What is Premium Tax Credit? How Does It Work?

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The US tax law makes available to qualified individuals and families with money back tax credit to sponsor the purchase of qualified health plans. They include plans provided through the federal and state health benefit exchange.  

The premium tax credit is generally paid in advance to the insurer issuing the qualified plan as an advance payment PTC, or APTC.

In this article, we’ll define premium tax credit and also explain in clear detail how it works.

What Is Premium Tax Credit?

Also known as PTC, the premium tax credit is a refundable credit that enables qualified individuals and families to cover the premiums for their health insurance that they bought through the Health Insurance Marketplace. You can pay it in advance directly to the healthcare insurance company to counterbalance the cost of monthly health insurance premiums. 

In addition, the tax credit was introduced in the US in 2014 by the Internal Revenue Service (IRS) and the aim is to cover health insurance for 18 million lower and middle-income American households. For you to be eligible for the premium tax credit, you must meet certain conditions and file a tax return. 

Understanding the Premium Tax Credit (PTC)

Generally, the premium tax credit is paid in advance to the insurer that issues the eligible plan as an advance payment PTC or simply APTC. The insurer receives the APTC every month against premiums for plans that are offered through the health insurance marketplace. 

For some reason, some qualified individuals may choose to pay their premiums from their money and claim the PTC at the end of the tax year. It is an alternative to benefitting from an APTC. 

Whether it was an APTC that was paid to you or you claimed a PTC at the end of the year, you must file IRS Form 8962. 

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Is the Premium Tax Credit for Everyone?

The Premium Tax Credit can be applied for by anyone. However, married individuals who file a joint return, as well as single individuals who file their returns, are qualified for the Premium Tax Credit. This can only be possible as long as they and their insurance plans meet supplementary requirements. 

On the other hand, individuals who are listed as dependents on a return and married individuals filing separately are not eligible for the Premium Tax Credit. Yet, there are special exceptions offered to victims of domestic abuse or those abandoned by their spouse as well as those who fall under the category of married but are living apart under the head of household rules. 

Overall, for you to be eligible for the PTC, your household income must get to 100% of the federal poverty line for the size of your household. However, it should not exceed 400%. 

In addition, household income is defined as modified adjusted gross income (MAGI). The calculation is made by adding back nontaxable income (like tax-exempt interest), the amount exempted from income by citizens who live abroad, and the nontaxable fraction of Social Security benefits, to your adjustable gross income (AGI). 

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IRS Form 8962: Premium Tax Credit

 This form is used in the calculation of the amount of premium tax credit that you are qualified to receive if you paid a premium for health insurance bought through the Health Insurance Marketplace. When you claim your PTC, it could lead to the reduction of your tax liability for the year. 

Moreover, completing Form 8962 will tell you the amount of credit you are qualified to receive or whether you owe any money to the IRS as a result of receiving too much in APTC. 

Who is Eligible to File for IRS Form 8962 Premium Tax Credit?

If you bought the health insurance via the Affordable Care Act’s Health Insurance Marketplace, all you will need to do is to complete IRS Form 8962. However, if you have a valid health insurance cover at work or you purchased health insurance directly from an insurance company outside of the exchange, you do not require the form to complete your tax filing. 

Equally important, if you received a Form 1095-B from your insurance company or a Form 1095-C from your employer, you do not need to file for Form 8962.

How Does The Premium Tax Credit Work?

For certain, premium tax credit minimizes your premium for most Health Insurance Marketplace policies. The amount you might receive on your tax credit may, largely, depend on the health plans in your area. 

Likewise, the Marketplace will define the expected contribution that is required of you to pay concerning the premium for a mid-range (Silver) benchmark plan. Also, the expected contribution will increase on a downward scale, depending on your income for the coming year.

For instance, if your income is between the poverty level and 150% of the poverty level, the expected contribution that is expected of you to pay regarding the benchmark plan is $0. What is more, if your income hits 400% of the poverty level, what you are expected to pay concerning the benchmark is 8.5% of your income. 

Therefore, the variance between the premium for the benchmark plan and your expected contribution is the amount of your tax credit. You are not to pay more than the actual premium for the tax. The Marketplace will let you know what the dollar amount is. The amount can be used to pay for a Bronze, Silver, Gold, or Platinum plan that the Marketplace offers. Also, the credit cannot be used to pay for a Catastrophic plan. 

It is at the end of the year that you will need to claim your premium tax credits. Likewise, you can apply for an advanced premium tax credit, according to your estimated income for the following year. If you opt to receive an advanced premium credit, every month, the government will send 1/12 of the credit straight to your insurance company. However, you will be the one to service the rest of the premium.

It is equally important to note that once you apply for the premium tax credit for the period of the Open Enrollment, you may not certainly know what your income for the year covered will be. It, then, means that you will apply depending on the projection you made. Well ahead, the time you file your tax return, the Internal Revenue Service will make a comparison between your actual income and the amount of the premium tax credit you initially claimed.

If for any reason, you misjudged your income and claimed the premium tax credit in excess, it may mean that you will pay back some or all of the differences. In the same way, if you did not receive all of the premium tax credit that you are eligible for during the year, you have the right to claim the difference when you file your tax return. As a result, you should report any changes in your income during the year to the Marketplace. That will make it easier for your credit to be adjusted and you can sidestep any major refunds at the end of the year. 

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Advanced Premium Credits and Reconciliation

As noted above, premium tax credits are based on a household’s income in the tax year premium is paid. But the whole credits are calculated the coming year as the household files its income tax returns. Moreover, the Treasury is known to send advance payment of premium credits to the insurance company. As a result, the household only pays a minimized premium. The advance payment of credits is dependent on estimated income and is commonly from the previous tax return filed before enrolment in health insurance. 

Also, if actual income in the year of enrolment is not up to the projected income, families are offered further credit amount at the time of filing their returns. On the other hand, if actual income exceeds the projected income, families that outnumber the projected income, the family is expected to pay back part or all of the advanced credit.

For most lower-income filers, reconciliation payments will minimize tax funds instead of requiring additional payment. Reconciling tax credit will most likely present hardships for some families that are receiving advanced premium credit even though they do not have tax payments due. This is because several low-income households have grown to rely on tax refunds to solve their basic needs.

Frequently Asked Questions

Can I use the premium tax credit to minimize the cost of any Marketplace health plan?

You can apply the premium tax credit towards any Bronze, Silver, Gold, or Platinum plan that the Marketplace made an offer for. Still, you cannot apply premium tax credits to Catastrophic plans or stand-alone dental plans.

What is the Health Insurance Marketplace?

Also known as the Marketplace, the Health Insurance Marketplace is the place where information about private health insurance plans is shared. You will also purchase health insurance and gain help with premiums and out-of-pocket costs if you are qualified.

Who is eligible for the premium tax credit?

You are qualified for the premium tax credit if you: Have household income that falls within a certain range, Do not file a Married Filing Separately tax return, except you fall under the grouping of victims of domestic violence or spousal abandonment, Cannot claim it as a dependent.

What are the income limits? 

Your income will be at least 100% but should not exceed 400% of the federal poverty line for your family.

Who is a family member with regards to premium tax credit?

Your family is made up of yourself, your spouse, and every other individual you claim as dependents. That is to say, your family size is the number of individuals in your family.


Premium tax credit helps you and your family to cover the premiums for your health insurance which you purchased through Health Insurance Marketplace. We believe that through this article, you will know what to do to meet the conditions.


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