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Taxes and the Federal Poverty Level Guidelines

Updated for Tax Year 2015


OVERVIEW

The federal government defines individuals and families as being in poverty if their household income falls below a certain level. The level varies based on household size and, to a lesser extent, location. Although many government programs base their eligibility requirements on federal poverty guidelines, taxes have a minor link to them.


What is the federal poverty level?

The federal government doesn't use the term "federal poverty level" in official contexts. It actually has two different ways of measuring poverty based on income:

  • The federal poverty threshold is used by the Census Bureau mainly for reporting demographic data. When the Census Bureau reports how many people live in poverty, for example, it's using the threshold.
  • The federal poverty guidelines are used for determining low-income assistance eligibility, such as food stamps or housing aid.

The federal poverty level and taxes

People living below the federal poverty level are often eligible for tax deductions and credits for low-income people. But with one exception: the specific income requirements for tax breaks are not tied to the same income thresholds as the poverty guidelines.

  • For example, in 2015, a single parent with one child would be considered in poverty with a family income of less than $15,930 using the federal poverty guidelines for the 48 contiguous state. The amounts are higher for Alaska and Hawaii.
  • But that parent would qualify for the Earned Income Credit — a tax break designed to help out lower-income workers — with income up to $38,511. The tax credit has a higher income threshold, which allows more people to claim it.

Premium Tax Credit is an exception

One tax break specifically tied to the federal poverty guidelines is the Premium Tax Credit. This is a tax break intended to help some people pay for health insurance under the Affordable Care Act (also called Obamacare). Generally, people can qualify for the credit if their income is more than 100% of the federal poverty guideline but less than 400% (1 to 4 times the federal poverty level).

For example, 2015 federal poverty guideline for a family of four is $24,250 in most of the U.S. Genreally, families can qualify for the Premium Tax Credit with an income of $24,250 to $97,000 ($24,250 X 4 = $97,000).

Tax effects of public assistance

Many major public assistance programs are tied to the poverty measures. Take food stamps, for example. In general, to qualify for the Supplemental Nutrition Assistance Program (the "official" name for food stamps), a family's total income usually can't be more than 130% of the federal poverty guideline, and its take-home pay can't be more than 100% of the guideline.

According to the IRS, income-based public assistance, such as food stamps, cash "welfare" benefits and housing aid, is not taxable. Unemployment benefits, however, are considered income replacement and generally are taxable.

How the guidelines are calculated

The federal Department of Health and Human Services is responsible for setting the federal poverty guidelines. Each guideline starts with a base amount for a one-person household and then adds an extra amount for each additional person in the home. For example, the 2015 guidelines are:

  • In the 48 contiguous states: $11,770 for the first person, plus $4,160 for each additional person in the household.
  • In Alaska: $14,720 for the first person, plus $5,200 for each additional person.
  • In Hawaii: $13,550 for the first person, plus $4,780 for each additional person.

So a family of five living in Kansas, would have a 2015 guideline of $28,410:

  • $11,770 for the first person
  • $4,160 x 4 = $16,640 for the next 4 people in the household
  • $11,770 + $16,640 = $28,410

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.


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