Subsidy Towards Health Insurance Premiums:
Healthcare costs can often feel like a heavy burden, but thankfully, there are ways to make quality health insurance more affordable. One such avenue is through health insurance subsidies, which can significantly lower your monthly premiums and out-of-pocket expenses. In this article, we’ll explore two crucial types of subsidies: Cost Sharing Reduction (CSR) on Silver plans and the Advance Premium Tax Credit (APTC), and understand the consequences of estimating your income incorrectly.
Head over to Health Insurance page, and enter your zip code to find out if you’re eligible for a subsidy.
What is Cost Sharing Reduction (CSR)?
Cost Sharing Reduction (CSR) is a subsidy designed to help individuals and families with modest incomes access better healthcare coverage by reducing their out-of-pocket costs. This subsidy is only available for Silver-tier plans purchased through the Health Insurance Marketplace. Silver plans are categorized by their actuarial value, which represents the percentage of total average costs that a health plan will cover.
CSR takes this affordability a step further. If you qualify for CSR, your plan’s actuarial value increases, meaning the insurance company covers a larger share of your medical expenses. This results in lower deductibles, copayments, and coinsurance, making essential medical services more accessible and affordable.
Example:
Let’s say you’re considering a Silver plan without CSR. It has an actuarial value of 70%, meaning the insurance company covers 70% of the average costs, while you cover the remaining 30%. With CSR, the actuarial value could increase to 94%, significantly reducing your out-of-pocket expenses for doctor visits, prescriptions, and other medical services.
Advance Premium Tax Credit (APTC): Easing Monthly Premium Costs
The Advance Premium Tax Credit (APTC) is another subsidy available to individuals and families with lower to middle incomes. Unlike CSR, which focuses on reducing out-of-pocket costs, APTC aims to make your monthly insurance premiums more affordable. APTC can be applied to any metal tier plan (Bronze, Silver, Gold, or Platinum) available on the Health Insurance Marketplace.
The amount of APTC you receive is determined by your estimated annual income, family size, and the cost of insurance in your area. This credit is applied directly to your monthly premium, reducing the amount you need to pay out of your own pocket.
Example of APTC:
Let’s say the monthly premium for a Silver plan is $400. Based on your income and family size, you qualify for an APTC that covers $300 of the premium. This means you would only need to pay $100 per month for your insurance coverage.
Estimating Income: Pitfalls and Consequences
Accurate income estimation is crucial when applying for these subsidies. If you overestimate your income, you might receive smaller subsidies than you’re eligible for, leading to higher monthly premiums and potentially missing out on cost-saving opportunities. However, if you underestimate your income, you might receive larger subsidies than you’re entitled to, which could lead to owing money when you file your tax return.
Consequences of Overestimating Income:
If you overestimate your income and receive smaller subsidies than you’re eligible for, you’ll likely have higher monthly premium costs. This could strain your budget unnecessarily.
Example:
Meet Sarah, a freelance graphic designer who estimates her annual income to be $60,000 when applying for health insurance through the Marketplace. Based on this income estimate, she qualifies for a moderate Advance Premium Tax Credit (APTC) that reduces her monthly premium costs. However, due to a slower year in her business, her actual income turns out to be $45,000.
Consequence: Since Sarah overestimated her income, she received a smaller APTC than she was eligible for throughout the year. As a result, her monthly premiums were higher than they needed to be, causing her to pay more out of pocket than necessary.
Consequences of Underestimating Income:
If you underestimate your income and receive larger subsidies than you’re entitled to, you might have to repay the excess subsidy when you file your tax return. This could result in unexpected financial obligations.
Example:
Consider John, a part-time retail worker, who estimates his annual income to be $20,000 when applying for health insurance through the Marketplace. Based on this lower income, he qualifies for a substantial APTC that significantly reduces his monthly premium costs. Unexpectedly, John secures a higher-paying job and ends up earning $35,000 for the year.
Consequence: Since John underestimated his income, he received a larger APTC than he was entitled to throughout the year. Now, when he files his tax return, he’ll have to repay the excess subsidy he received. This could lead to a financial burden he wasn’t prepared for.
These examples highlight the importance of accurately estimating your income when applying for health insurance subsidies. It’s advisable to review your income projections, consider potential changes, and adjust your subsidy application accordingly to avoid unexpected financial consequences.
Household Income Calculation: What is included as an income?
To get savings on Marketplace health insurance, you need to estimate your income to include in calculator for subsidy and this is called marketplace income calculation. This is based on a special number called modified adjusted gross income (MAGI), which is not the same as your total income on your tax return. Here are some important points to remember:
- Your MAGI is the total of the following for each member of your household who’s required to file a tax return:
- Your adjusted gross income (AGI) on your federal tax return. This is your total (or “gross”) income for the tax year, minus certain adjustments you’re allowed to take. Adjustments include deductions for conventional IRA contributions, student loan interest, and more. (Adjusted gross income appears on IRS Form 1040, line 11.)
- Excluded foreign income. This is any income you earn outside the U.S. that is exempt from U.S. tax. (You can find this amount on Form 2555, line 45.)
- Nontaxable Social Security benefits (including tier 1 railroad retirement benefits). This is any Social Security income that is not subject to federal income tax. (You can find this amount on Form SSA-1099, box 5.)
- Tax-exempt interest. This is any interest income that is not taxable by the federal government. (You can find this amount on Form 1099-INT, box 8.)
- MAGI does not include Supplemental Security Income (SSI). SSI is a benefit program for people with low income and limited resources who are 65 or older, blind, or disabled.
- When you fill out a Marketplace application, you’ll need to estimate what your household income is likely to be for the year you want coverage, not last year’s income. You must make your best estimate so you qualify for the right amount of savings.
- For most people, a household consists of the tax filer, their spouse if they have one, and their tax dependents, including those who don’t need coverage to calculate your subsidy.
The chart below shows common types of income and whether they count as part of MAGI:
- If your income is hard to predict, base your estimate on your past experience, recent trends, what you know about possible changes at your workplace, and similar information.
- Update your Marketplace application as soon as possible when your income or household members change during the year. Learn how to update your information during the year.
| Income type | Is this income? | Notes |
| Capital gains | Yes | |
| Excluded (untaxed) foreign income | Yes | |
| Federal Taxable Wages (from your job) | Yes | Use “federal taxable wages” or “gross income” minus deductions for child care, health insurance, and retirement plans. |
| Investment income | Yes | Include expected interest and dividends earned on investments, including tax-exempt interest. |
| Rental and royalty income | Yes | Use net rental and royalty income. |
| Retirement or pension Income | Yes | Include most IRA and 401k withdrawals. Don’t include qualified distributions from a designated Roth account as income. |
| Self-employment income | Yes | Use “net self-employment income” minus business expenses. Enter farming or fishing income as either “farming or fishing” or “self-employment”, but not both. |
| Social Security | Yes | Include both taxable and non-taxable Social Security income. Enter the full amount before any deductions. |
| Social Security Disability Income (SSDI) | Yes | Do not include Supplemental Security Income (SSI). |
| Tips | Yes | |
| Unemployment compensation | Yes | Include all unemployment compensation from your state. |
| Child support | No | |
| Child Tax Credit checks or deposits (from the IRS) | No | |
| Gifts | No | |
| Proceeds from loans (like student loans, home equity loans, or bank loans) | No | |
| Supplemental Security Income (SSI) | No | But do include Social Security Disability Income (SSDI). |
| Veterans’ disability payments | No | |
| Worker’s Compensation | No | |
| Alimony | Depends | Include as income for divorces and separations finalized before January 1, 2023. Don’t include as income for divorces and separations finalized on or after January 1, 2023. |
