When you apply for health insurance coverage in the Marketplace, you may be eligible for a premium tax credit. The premium tax credits are based on your estimated household income for the following year. Additionally, if you do qualify, the amount of your tax credit will also be determined by your estimated income for the next year.
The premium tax credit will save you money on your health insurance because the amount of the tax credit can be sent directly to the insurance company, so your monthly premium will be based on the lower amount. This will lower the payments you have to make each month. The larger your tax credit, the lower the monthly payments will be.
However, it is important to understand that when your income changes, so does your tax credit. Household or income changes need to be reported to the Marketplace as soon as possible, so the appropriate adjustments can be made in a timely manner. Doing so will save you money.
There are two primary changes that you need to report immediately to the Marketplace.
- If your income increases or your household gets smaller. Either of these changes may reduce your premium tax credit. Not making the appropriate adjustments as soon as possible may result in you taking more credits than you qualify for, which may cost you more money in the future. Reporting these changes will allow you to reduce the advance you take on your tax credit each month, which you put toward the insurance premiums.
- If your income goes down or your household increases. It is also essential to report a decrease in income or an increase in household size because those changes may increase your premium tax credit. An increased tax credit can be used to reduce your monthly premiums, which will lower your overall expenses for health care coverage.
At the end of the year, you may have to do what is called reconciling. Your premium tax credit is based on your estimated income. If, at the end of the year, your actual income is different than your estimated income and the difference is higher, you may end up having to pay back a portion of the money you received through the tax credit. If it turns out that the tax credit you were given was more than it was supposed to be, you will have to pay back the difference.
The need to reconcile also highlights the importance of accurately estimating your future income. This is particularly true if you are self-employed or have a variable income based on commission or tips. It is better to estimate high even though it may cost you more in the short-term because estimating low will result in a potentially large bill at the end of the year.
If, at the end of the year, the difference between your estimated and actual taxes turns out to be lower, your tax credit may be higher than you thought it would be. The remaining tax credit amount that was not applied to your premiums throughout the year will then be applied to your taxes when you file. This may mean owing less or getting more back depending on your income and taxes.