Connecting EITC filers to the Affordable Care Act premium tax credit

Every year during tax time, millions of workers and their families gain access to the earned income tax credit (EITC), one of the nation’s most effective anti-poverty programs. This tax season, millions of EITC filers may also be navigating a new tax benefit for the first time: the Affordable Care Act premium tax credit.

The EITC is a refundable federal tax credit that encourages work and increases the take-home pay of lower-income workers and their families.¹ Last year 1 in 5 taxpayers (almost 28 million filers) claimed the EITC, for an average credit of roughly $2,400.² The EITC keeps more than 6 million people out of poverty each year, including more than 3 million children, and, together with the refundable portion of the child tax credit, reduces the nation’s poverty rate by almost 3 percentage points.³ In addition, half of all states and the District of Columbia have enacted state versions of the EITC that further boost the impact of the federal credit.⁴

Because of the importance of these credits, the IRS and national and local organizations across the country conduct outreach campaigns each year to make sure low-income taxpayers know about the EITC and other tax-related benefits they qualify for, and to help these taxpayers connect to free tax preparation services so they can take home the full value of such provisions.⁵ This tax season, for the first time, many of these filers may also be eligible to claim a tax credit for health insurance premiums. Created as part of the Affordable Care Act (ACA), the premium tax credit helps offset the cost of health insurance for lower- and moderate-income taxpayers who purchased coverage through state or federal health insurance marketplaces.

Filers who are likely to qualify for both the EITC and the premium credit include workers with low to moderate earned income (between one and four times the poverty line) who do not have access to affordable employer-based health coverage and who are not eligible for Medicaid under their state’s rules.

To better understand the number and types of workers and families that are likely to be eligible for the EITC and ACA credits, and to inform outreach efforts moving forward, we used our MetroTax model to estimate the overlap between these two populations.⁶ We find that:

1. More than 4.2 million households, or 7.5 million people, are likely to qualify for both the EITC and premium credit.

2. Almost 70 percent of EITC-eligible filers who also likely qualify for the premium credit live in states that depend on the federal health insurance marketplace.

3. The nation’s 100 largest metro areas are home to almost two-thirds of taxpayers likely to benefit from both the EITC and premium credit.

What is the premium tax credit?

Individuals who purchase health insurance through a state or federal marketplace may be eligible for the premium credit if their income falls between 100 and 400 percent of the federal poverty line. (Those eligible for other public or private insurance options—like Medicaid, the Children’s Health Insurance Program, or an employer-provided plan that meets affordability and coverage guidelines—typically do not qualify for the premium credit, nor do undocumented immigrants or those who are incarcerated.)

The amount of the premium credit people qualify for varies depending on their family income and the cost of health insurance offered in the local marketplace. The ACA uses the second-lowest-cost plan in the “silver” category of plans offered in the local marketplace as a reference point.⁷ Based on that benchmark, the law sets a maximum share of income a person is expected to pay for coverage, ranging from 2 percent of income for people at the poverty line to 9.5 percent for those at four times the poverty line. If the premium a person pays exceeds the maximum share of income he or she is expected to pay, that person can claim a premium credit equal to the difference between the income cap and the price of the benchmark plan.⁸

Those who claim the premium credit can choose to reduce their monthly premiums by having some or all of the estimated credit advanced to their insurance provider, or they can receive the tax credit at tax time when they file their return. In either case, they must fill out the appropriate forms as part of their federal tax return to reflect their claim.

We use our MetroTax model to estimate the number of tax units and individuals likely to be eligible for the premium credit based on the above criteria.⁹ Note that not all individuals who may be considered eligible for this credit necessarily purchased coverage in a marketplace in 2014. As participation in state and federal marketplaces continues to increase, these estimates represent the pool of taxpayers who could benefit from this provision of the ACA.

More than 4.2 million households, or 7.5 million people, are likely to qualify for both the EITC and premium tax credit

Nationally, we estimate that, among EITC-eligible tax units, 4.2 million are also potentially eligible to claim the premium tax credit. Within these tax units, 7.5 million people qualify for both the EITC and the ACA credits.

The typical adjusted gross income among these taxpayers is $20,245. Eligible households tend to be headed by workers in the accommodation and food services, retail, construction, and health care industries. The most common occupations among these workers are construction, sales, office and administrative support, and food preparation and related services. The filers in this group are more likely to be white (46 percent versus 32 percent Latino and 14 percent black), and to have a high school diploma or less (58 percent versus 30 percent with some college education or an associate’s degree, and 12 percent with a bachelor’s degree or higher).

Almost 70 percent of EITC-eligible filers who likely qualify for the premium credit live in states that depend on the federal health insurance marketplace

The largest numbers of filers likely to be eligible for both the EITC and premium credit live in California, Texas, Florida, New York, Georgia, and North Carolina (Table 1). Each of these states has at least 150,000 tax units (250,000 people) eligible for both credits.

Of these states, only California and New York operate state exchanges; the others in the top 10 depend on the federal marketplace. (Note that Illinois operates a state-partnership marketplace, meaning the state may provide in-person assistance to consumers, but customers enroll in coverage through the federal marketplace and the federal Department of Health and Human Services is responsible for all marketplace functions.) All together, almost 70 percent of EITC-eligible filers likely to also benefit from the premium credit live in a state that uses the federal marketplace.¹⁰ (For detailed estimates, see Appendix A.)

The nation’s 100 largest metro areas are home to almost two-thirds of taxpayers likely to benefit from both the EITC and premium tax credit

In every major metro area, thousands of EITC-eligible households are also likely to be eligible for the premium credit. Together, these regions account for almost two-thirds of all taxpayers and individuals eligible for both the EITC and the premium credit.

The metro areas that have the largest number of filers eligible to claim both credits include a number of major population centers in the top eligible states (Table 2). Led by Los Angeles and New York, where more than 200,000 tax filers qualify for both credits, all of these regions have at least 50,000 EITC-eligible tax units that also likely qualify for the premium credit.

In terms of shares, as opposed to numbers, of EITC-eligible filers who are also potentially eligible for the premium credit, without exception the metro areas that rank among the 20 lowest, including Boston, Minneapolis-St. Paul, and Akron, Ohio, all fall in states that have opted to expand Medicaid through the ACA. In contrast, the 20 regions with the highest shares (with the exception of Los Angeles) all fall in states that have declined to expand Medicaid, including six Texas metro areas (Austin, Dallas, El Paso, Houston, San Antonio, and McAllen) and eight in Florida (Cape Coral, Deltona, Lakeland, Miami, North Port, Orlando, Palm Bay, and Tampa). (For detailed estimates, see Appendix B.)

Conclusion

Millions of taxpayers across the country stand to benefit from both the EITC and the premium tax credit this tax season. Navigating the eligibility and filing requirements for these credits can be complicated, as evidenced by the IRS’ recommendation that filers claiming the premium credit consider using tax preparation software or professional assistance.¹¹ As outreach campaigns and free tax assistance programs work to educate potentially eligible filers about these credits and connect them to benefits, these state and metro area estimates can help inform their efforts.

The authors thank Cynthia Cox, Anthony Damico, and Larry Levitt at the Kaiser Family Foundation for their invaluable assistance in adapting their methodology for modeling eligibility for ACA premium tax credits to our MetroTax model.

1. Research has found the EITC to have a range of positive effects, from increasing employment among single mothers to improving education outcomes and future earnings for children. See Chuck Marr, Chye-Ching Huang, and Arloc Sherman, “The EITC Promotes Work, Encourages Children’s Success at School, Research Finds” (Washington: Center on Budget and Policy Priorities, 2014).
2. For more information on state EITCs, see www.eitc.irs.gov/EITC-Central/eitcstats.
3. Elizabeth Kneebone and Natalie Holmes, “Fighting Poverty at Tax Time Through the EITC,” available at brookings-edu-2023.go-vip.net/blogs/the-avenue/posts/2014/12/16-poverty-tax-eitc-kneebone-holmes.
4. See www.taxcreditsforworkingfamilies.org/state-resources.
5. See www.eitc.irs.gov/Partner-Toolkit/main or www.eitcoutreach.org for example outreach materials, and www.irs.treasury.gov/freetaxprep for a directory of free tax assistance locations.
6. This analysis uses American Community Survey microdata to model the characteristics of the ACA- and EITC-eligible populations. Reporting differences in data sources may affect comparability to other estimates, like those produced by the Kaiser Family Foundation, which use Current Population Survey microdata.
7. For a description of the different categories of plans offered through the marketplace, see www.healthcare.gov/choose-a-plan.
8. Visit the Kaiser Family Foundation’s premium subsidy calculator for examples and additional explanations of how tax credits are calculated: www.kff.org/interactive/subsidy-calculator.
9. Our MetroTax model uses American Community Survey microdata to estimate tax units and characteristics such as filing status, adjusted gross income, liability, number of dependents, and eligibility for tax credits like the EITC. For more detail on this model, see our technical appendix. Note that the appendix refers to tax year 2005, but that we used 2013 American Community Survey data and tax year 2013 tax law as a baseline for this analysis. To model eligibility for the premium tax credit, we adapted the Kaiser Family Foundation methodology, and we used its estimates for the second-lowest-cost silver plans in each county as well as the share of employees offered coverage through their employer who declined that coverage.
10. This figure does not include the three states—Nevada, New Mexico, and Oregon—that operate state-based marketplaces that are federally supported. In these states, customers enroll in coverage through healthcare.gov, but the state performs all marketplace functions. This figure does include state-partnership marketplaces, where the state may offer assistance to consumers but the federal Department of Health and Human Services carries out all marketplace functions. For more information on marketplace types, see www.kff.org/health-reform/state-indicator/state-health-insurance-marketplace-types.
11. See www.irs.gov/Affordable-Care-Act/Individuals-and-Families/The-Premium-Tax-Credit.