How Does the Premium Tax Credit for Health Insurance Work?
https://www.goodrx.com/insurance/aca/premium-tax-credit-for-health-insurance
Key takeaways:
Health Insurance 101: What Is a Premium Tax Credit?
The Affordable Care Act (ACA) paved the way for tax subsidies such as the premium tax credit (PTC). This refundable credit helps individuals and families save money on health insurance.
Not everyone will qualify for this credit, though. Those eligible must enroll in ACA coverage through a state health insurance exchange or HealthCare.gov marketplace to claim the premium tax credit.
How does the premium tax credit work?
If you qualify, the premium tax credit can reduce your tax bill or increase the size of your tax refund.
Generally, you have to wait until you file your tax returns to secure any tax benefits that you are eligible for. That’s not the case with the premium tax credit. Eligible individuals can receive premium tax credit benefits during the year.
The marketplace will send advance payments of the premium tax credit (APTC) to your health insurance company. This will reduce your out-of-pocket insurance costs every month by making your premium much lower than it would have been.
What factors affect how much premium tax credit you can claim?
The premium tax credit makes health insurance more accessible and affordable. However, every individual will not receive the same premium tax credit. The amount of your credit may also vary from year to year. Several factors influence your credit amount, including:
A higher premium tax credit can lead to more savings — as long as you keep up with income reporting requirements. When you apply for ACA marketplace coverage, you will have a chance to forecast your income. The information you report will determine your premium tax credit.
Who qualifies for the premium tax credit?
As stated earlier, you must have health insurance through the marketplace to qualify for the premium tax credit. A family member can also be enrolled. You can not claim the premium tax credit with plans purchased elsewhere than the marketplace.
Here are some other qualifications that you must meet:
Even if you qualify to receive the premium tax credit, your credit amount may change due to swings in income. It’s important to keep up with income requirements and report increases in income. This will help you determine the amount of premium tax credit you are actually eligible for.
Under the ACA, household incomes had to be between 100% and 400% of the federal poverty level (based on household size). This was the income range to qualify for the premium tax credit. The lower the household income, the higher the premium tax credit.
For 2021 and 2022, the American Rescue Plan (ARP) expanded access to the premium tax credit. Families that exceeded the 400% federal-poverty-level cap did not have to pay more than 8.5% of their total household income toward the cost of a benchmark plan. For 2023, the amount is capped at 9.12%. The premium tax credit will help cover marketplace insurance premiums that exceed the 9.12% cap, regardless of income.
When do you receive your tax credit?
There are two ways to receive your premium tax credit. One option is to delay the benefits of your premium tax credit until tax time. When you file your tax returns, you’ll receive the total amount of the credit you qualify for. Since the premium tax credit is a refundable credit, you may be eligible for a tax refund at the end of the year.
You can also choose to receive advance payments of the premium tax credit (APTC) during the year. The government will make payments to the insurance company every month on your behalf. This will lower your out-of-pocket costs for insurance premiums. However, you’ll be responsible for paying the remaining amount of the insurance bill that is not covered by the advance payments.
Will you still owe money during tax time even after you’ve claimed tax credits?
There are some items to consider if you receive advance payments of the premium tax credit. Your projected income will determine your credit amount. If your income changes during the year, this could pose problems during tax time.
Let’s say you pick up a side hustle as an Uber driver or freelance writer. If your income is inconsistent from month to month, you may earn more money than you expected to receive. You would have to repay a portion or all your premium tax credit back at the end of the year.
It’s also important to report any life changes. This could impact the amount of premium tax credits you are eligible for. Here are a few life events that you should report immediately:
You should report any of these changes as soon as possible to avoid an unexpected tax bill. If you fail to act immediately, you may have to repay excess premium tax credit you received during the year.
Does the premium tax credit work with any type of insurance?
The premium tax credit is available to individuals who have ACA health insurance. You can buy it through the HealthCare.gov website or state marketplaces.
Coverage purchased outside of the marketplace does not count. If you have affordable health insurance through your job, you cannot claim the credit.
You also don’t qualify for the premium tax credit if you have the following insurance:
What tax forms do you need to claim a premium tax credit?
You will need Form 1095-A, Health Insurance Marketplace Statement and Form 8962, Premium Tax Credit (PTC) to claim the premium tax credit.
You should receive Form 1095-A, Health Insurance Marketplace Statement by January 31. This form is usually sent in the mail by the health insurance marketplace. If you have trouble finding your 1095-A, you can sign in to your HealthCare.gov account.
Your 1095-A includes the following information:
Review Form 1095-A for accuracy. This form will help you reconcile premiums paid with premium tax credits used. If you received too much, you will have to pay back any excess premium subsidy you received.
Use Form 1095-A to complete Form 8962, Premium Tax Credit (PTC). You should submit this form with your tax return to claim the premium tax credit. You are also required to complete this form if you or a family member received APTC during the year. Download Form 8962 from the IRS website for the tax filing year you are claiming the premium tax credit for.
The bottom line
If you qualify for the premium tax credit, make sure you understand how it works. An ACA subsidy like the premium tax credit can help you save money on monthly insurance. It can also help you boost your tax refund or lower the amount you owe. You can claim the premium tax credit on your tax return or receive APTC during the year. Pay attention to reporting requirements to ensure you can maximize your benefits. You don’t want to pay back your premium tax credit because you failed to report any income or life changes on time.
