Rescue Plan’s Premium Tax Credit Improvements Help Now and at Next Tax Filing

People who buy coverage in the health insurance marketplaces, including at HealthCare.gov, will get a bigger tax credit to reduce their premiums in 2021 and 2022 under the American Rescue Plan, and some will see savings on their 2020 tax returns due May 17.

The Rescue Plan provides immediate tax relief to people who would otherwise need to repay some or all of their premium tax credit because they misjudged their 2020 income. Most enrollees take the credit in advance to defray upfront premium costs. The amount of the advance credit is based on their projected income for the year. If their actual income ends up lower than they had predicted, they can claim a bigger credit when filing their taxes, but if their income is higher than they predicted, they owe money back.

Of course, many people’s incomes in 2020 changed unexpectedly due to the COVID-19 pandemic and economic downturn. Some ended up with higher income than they originally projected, such as a person who predicted their income after losing their job in the spring but who found a new job in the fall. For 2020 only, the Rescue Plan protects people in this situation from having to repay premium tax credits.

Another Rescue Plan provision increases premium tax credits across the board in 2021 and 2022 for people who buy coverage in the marketplace. HealthCare.gov enrollees can either claim the bigger credit up front by updating their application (in which case it will lower their monthly premiums) or claim it when they file their 2021 tax return next spring (in which case it will reduce the taxes they owe). A Rescue Plan provision that HealthCare.gov will implement this summer will give anyone receiving unemployment benefits in 2021 the most generous credits, which are usually available only to people with low incomes. (Some state-based marketplaces make it even easier to claim the credit up front or have different implementation timelines, but all enrollees benefit from the Rescue Plan’s savings.) For example:

• A single 30-year-old making $30,000 can claim a credit of roughly $3,800 under the Rescue Plan, compared to $2,500 previously.
• A family of four (two 40-year-olds and 5- and 10-year-old children) making $50,000 can claim a credit of roughly $16,500, compared to $14,300 previously.
• A single 40-year-old making $40,000 who received unemployment benefits at some point in 2021 will be able to claim a credit of roughly $5,400, compared to $1,500 previously.

The Rescue Plan also extends premium tax credits to people whose income exceeds the previous eligibility limit of 400 percent of the poverty line but who face burdensome premiums. The previous limit created a drastic cliff for some people when they filed their taxes: if their income turned out to be even $1 over the 400 percent threshold, they would have to repay their entire credit for the year. Older people were the likeliest to have to repay large sums, since they have the highest premiums and thus the biggest credits. The Rescue Plan eliminated that cliff by capping the amount that anyone, regardless of their income, should pay for benchmark coverage at 8.5 percent of their income. These examples, for 2021, show why eliminating the cliff is so important:

• A 64-year-old who projects an income of $51,000 — 400 percent of the poverty line — receives a $8,368 premium tax credit. Under the cliff, if their income was $500 over their projection they would have to repay the entire credit, but with the cliff eliminated, they only owe $47.
• A 60-year-old couple who project an income of $69,000 — 400 percent of poverty — receive a $17,110 premium tax credit. Under the cliff, if their income was $500 over their projection they would have to repay the entire credit, but with the cliff eliminated, they only owe $42.

Right now, these premium tax credit enhancements are only for 2021 and 2022, but in the American Families Plan, President Biden has recommended making them permanent. That step, and other affordability improvements, would make major progress toward universal coverage.