If you buy health insurance from healthcare.gov or a state-run ACA exchange, whether you qualify for a premium tax credit is determined by your income relative to the Federal Poverty Level (FPL). You don’t qualify for a premium tax credit if your income is above 400% of FPL. That’s a hard cutoff. See Stay Off the ACA Premium Subsidy Cliff.
If you do qualify for a premium tax credit, how much credit you qualify is determined by a sliding scale set each year by the government. The government says based on your income, you are supposed to pay this percentage of your income toward a second lowest-cost Silver plan in your area. After you pay that amount, the government will take care of the rest. If you pick a less expensive policy than the second lowest-cost Silver plan, you keep 100% of the savings. If you pick a more expensive policy than the second lowest-cost Silver plan, you pay 100% of the difference.
That sliding scale is called the Applicable Percentage Table. The numbers are adjusted each year. In 2020, people with income between 300% and 400% of Federal Poverty Level are expected to pay 9.78% of their income toward a second lowest-cost Silver plan in their area. That number is going to change to 9.83% for 2021.
Here are the numbers for different income levels in 2020 and 2021:
|< 133% FPL||2.06%||2.07%|
|< 150% FPL||3.09% – 4.12%||3.10% – 4.14%|
|< 200% FPL||4.12% – 6.49%||4.14% – 6.52%|
|< 250% FPL||6.49% – 8.29%||6.52% – 8.33%|
|< 300% FPL||8.29% – 9.78%||8.33% – 9.83%|
|<= 400% FPL||9.78%||9.83%|
As you see from the table above, the changes between 2020 and 2021 are quite minimal. The percentage of income the government expects you to pay toward a second lowest-cost Silver plan depends on your income relative to the Federal Poverty Level. To calculate where your income falls relative to the Federal Poverty Line, please see Federal Poverty Levels (FPL) For Affordable Care Act (ACA).
If your income is low, they expect you to pay a low percentage of your low income. As your income goes higher, they expect you to pay a higher percentage of your higher income. The higher percentage applies not just to the additional income but to your entire income. A higher income times a higher percentage is much more than a lower income times a lower percentage. For example, a household of two in the lower 48 states is expected to pay 7.82% of their income when their 2020 income is $40,000. If they increase their income to $50,000, they are expected to pay 9.66% of their income. The increase of their expected contribution toward ACA health insurance, and the corresponding decrease in their premium tax credit will be:
$50,000 * 9.66% – $40,000 * 7.82% = $1,702
This represents 17% of the $10,000 increase in their income. For a married couple, the effect of paying 17% of the additional income toward ACA health insurance is greater than the effect of paying 12% toward federal income tax. Normally it’s a good idea to consider Roth conversion or harvesting tax gains in the 12% tax bracket, but those moves become much less attractive when you receive a premium subsidy for ACA health insurance. For a helpful tool that can calculate this effect, please see Tax Calculator With ACA Health Insurance Subsidy.
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