Jeffrey Wade
The cost of health insurance can be a significant expense for many people. To help with this, the Internal Revenue Service (IRS) offers a premium tax credit (PTC) to eligible individuals and families. This credit can be used to lower the monthly cost of health insurance premiums purchased through the Health Insurance Marketplace. The amount of the PTC is generally equal to the premium for the second-lowest cost silver plan available through the Marketplace, minus a certain percentage of the household income. The PTC can be claimed at the end of the year or in advance, and it is important to report any life changes to the Marketplace as they may alter the tax refund or result in additional taxes owed.
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What You'll Learn
Eligibility requirements
To be eligible for the premium tax credit, you must meet certain requirements and file a tax return with Form 8962, Premium Tax Credit (PTC). The premium tax credit is a refundable credit that helps eligible individuals and families cover the premiums for their health insurance purchased through the Health Insurance Marketplace.
For the tax years 2021 and 2022, the American Rescue Plan Act of 2021 (ARPA) temporarily expanded eligibility by eliminating the rule that a taxpayer with a household income above 400% of the federal poverty line cannot qualify for a premium tax credit. For tax years other than 2021 and 2022, if your household income is more than 400% of the federal poverty line for your family size, you are not allowed a premium tax credit and will have to repay all of the advance credit payments.
To be eligible for the premium tax credit, your household income must be at least 100% and, for years other than 2021 and 2022, no more than 400% of the federal poverty line for your family size. If you or your spouse file a joint return and received unemployment compensation for any week in 2021, the amount of your household income is considered to be no greater than 133% of the federal poverty line for your family size, and you are considered to have met the household income requirements.
You are also eligible for the premium tax credit if you meet the following requirements: you cannot be claimed as a dependent by another person, you are not eligible for other qualifying health coverage such as employer-sponsored insurance, Medicare, or Medicaid, and you are a U.S. citizen or lawfully present in the United States.
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Enrollment periods
Generally, individuals and families purchase health insurance through the Marketplace during an open enrollment period. The open enrollment period for coverage in 2025, for example, is November 1, 2024, through January 15, 2025. Some states with State-Based Marketplaces have longer open enrollment periods. During this time, applicants need to provide information on their income, household composition, tax filing methods, and whether they have an offer of health coverage through their job.
After the open enrollment period ends, certain life events may qualify an individual for a Special Enrollment Period, allowing them to buy a health plan through the Marketplace outside of the annual open enrollment period. Examples of qualifying life events include changes in family size or household income, or a change or loss of health coverage. It is essential to promptly report any such changes to the Health Insurance Marketplace to maintain accurate PTC eligibility and avoid issues with overpayment or underpayment.
When enrolling in a health insurance plan through the Marketplace, individuals and families have the option of applying for the Premium Tax Credit (PTC) to lower their monthly insurance premiums. The PTC is a refundable tax credit designed to assist eligible individuals and families with low to moderate incomes in affording health insurance purchased through the Marketplace. The PTC is based on a sliding scale, with lower-income individuals and families receiving a larger credit. The Marketplace will estimate the PTC amount an applicant may claim for the tax year, and they can choose to receive all, some, or none of the estimated credit in advance to lower their monthly premiums.
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Calculating the amount
The Premium Tax Credit (PTC) is a refundable credit that helps eligible individuals and families cover the premiums for their health insurance purchased through the Health Insurance Marketplace. The PTC is also referred to as the Advance Premium Tax Credit (APTC). The amount of the PTC is generally equal to the premium for the second-lowest-cost silver plan available through the Marketplace that applies to the members of your coverage family, minus a certain percentage of your household income. The credit cannot be more than the premiums for the Marketplace plan or plans in which you or your family enrol (called your enrolment premiums). Your coverage family consists of the members of your family who are enrolled in coverage through the Marketplace and are ineligible for non-Marketplace coverage such as Medicare, Medicaid, or affordable employer-sponsored coverage.
If there is only one silver plan, that plan is treated as the second-lowest-cost silver plan. If the two lowest-cost silver plans have identical premiums, that premium is the premium for the second-lowest-cost silver plan.
When you enrol, the Marketplace will determine if you are eligible for advance payments of the PTC. Advance credit payments are amounts paid to your insurance company on your behalf to lower the out-of-pocket cost for your health insurance premiums. To be eligible for the PTC, you must not be eligible for other qualifying health coverage, such as employer-sponsored insurance, Medicare, or Medicaid.
If your income is between $15,060 and $22,590 in 2025 (100%-150% FPL for a single adult), the benchmark Silver plan will cost you $0. If your income reaches $60,240 (400% FPL for a single adult) or higher, you would be required to pay 8.5% of your income toward the benchmark plan. The difference between the premium for the benchmark plan and your expected contribution equals the amount of your tax credit.
If you benefit from advance payments of the PTC, it is important to report life changes to the Marketplace as they happen throughout the year. Certain changes to your household, income, or family size may affect the amount of your PTC. These changes can alter your tax refund or cause you to owe tax. Reporting these changes promptly will help you get the proper type and amount of financial assistance.
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Claiming the credit
The Premium Tax Credit (PTC) is a refundable credit that helps eligible individuals and families cover the premiums for their health insurance purchased through the Health Insurance Marketplace. The amount of the PTC is generally equal to the premium for the second-lowest-cost silver plan available through the Marketplace that applies to the members of your coverage family, minus a certain percentage of your household income. The credit cannot be more than the premiums for the Marketplace plan or plans in which you or your family enrol.
To claim the PTC, you must meet certain requirements and file a tax return with Form 8962, Premium Tax Credit (PTC). For tax years other than 2020, if you have Advance Payments of the Premium Tax Credit (APTC) in any amount, you must file a Form 8962 and attach it to your federal income tax return for that year. You will use Form 8962 to reconcile the difference between the APTC made on your behalf and the actual amount of the credit that you may claim on your return.
If you are claiming net PTC on Form 1040 or 1040-SR, Schedule 3, Line 8, you must file Form 8962 with your return and report net PTC on Line 26. You are eligible to claim net PTC if you are allowed a PTC for the tax year but were not eligible for, or chose not to receive the benefit of, APTC at enrolment in Marketplace coverage for that year.
You can claim premium tax credits at the end of the year, or you can apply for an advanced premium tax credit based on your estimated income for the upcoming year. If you elect to receive an advanced credit, the government will pay the credit directly to your insurance company each month, and the insurer will bill you for the rest of the premium. If you benefit from advance payments of the PTC, it is important to report life changes to the Marketplace as they happen throughout the year. Certain changes to your household, income, or family size may affect the amount of your PTC. These changes can alter your tax refund or cause you to owe tax. Reporting these changes promptly will help you get the proper type and amount of financial assistance.
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Other ways to save
If you don't qualify for the premium tax credit, there are still ways to save money on your medical insurance. Here are some options to consider:
- Switch to a high-deductible plan: A high-deductible plan can help lower your monthly premium payments. This option may be suitable if you are generally healthy and don't anticipate needing extensive medical care.
- Catastrophic health plan: If you are under 30 or qualify for a financial hardship exemption, you may consider a catastrophic health plan. These plans have lower premiums than bronze plans but higher annual deductibles.
- Health reimbursement arrangement (HRA): If your employer offers an HRA, you can take advantage of 100% tax-free reimbursements for your health insurance premiums and other medical costs. An HRA provides you with a monthly allowance to cover qualified healthcare expenses, including health insurance premiums, prescription drugs, and other out-of-pocket costs.
- Section 125 plan or "cafeteria plan": This type of plan allows you to use a portion of your salary to pay for health insurance premiums on a pre-tax basis. As a result, your overall taxable household income decreases, leading to potential savings on federal income taxes and Medicare and Social Security taxes.
- Health savings accounts (HSAs): HSAs are special savings accounts that allow you and your employer to contribute money on a pre-tax basis. You can then withdraw these funds to pay for medical services, prescription drugs, preventive care, and other qualified medical expenses.
- Shop around for insurance: You can explore different options, such as purchasing insurance directly from an insurance company, using an online insurance seller, or working with an insurance agent or broker. They can help you compare plans, prices, and features to find the most suitable option for your needs and budget.
Remember that the best option for you will depend on your specific circumstances, such as your health status, income, and family situation. It's always a good idea to review your options and stay informed about any changes or updates that could impact your insurance choices.
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Frequently asked questions
A premium tax credit is a refundable credit that helps eligible individuals and families cover the premiums for their health insurance purchased through the Health Insurance Marketplace.
When you or a family member applies for Marketplace coverage, the Marketplace will estimate the amount of the Premium Tax Credit that you may be able to claim for the tax year, using information you provide about your family composition, projected household income, and other factors, such as whether those whom you are enrolling are eligible for other, non-Marketplace coverage.
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.
To get this credit, you must meet certain requirements and file a tax return with Form 8962, Premium Tax Credit (PTC). If you are claiming net Premium Tax Credit (PTC) on Form 1040 or 1040-SR, Schedule 3, Line 8, you must file Form 8962 with your return and report net PTC on Line 26.
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