If you buy health insurance from healthcare.gov or a state-run ACA exchange, up through the year 2020, there was a hard cutoff for whether you qualify for a premium tax credit. You didn’t qualify for a premium tax credit if your income was above 400% of the Federal Poverty Level (FPL). The American Rescue Plan removed the hard cutoff at 400% of FPL in 2021 and 2022. See ACA Premium Subsidy Cliff Turns Into a Slope.
Now, how much credit you qualify for is determined by a sliding scale. The government says that 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, up to the point you get the policy for free. 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 Percentages Table. The American Rescue Plan also lowered the applicable percentages significantly in 2021 and 2022 from previous years. Unless these provisions are extended, the 400% FPL subsidy cliff and the higher applicable percentages will return in 2023.
Here are the applicable percentages for different income levels in 2022 and 2023:
|< 133% FPL||0%||1.92%|
|< 150% FPL||0%||2.88% – 3.84%|
|< 200% FPL||0% – 2%||3.84% – 6.05%|
|< 250% FPL||2% – 4%||6.05% – 7.73%|
|< 300% FPL||4% – 6%||7.73% – 9.12%|
|<= 400% FPL||6% – 8.5%||9.12%|
|> 400% FPL||8.5%||not eligible|
As you see from the table above, the changes between 2022 and 2023 are quite substantial. 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).
For example, people with income between 250% and 300% of the Federal Poverty Level are expected to pay between 7.73% and 9.12% of their income toward a second lowest-cost Silver plan in their area in 2023. That’s much higher than the sliding scale between 4% and 6% of income in 2022.
Congress is considering a new bill — the Inflation Reduction Act of 2022 — that will extend the 2022 applicable percentages for another three years through 2025. If this bill passes, it will reduce the amount many people pay toward their ACA health insurance.
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 3.18% of their income when their 2022 income is $40,000. If they increase their income to $50,000, they are expected to pay 5.48% 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 * 5.48% – $40,000 * 3.18% = $1,468
This represents about 15% of the $10,000 increase in their income. For a married couple, the effect of paying 15% of the additional income toward ACA health insurance is greater than the effect of paying 12% toward their federal income tax. It makes the effective marginal tax rate on the additional $10,000 income 27%, not 12%.
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 the 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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