays out more if you make less, and it’s refundable, which means you will get a cash refund if your credit exceeds your taxable liability. More details can be found here.
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So what’s changed?
The subsidies will increase at every income level, thus reducing the percentage of your income needed to qualify for a given plan (the healthcare news site KFF has more details here). To get a ballpark idea of how the rates have increased, check out this chart that compares rates for 2020 and 2021. Most individuals in this chart would save roughly $50-$100 a month, although the subsidy can vary based on income, age, or location.
The other big change eliminates the “subsidy cliff,” which describes how your PTC subsidy gets abruptly cut off once your income exceeds 400% of the poverty level. Since tax filers can choose to receive the credit monthly, as an advance based on their estimated yearly income, many get caught off guard when their actual income creeps up throughout the year and disqualifies them from the PTC. In that case, a borrower only learns at tax time that they owe back all those monthly credits to the IRS—a total that can add up to thousands of dollars.
The fix eliminates the abrupt 400% cut-off by capping the percentage of income that can be paid for healthcare premiums at 8.5% for those that exceed the threshold, while still allowing them to qualify. This fix is meant to prevent scenarios in which households were paying as much as half of their annual income on health insurance premiums.
Per MedPage Today, the bill also includes a “repayment holiday” applicable to the 2020 tax year. Again, this gets rid of the subsidy cliff as people earning more than originally projected won’t have to repay the extra tax credits.
Lastly, a special rule allows for any person who received at least one week’s worth of unemployment insurance to disregard any income above 138% of the poverty level when calculating eligibility for tax credits.
How to claim the PTC
To see if you qualify for the healthcare credit, you can start with this flow chart. If you qualify, you must file IRS Form 8962 with your Form 1040. The one caveat is that these changes are part of a bill that has not yet been signed into law, although further changes seem unlikely now that the bill has passed through the Senate (Democrats expect to pass the bill on Tuesday). In the meantime, you have an opportunity to adjust your plan, as a special enrollment period is open right now.
