Health Plan Tax Credit Eligibility Proposed

WASHINGTON (CN) - The Internal Revenue Service plans to offer a tax credit to taxpayers to pay for health insurance purchased through state health insurance exchanges created under the Patient Protection and Affordable Care Act.

The exchanges are supposed to be up and running by 2014, when qualified taxpayers will be able to claim a refundable tax credit to subsidize purchasing private insurance.

The Congressional Budget Office estimates that once the act is fully phased in, the average tax credit will be over $5,000 per year. It is limited to the difference between the premium for so-called benchmark plans, which provide basic coverage, and the amount of a taxpayer's "expected contribution" which is capped at 9.5 percent of household income.

The amount of the credit is tied to the amount of the insurance premium so that those who, because of old age or pre-existing conditions, pay more for their coverage will receive a larger credit.

A tax credit differs from a tax deduction in that a credit actually lowers the tax due dollar-for-dollar where as a deduction reduces the taxable income the IRS considers when determining tax liability. This credit is refundable, so individuals who owe little or no income tax will receive a refund from the government.

Under the proposed regulations, individuals with incomes between 100 percent and 400 percent of the federal poverty level -$22,350 to $89,400 for a family of four in 2011 - will be eligible for the credit.

Individuals eligible for other coverage such as Medicare, Medicaid, veteran's benefits, affordable employee-sponsored coverage or military insurance plans will not be eligible for the credit.

Since the point of the credit is to make insurance affordable to help taxpayers meet the individual coverage mandates of the Affordable Care Act, the proposed credit can be advanced directly to an insurance company on an individual's behalf.

Repayment of advances by taxpayers is capped based on their income relative to the federal poverty level and no repayment would be required if the taxpayer's income fell below 100 percent of the poverty level.

The IRS is interested in public comments on details of eligibility for, and calculation of, the size of the credit when a family's tax filing status changes during the course of a tax year through marriage or divorce, or a change in the number of dependents in a household.

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