How Does the Premium Tax Credit Work?
The government uses a household income-based calculation to determine the amount of your health insurance premium tax credit. This means the amount of the PTC you qualify for depends on the estimated household income you enter on your Marketplace application and the cost of health coverage in your area. The health care tax credit helps reduce the amount you spend on your monthly health insurance premium.
Using the Premium Tax Credit to Lower Premium Costs
When you apply for Marketplace insurance, you will find out if you qualify for a PTC, including the estimated amount, which is then paid to the insurance provider you choose, reducing or eliminating your monthly premium. The amount of the tax credit is based on a household income scale, so those who have a lower income typically qualify for a larger PTC. Once the amount of your credit is determined, you can opt to use some or all of it as an Advance Premium Tax Credit, automatically reducing your monthly premium throughout the year, or claim it as a refund when you file your tax return the following year.
Reconciliation at Tax Filing
When you file your federal income tax return, you will reconcile the estimated amount of PTC applied to your monthly premium in advance, with the actual credit you are eligible for based on your final yearly income. If your income was higher than initially estimated, you may need to repay the excess health tax credit received. Alternately, if your income was lower than initially estimated, you may be eligible for an additional tax credit.
Changes in Family Size or Income Levels During the Year
If there are changes to your family size, eligible dependents, or income levels throughout your plan year, it can impact your qualification for the Health Insurance Tax Credit and the amount you receive. It’s important to note the requirements to be eligible for the tax credit could change annually. You should report any changes in family size or household income to the Marketplace as soon as possible to ensure you receive the correct tax credit.
Below reflects what generally happens in such situations:
- Changes in Family Size: If your family size changes during the year, such as due to marriage, divorce, birth, or adoption, it may affect the amount of the tax credit you are eligible for. For example, adding a family member may increase your credit, while removing a family member may decrease it.
- Changes in Income: If your household income changes during the year, it may impact your eligibility for the tax credit. The PTC is based on your estimated annual income at the time of enrollment in a Marketplace plan. However, if your income is actually higher or lower than your initial estimate, it can affect the final amount of credit you receive.
- Changes in or Loss of Insurance Coverage: If you experience a qualifying life event resulting in a change or loss of health coverage, you may be eligible for a Special Enrollment Period, giving you the option to enroll in a new health plan outside of the annual Open Enrollment period.
Reporting Changes to the Marketplace
It is important to report any changes in family size or household income promptly to the Health Insurance Marketplace. This allows them to adjust your PTC eligibility accordingly. Failing to report changes can result in overpayment or underpayment of the PTC, which you will have to reconcile when you file your annual tax return.
Who is Eligible for the Health Coverage Tax Credit?
Eligibility depends on your income level and household size. To be eligible to receive the health coverage tax credit, you must meet certain criteria, including:
- Income: Your household income must fall within a certain range, typically between 100% and 400% of the federal poverty level (FPL) for your family size. The Office of the Assistant Secretary for Planning and Evaluation (ASPE) outlines the current poverty guidelines.
- Citizenship and residency: You must be a U.S. citizen or a lawfully present individual living in the United States.
- Employer-sponsored plan affordability: If you have access to employer-sponsored coverage for your family but must contribute more than a certain percentage of household income to the monthly premium, your family may be eligible for health tax credits through the Marketplace as part of the ACA Family Glitch fix.
- Not eligible for other coverage: You generally cannot be eligible for other qualifying health coverage, such as employer-sponsored insurance, Medicare, or Medicaid.
It's important to note the specifics of the PTC may vary based on individual circumstances, changes in laws, and updates to regulations. It's always recommended to consult official government sources or a tax professional for the most up-to-date information and guidance about the health coverage tax credit, as well as other health insurance subsidies.
How to Apply for the Premium Tax Credit
When you enroll in a health insurance plan through the Marketplace, you’ll have the option of applying for the tax credit without having to immediately pay for coverage. The Marketplace will decide if and what type of financial help you qualify for, including the PTC. If eligible, the Marketplace will provide the necessary forms for you to complete to receive the tax credit.
What Tax Forms Do You Need to Claim a Health Insurance Tax Credit?
Multiple tax forms apply to health care tax credits, including the following:
IRS Form 1095-A is a tax form used in the United States to report information about health insurance coverage obtained through the Health Insurance Marketplace. It is also known as the "Health Insurance Marketplace Statement."
The Health Insurance Marketplace sends Form 1095-A to individuals who enrolled in a health insurance plan through the Marketplace. It is typically sent by January 31st for the previous tax year. The form contains important details about the coverage, including the dates of coverage, the amount of the monthly premium, and the amount of any advance premium tax credit received.
Form 1095-A includes various sections and information, such as:
- Taxpayer and recipient information
- Coverage information
- Premium and credit information
Individuals who received advance premium tax credits must reconcile them on their tax return using Form 8962. The information provided on Form 1095-A is used to complete Form 8962 accurately.
Form 1095-A does not need to be filed with the tax return. However, taxpayers should keep it for their records, as they may need to refer to it when completing their tax return or in the event of an IRS audit.
Form 8962, officially known as the "Premium Tax Credit (PTC)" form, is a tax form used by individuals and families who have received “advance payments of the Premium Tax Credit (APTC)” to reconcile the amount they received with the actual credit they are eligible for.
This form is used to calculate the correct amount of the Premium Tax Credit for individuals and families who received advance payments of the credit to help lower their monthly health insurance premiums. The form is also used to determine if there is any excess advance credit that needs to be repaid or if additional credit is due.
When you file your federal income tax return, you must complete Form 8962 to reconcile the advance payments you received with the actual Premium Tax Credit you are eligible for based on your final income for the tax year.
You’ll be required to provide information such as your household income, the number of individuals in your household, the premiums you paid, and the second lowest-cost Silver plan premium in your area. You'll also need to indicate whether you received advance payments of the Premium Tax Credit and the amount you received.
Form 8962 is typically filed with your federal income tax return (Form 1040 or Form 1040A). It is important to accurately complete and include the form when filing your taxes to ensure proper reconciliation of the Premium Tax Credit.
What Other Ways Can I Save On Health Coverage Costs?
There are several other ways you can potentially save on health insurance costs besides the Premium Tax Credit.
Cost-sharing reductions (CSRs)
If you qualify for a PTC and have a low household income, you may also qualify for other subsidies such as cost-sharing reductions (CSRs). CSRs are based on your income level and help reduce the out-of-pocket costs for care (such as your deductible, copayments, and coinsurance) associated with your health insurance plan. CSRs are only available with Silver level plans purchased through the Health Insurance Marketplace.
Health Savings Accounts (HSAs)
If you enroll in a high-deductible health plan (HDHP), a Health Savings Account (HSA) may be an option for you. HSAs allow you to set aside pre-tax money to pay for qualified out-of-pocket medical expenses.
Medicaid or Children's Health Insurance Program (CHIP)
Depending on your income level, you may be eligible for Medicaid or a CHIP health plan, which provide free or low-cost coverage for individuals and families with limited financial resources. Eligibility requirements vary by state, so it's important to check your state's guidelines.