How Is the ACA Tax Credit Calculated?
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]:
- Platinum plans cover 90 percent of the average overall cost of your essential health benefits.
- Gold plans cover 80 percent.
- Silver plans cover 70 percent.
- Bronze plans cover 60 percent.
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.