Low-Income Households and ACA Tax Policies: Benefit from Tax Credits but Paying the Penalty

By Dania Palanker and Rachel Schwab

The Affordable Care Act (ACA) lives up to its name through three primary means: expanding Medicaid, prohibiting discrimination and medical underwriting based on pre-existing conditions, and offering refundable tax credits to lower the cost of coverage. To balance these measures and to ensure the stability of the market, the ACA employs a “stick” in addition to those cost-reducing carrots: a financial penalty for those who don’t maintain health coverage. The two tax measures, known as the premium tax credit (PTC) and individual shared responsibility payments (ISRP), are two very important ingredients in the ACA alphabet soup.

We are well into the third tax year of ACA premium tax credits and the individual shared responsibility requirement. The IRS recently released a report on 2014 income tax filings that includes data on the first year of the PTC and ISRP. We analyzed this data to look at the tax credits and payments by income brackets and found that millions of low-income tax filers benefited from the PTC in 2014 – but millions of low-income tax filers also paid the ISRP, indicating that a very vulnerable population still lacks coverage.

The IRS data are broken down by adjusted gross income (AGI), leading to a number of limitations for researchers. Eligibility for the premium tax credits is based on modified adjusted gross income (MAGI) rather than (AGI). MAGI is often different than AGI because it does not include certain income losses or exclusions. Therefore, some tax filers receiving PTCs appear to have incomes below the minimum income levels for PTC. In addition, the report does not provide data on household size or any demographic data related to the PTC or ISRP.

(If you want a thorough breakdown of the tax provisions of the ACA before you wade into the wonk, you can read our previous blog post with common questions and answers.)

The Premium Tax Credit

The PTC makes health insurance more affordable by subsidizing the cost of health insurance premiums purchased through the health insurance marketplaces. While the advanced premium tax credit (APTC) reduces the monthly premium through a payment made directly to the insurer, tax filers reconcile their actual income with projected income when filing taxes to determine the final PTC amount. The IRS report provides data on both the APTC, the actual PTC and the difference. We analyzed the final PTC received.

The premium tax credit provided billions of dollars to households with low incomes:

  • Over 3.1 million tax filers received about $11.2 billion for the 2014 tax year.
  • Over half of tax filers receiving the PTC had AGI between $10,000 and $30,000.
  • The average PTC was $3,459.

The lowest income tax filers received the highest average premium tax credits:

  • Tax filers with an AGI between $0 and under $5,000 received an average PTC of $4,388.
  • About 107,000 tax filers with no AGI received an average PTC of $5,517.

How can somebody without income receive a tax credit? The PTC is a refundable tax credit, which means that tax filers receive a refund in the amount of the tax credit that is greater than the amount of taxes owed. For example, if a family has a $500 tax liability but receives $3,000 in refundable tax credits, the family will receive a $2,500 refund. In the case of the PTC, the total amount may not be received in a refund because advance payments were likely made directly to the insurer. Because the PTC is based on MAGI, it is possible that a tax filer has MAGI within eligibility for the PTC, but has additional income losses that are subtracted in determining AGI.

These numbers suggest the PTC is working to provide financial assistance to low-income households to make health coverage affordable. They also show the importance of the PTC being refundable because the highest PTC go to people with little or no AGI; these individuals may have low or no income tax liability.

The Individual Shared Responsibility Payment

The ISRP is meant to work in conjunction with the employer shared responsibility requirement, the market reforms, and the affordability provisions of the ACA to incentivize insurance coverage, particularly among healthy individuals who might not otherwise enroll. The ISRP began for the 2014 tax year. Any individual that went without health insurance for three months or longer had to pay the ISRP, unless the individual received an exemption.

Millions of tax filers had one or more household members go without coverage for three or more months in 2014 and therefore had to pay the individual shared responsibility payment:

  • Over 8 million tax filers paid a total of $1.7 billion in the 2014 tax year.
  • Over half of tax filers paying the ISRP had AGI of $40,000 or more.
  • Just over 30 percent of tax filers paying the ISRP had AGI between $10,000 and $30,000.

In general, the average ISRP was higher for tax filers with higher incomes:

  • Tax filers with AGI under $20,000 had an average ISRP of $96.82
  • In comparison, tax filers with AGI over $50,000 had an average ISRP of $555.58.

Although more tax filers paid the penalty than received financial assistance, the total ISRP payments, as well as the average, were significantly lower than the corresponding amounts provided through the PTC. This suggests the PTC has a much larger financial impact on individual households. However, millions of low-income tax filers are paying a fine, so there is a financial impact on some of our most vulnerable families. As the payment amount increases in 2015 and 2016, this financial impact on households will increase, but it is also possible more people will choose insurance over paying the penalty.

Looking Forward

The IRS report only provides information from 2014 tax returns. We know the numbers will be different in both 2015 and 2016:

  • First, we know enrollment in the health insurance marketplaces increased in 2015 and 2016. We can therefore expect to see that more taxpayers received the PTC in 2015 and even more to claim the credit for 2016.
  • Second, the uninsured rate dropped to the lowest rate in recorded history in 2015. With uninsurance so low, we can expect that more people had minimum essential coverage in 2015 – and that means fewer people should have paid an ISRP for 2015.
  • Third, we can expect the average ISRP to have increased significantly for 2015 because the ISRP phases in over the first three years.

The maximum ISRP can be no higher than the average premium for a bronze plan available through the marketplaces. Premium data for 2017 marketplace plans is just now becoming available as marketplaces prepare for open enrollment. The IRS can assist with open enrollment efforts by ensuring that the maximum ISRP for 2017 is released and publicized before enrollment begins on November 1st.

With open enrollment around the corner and a new administration on the horizon, knowing more about who is receiving PTCs and paying the ISRP can help guide enrollment efforts – especially since an estimated 2.5 million people who may be eligible for the PTC are purchasing coverage outside the marketplaces.

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