How the Affordable Care Act Tax Credit Works

To be eligible for the premium tax credit, you have to meet certain criteria. To start off, your income must be between 100 percent and 400 percent of the federal poverty line. For a person filing individually in 2015 (for tax year 2014), this means between $11,670 and $46,680. For a family of four, it's between $23,850 and $95,400 [sources: CBPP, HSS]. (Income qualifications are higher for Alaska and Hawaii.) You must also be a U.S. citizen or a legal immigrant.

In most states, Medicaid covers you if you fall below the poverty line, so you wouldn't be eligible for coverage under the Affordable Care Act. Legal immigrants who live below the poverty line also qualify for Medicaid, but sometimes there's a five-year waiting period for coverage. Those who are on the wait list can apply for ACA marketplace insurance and the tax credit during that period.

There is one hitch with the income qualification guidelines. When the Supreme Court upheld the ACA in 2012, there was a provision for states to choose whether they'd like to expand Medicaid to include those who make up to 133 percent of the poverty line. Some states took this option, and some didn't. This means that if you live in a state that expanded Medicaid, you do qualify for ACA coverage (and thus the tax credit) only if you make between 133 percent and 400 percent of the poverty level (133 percent equals $15,521 for an individual and $31,720 for a family of four). If you make between 100 and 133 percent of the line, you must take the Medicaid option. If your state decided to keep Medicaid as-is, the minimum qualifying income for the tax credit remains at 100 percent of the poverty line [source: CBPP].

Employer insurance is also a factor. If your employer offers health insurance that is deemed "affordable and adequate," you cannot apply for ACA marketplace coverage and the tax credit. "Affordable" means that the annual premium does not add up to more than 9.5 percent of your yearly income. To be considered adequate, the employer health plan must offer coverage equal to that of a bronze plan on the ACA marketplace. (We'll explain the plan categories on the next page.) If the insurance offered by your employer fits the bill on both counts, you must sign up for that coverage instead of an ACA marketplace plan.

You also have to file your taxes as an individual or jointly with your spouse. If you're a legal dependent or are married but file separately, you don't qualify for the tax credit. There are provisions for victims of domestic abuse who are still married but are not filing jointly.

So, once you've figured out that you qualify, how do you go about actually getting that credit and picking a plan?

The amount of credit you receive is on a sliding scale based on your estimated income for the year, with those on the high end expected to contribute a higher percentage. A family of four making 400 percent of the poverty line in 2014 would have to pay 9.56 percent of their monthly income, or $760. A family living exactly on the poverty line would only be expected to pay 2 percent, or about $40 a month. For single people, your expected contribution after your credit would range from about $20 to $370, depending on income [source: Clark & Associates].

Once the percentage has been calculated, the program moves on to figure out the exact amount of your credit. The plans on the ACA exchanges fall into four categories, based on the percentage of costs they will pay [source: Healthcare.gov]:

The platinum plans offer the most coverage but have the highest premiums. The bronze plans are the least expensive but offer less coverage and more out-of-pocket costs. The amount you'll ultimately have to pay is based on the second-cheapest silver plan in your state that covers you or your entire family. This is called your benchmark plan. The cost of the benchmark plan minus your expected contribution is the amount of your credit.

While your credit amount is based on this benchmark plan, you do get to choose your own plan. You'll get the same amount of credit no matter what plan you pick. A platinum plan will have a higher premium than the benchmark plan, so the credit won't stretch quite as far. But if you go with a bronze plan, the premium might be equal to or lower than the amount of credit. It's possible that you could end up paying nothing.

However, you might find it makes more sense to use the credit toward a silver plan, which might mean you pay something out of pocket each month for premiums, but you come out ahead in terms of how much you pay for copayments and coinsurance. (In case you're wondering about making money by picking a really cheap plan, it's not going to happen: You can't get credit for more than the cost of a plan.)

If your income fluctuates over the course of the year, taking a partial credit could help if you don't want to owe money at the end of the year. Everything should come out in the wash at tax time – read on to find out how that works.

In a perfect world, everything will come out evenly when you file your taxes: You would have been exactly on the mark with the income estimate you gave at enrollment, and the credit due will equal the payments you received. But if the advance payments you received don't add up to the full credit you were due, you'll get a refund. If the reverse happens, you'll owe some money. And if your income doesn't end up being the same as the estimate you gave when you enrolled, the IRS will make the necessary adjustments.

But we all know things aren't always so easy when we're talking taxes. A lot can happen in the months between when you enroll and when the final assessment is made. New babies, new jobs, raises, pay cuts, interstate moves -- they'll all have an impact on your tax credit. This is why the government urges all enrollees to inform the marketplace of any life changes that happen over the course of the year. It's better to make small adjustments to your credit as you go than to get a possibly unwelcome surprise in April.

If it turns out that your income is higher than what you thought it would be -- or if there was another reason you received more credit than you were supposed to -- you will have to repay the IRS. But there is a cap on the amount you'll owe, based on your income not exceeding 400 percent of the poverty line. Individual taxpayers would pay $300 to $1,250, and a married couple would owe between $600 and $2,500 in 2014, based on where they fall on this scale [source: Kaiser Family Foundation]. But if they ended up making more than 400 percent of the poverty line, there is no cap and the full amount would have to be repaid.

And beware, potential tax evaders: If you don't file a tax return for the year you received the credit, you no longer qualify for further ACA tax credits.

For more information on the Affordable Care Act tax credit, take a look at the links on the next page.