Despite its name, the Inflation Reduction Act’s main goals are really to address climate change and lower healthcare costs. One of the ways healthcare costs would be reduced under the bill is by extending enhancements to the premium tax credit that were put in place for 2021 and 2022. If the bill gets through Congress and becomes law, not only will more people qualify for the premium tax credit for three more years, but many of them will also get a larger credit during that time.
Premium Tax Credit Eligibility Expanded
The premium tax credit was originally enacted as part of the Affordable Care Act (a.k.a., Obamacare) to help lower- and middle-income Americans pay for health insurance purchased through the healthcare marketplace (e.g., HealthCare.gov or a state exchange). By subsidizing the cost of health insurance with the credit, more people can afford insurance and get it at a lower price. And, with advance payments of the credit directly to the insurer, consumers have less out-of-pocket costs.
However, there are a number of requirements you must satisfy to be eligible for the credit. For instance, you normally can’t claim the credit unless your household income is between 100% and 400% of the federal poverty level for your family’s size. You also can’t be claimed as a dependent on someone else’s tax return. And, if you’re married, you generally must file a joint return to claim the credit. (There are other requirements, too.)
With regard to the household income requirement, the American Rescue Plan Act (ARPA), which was passed last March in response to the COVID-19 pandemic, changed that requirement for the 2021 and 2022 tax years. Instead of capping the federal poverty level at 400%, people with income levels above that threshold are allowed to claim the premium tax credit for those two years (assuming they satisfy all the other eligibility requirements).
The Inflation Reduction Act would extend the temporary exception to the 400% cap through the 2025 tax year. That would permit people with household incomes over that amount three more years to claim the premium tax credit (again, assuming they otherwise qualify). According to the Centers for Medicare & Medicaid Services, 1.1 million Americans are eligible for the 2022 credit who wouldn’t have qualified if the 400% cap had not been lifted, which gives you a sense of how many people would be affected for the next three years if the Inflation Reduction Act is passed.
Caution: If you purchase insurance through the healthcare marketplace, you can choose to have an estimated credit amount paid in advance to the insurance company so that less money comes out of your own pocket to pay monthly premiums. When you submit your tax return for the year (which you’re …….