How the Premium Tax Credit Works - SmartAsset

Tax credits can save you money at tax time by reducing what you owe. If you purchase health insurance through the Health Insurance Marketplace, you may qualify for the Premium Tax Credit. Eligibility for the credit is based on income and household size. If you’re able to claim the premium tax credit, you can apply the credit to lower your monthly health insurance premiums. You can also work with a financial advisor that specializes in taxes to get a full understanding of what tax decisions might be best for you.

What Is the Premium Tax Credit?

The premium tax credit is a refundable tax credit that was established under the Affordable Care Act. The credit is intended to make premiums more affordable for people who enroll in a health insurance plan through the Health Insurance Marketplace.

Taxpayers who are eligible for the credit can receive it before they file their returns as an advance against any taxes they might owe or when they file. The amount of credit someone receives depends on their household size and income.

If you take the advance credit and it ends up being more than the amount you’re allowed to claim based on your income, you’ll have to pay back the difference when you file your taxes. On the other hand, if you took a smaller credit than you were eligible for, you’ll get the difference paid back to you as a refund.

Who’s Eligible for the Premium Tax Credit?

As mentioned, household size and income are the two major qualifying criteria for the premium tax credit. Ordinarily, you would qualify if your income is between 100% and 400% of the federal poverty line for your household size. Beyond that, however, there are a few other requirements to meet:

You’re required to buy your health insurance through the Health Insurance Marketplace.
No one else can claim you as a dependent on their tax return.
If you’re married, you have to file a joint tax return.

If you buy your health insurance outside of the Marketplace, you’re not eligible for the premium tax credit. You also won’t qualify if you’re eligible to get health insurance through your employer or a government-sponsored program like Medicaid.

In terms of the income guidelines, the baseline amounts can vary depending on whether you live in the contiguous 48 states, Hawaii, Alaska or the District of Columbia. If you’re approved for the credit and you have a change in income or household size, you’re required to update your information through the Marketplace as changes can affect your ability.

For tax years 2021 and 2022, the American Rescue Plan Act (ARPA) temporarily eliminated the 400% upper threshold for income. That means if you have income above 400% of the federal poverty line for your household sizes you may still be able to claim the credit on your 2021 and 2022 tax returns.

What Kind of Health Insurance Do I Need for the Premium Tax Credit?

You’ll need to buy your health insurance through the Health Insurance Marketplace in order to be eligible for the credit. The Marketplace offers four plan tiers: Bronze, Silver, Gold and Platinum.

You’re not required to choose one or the other to qualify for the credit but the plan you choose can influence what you pay for health insurance and what you get back from the credit. Bronze plans can have lower premiums but higher deductibles and out-of-pocket costs. Platinum plans, on the other hand, have the highest premiums but the lowest cost when you receive care.

Talking to an insurance expert or your financial advisor can help you to evaluate which type of plan might make the most sense, based on your overall health and financial situation. Remember that you’ll be able to update or change your plan choices once a year during the fall open enrollment period.

Calculating and Claiming the Premium Tax Credit

If you believe you’re eligible for the premium tax credit, you’ll use IRS Form 8962 to claim it. There are two parts to the form, and you can’t skip either one. The first section determines eligibility for the credit. Here, you’ll enter your filing status, information about your household size and details about your household income. You’ll need to include your spouse and your dependents here if you have either one and/or file a joint return.

From there, you can determine how much of the credit you’re eligible to claim, based on the federal poverty level amount that applies to you. Again, you can take the credit one of two ways:

As an advance to lower the amount you pay toward monthly health insurance premiums.
When you file to reduce the amount of tax you owe.

With the first option, the credit is paid to your health insurance company during the year to offset your premiums. With the second, you claim the credit to reduce your tax liability when you file Form 1040.

How Should I Take the Premium Tax Credit?

Whether it makes sense to take an advance credit or claim the credit after the fact depends on your financial situation. If you have sufficient money in your budget to cover your health insurance premiums each month without it resulting in financial strain then you may want to delay the credit, especially if you anticipate a large tax bill in April.

On the other hand, if your health insurance premiums are making it difficult to cover other expenses then an advance credit could provide some financial relief. Again, it’s important to estimate your health insurance costs and the amount of the tax credit you’re eligible for as accurately as possible.

If you claim too large of a credit, you could be hit with a surprise tax bill when you file should you need to pay some of that money back. Should you end up getting some of the credit refunded to you instead, it’s important to consider the best way to use that money. Paying down high-interest debt, for example, could free up more money in your budget that you could save or invest.

The Bottom Line

The premium tax credit can prove valuable if you’re paying for your own health insurance and you’d like to save a little money in the process. If you don’t qualify for the credit, then you might consider other ways to reduce health insurance costs, such as increasing your deductible to lower your premiums or developing healthy habits so you need to see a doctor less often. It may also be worth shopping around to see who offers the most affordable health insurance.

Tips for Tax Planning

Consider talking to your financial advisor about the best way to approach health insurance planning and the premium tax credit. If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
You might be able to qualify for an additional tax break on health insurance if you’re self-employed. It’s possible to claim both the premium tax credit and a deduction for health insurance premiums you pay out of pocket. If you’re eligible to take both the credit and a deduction, your combined tax benefits cannot exceed the total amount paid in eligible health insurance premiums. Again, it may be helpful to talk to a tax professional or financial advisor about how to leverage both tax benefits.