Starting October 1, Americans will begin to enroll in the Affordable Care Act with coverage becoming effective January 1, 2014. Sometime within the next few months, those who purchase insurance on the new exchanges will pay their first premium.

A number of states have recently released ‘menus’ of premiums within the individual insurance market for 2014 and, in many cases, they’ve provided comparisons to what people who purchase their own insurance are currently paying. Yet, the Kaiser Family Foundation, a private foundation focusing on health care issues, likens the new premiums to "sticker prices” as they are not the actual price people will pay for their plans.

Instead, purchasers of insurance on the new exchanges may pay less because they may become eligible for federal tax credits. In fact, just under half of people currently purchasing their own insurance may be eligible for a tax credit.

Who is eligible for a federal tax credit?

The level of subsidy varies based on personal characteristics. For instance, age, income, family size, and state of residence all factor into the equation. Generally speaking, subsidies (in the form of tax credits) will become available for people who have incomes anywhere from 100 percent to 400 percent of the poverty level (about $24,000 to $94,000 per year for a family of four in 2014).

The amount of the tax credit is based on a benchmark premium (different for each state). The tax credit will equal the benchmark premium minus what the individual is expected to pay based on his or her family income (a sliding scale from two percent to 9.5 percent of income). Kaiser Family Foundation furnishes the following example of a calculation for a 40-year-old individual who makes $30,000 a year:

  • Estimated benchmark premium for a 40-year-old = $3,857 per year (variable by state)
  • Person is responsible for paying 8.37 percent of his or her income = $2,512
  • Tax credit = $1,345

To estimate subsidy amounts for different individuals and families, the Kaiser Family Foundation provides a calculator, which you can use by going here.

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