The Inflation Reduction Act is designed to address climate change and lower healthcare costs. The new law reduces healthcare costs by extending enhancements to the premium tax credit that were put in place for 2021 and 2022. Now, 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The premium tax credit was originally enacted as part of the Affordable Care Act (a.k.a., Obamacare) to help lower- and middle-income Americans pay for health insurance purchased through the healthcare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.)
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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 extends the temporary exception to the 400% cap through the 2025 tax year. That permits 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 will be affected for the next three years now that the Inflation Reduction Act has been signed into law.
Larger Premium Tax Credit Amounts
Calculating the amount of your premium tax credit can be complicated. Generally, the credit amount equals the health insurance premium charged for the second cheapest "silver plan" available to you, minus your expected contribution amount, which is based on your household income. This approach permits people with a lower income to get a larger credit.
For 2021 and 2022, the ARPA increased the credit amount for eligible taxpayers by reducing the percentage of annual household income they're required to contribute toward their health insurance premium. For earlier years, the percentages ranged from 2% to 9.5% of household income (the higher your income, the higher your percentage). For 2021 and 2022, the contribution percentages go from 0% to 8.5%.
The Inflation Reduction Act allows people to use the lower contribution percentages for three more years. The Kaiser Family Foundation says this will keep premium costs relatively flat for 2023. On the other hand, allowing the reduced contribution amounts to expire at the end of 2022 would have resulted in an increase of out-of-pocket health insurance premiums for roughly 13 million people. If the lower percentages had not been in effect for 2022, the KFF estimates that premium payments would have been 53% higher this year in the 33 states using HealthCare.gov to sign up residents for Obamacare.
What's Not in the Inflation Reduction Act
There were some other changes made to the premium tax credit by COVID-relief laws. For instance, advance payments that exceeded the credit amount on your 2020 tax return didn't have to be repaid. For 2021, if you received (or were approved to receive) unemployment compensation at any point during the year, your household income was treated as being 133% or less of the federal poverty level for your family size. These types of changes aren't included in the Inflation Reduction Act.
Congress also considered several other enhancements to the premium tax credit during last year's negotiations for the failed Build Back Better bill. One provision that was tossed around would have excluded Social Security benefit lump-sum payments for people with disabilities, widow(er)s, new retirees, and others from the calculation of household income for purposes the credit. Other ideas were presented that would have let people with a household income below 100% of the federal poverty level claim the credit and adjusted the payback rules for people with household incomes below 200% of the federal poverty level. None of these changes, or others from the Build Back Better bill that aren't already mentioned, made it into the Inflation Reduction Act, either.
Learn More About the Inflation Reduction Act
The Inflation Reduction Act was signed into law on August 16, 2022. For more information from Kiplinger about this climate, healthcare and tax legislation, see:
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