Jeffrey Wade
The Premium Tax Credit is a refundable credit that helps eligible individuals and families with low or moderate incomes afford health insurance purchased through the Health Insurance Marketplace. The size of the Premium Tax Credit is based on a sliding scale, with lower-income earners receiving larger credits. When applying for Marketplace coverage, individuals will find out if they qualify for the Premium Tax Credit, which lowers the premium amount, or the monthly payment for the insurance plan. The Premium Tax Credit is also referred to as the PTC or APTC (advance payments of the Premium Tax Credit).
| Characteristics | Values |
|---|---|
| What is a Premium Tax Credit? | A refundable tax credit designed to help eligible individuals and families with low or moderate income afford health insurance purchased through the Health Insurance Marketplace. |
| Who is eligible for a Premium Tax Credit? | Individuals and families with low or moderate incomes who are not eligible for coverage through a government program like Medicaid, Medicare, CHIP or TRICARE. |
| How is eligibility determined? | Based on the estimated household income for the year, family composition, and whether those being enrolled are eligible for other, non-Marketplace coverage. |
| How do I apply for a Premium Tax Credit? | File a tax return with Form 8962, Premium Tax Credit (PTC). |
| How do I receive the Premium Tax Credit? | You can choose to have the Marketplace compute an estimated credit that is paid to your insurance company to lower what you pay for your monthly premiums (advance payments of the Premium Tax Credit, or APTC), or you can choose to get all of the benefit of the credit when you file your tax return for the year. |
| What is the difference between APTC and PTC? | APTC refers to advance payments of the Premium Tax Credit, which are amounts paid to your insurance company to lower your monthly premiums. PTC refers to the net Premium Tax Credit, which is the actual amount of the credit that you qualify for based on your final income for the year. |
| What if my income changes during the year? | It is important to report income and household changes to the Marketplace as soon as possible. If you have received more advance payments of the Premium Tax Credit than you are eligible for based on your final income, you may have to pay money back when you file your federal income tax return. |
| How do insurance companies determine premiums? | Insurance companies may use credit-based insurance scores, payment history, outstanding debt, age, and other factors to determine premiums. |
| How do I record a payment for insurance? | On December 31, write an adjusting entry to record the insurance expense that was used up (expired) and to reduce the amount that remains prepaid. This is accomplished with a debit of $1,000 to Insurance Expense and a credit of $1,000 to Prepaid Insurance. |
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Premium tax 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 size of the Premium Tax Credit is based on a sliding scale, meaning those with lower incomes get a larger credit to cover the cost of their insurance.
To qualify for the PTC, your health insurance situation, tax situation, immigration status, and income must meet certain criteria. You must have purchased a health insurance plan from the Health Insurance Marketplace, and your income must be above the federal poverty line. For 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.
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. This estimate is based on information such as family composition, projected household income, and other factors, such as whether those being enrolled are eligible for other, non-Marketplace coverage. Based on this estimate, you can decide how much of your estimated credit you would like to be paid in advance directly to your insurance company to lower your monthly premiums.
If you choose to have advance credit payments made on your behalf, you will be required to file Form 8962 with your income tax return to reconcile the amount of advance payments with the Premium Tax Credit that you may claim based on your actual household income and family size. For tax years other than 2020, if you get the benefit of advance credit payments in any amount, or if you plan to claim the premium tax credit, you must file a federal income tax return and attach Form 8962, Premium Tax Credit (PTC), to your return.
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Eligibility requirements
To be eligible for a premium tax credit, you must meet certain requirements. For tax years 2021 and 2022, eligibility was expanded by the American Rescue Plan Act of 2021, which eliminated the rule that a taxpayer with household income above 400% of the federal poverty line cannot qualify for a premium tax credit.
For tax years other than 2021 and 2022, your household income must be within a certain range to qualify for a premium tax credit. Specifically, your income must be at least 100% and no more than 400% of the federal poverty line for your family size. There are, however, two exceptions for individuals with household incomes below 100% of the applicable federal poverty line. The amount of the premium tax credit is based on a sliding scale, with generally larger credit amounts available to those with lower household incomes.
Additionally, you must meet the following requirements:
- You cannot be claimed as a dependent by another person.
- You must have health insurance coverage through a Health Insurance Marketplace.
- If you are married, you must not file a tax return using the filing status of "Married Filing Separately." However, there is an exception to this rule for certain victims of domestic abuse and spousal abandonment who can meet specific criteria.
- You must be a U.S. citizen or lawfully present in the United States.
- You cannot be eligible for other "minimum essential coverage," including Medicare, Medicaid, or employer-sponsored coverage that is considered adequate and affordable.
When you apply for Marketplace coverage, the Marketplace will estimate the amount of the Premium Tax Credit you may claim for the tax year, using information about your family composition, projected household income, and other factors. Based on this estimate, you can choose to have all, some, or none of your estimated credit paid in advance directly to your insurance company to lower your monthly premiums.
If you benefit from advance payments of the premium tax credit, it is important to report life changes to the Marketplace as they happen, as changes to your household, income, or family size may affect the amount of your premium tax credit and, consequently, your tax refund or tax owed.
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Tax forms
If you have enrolled in a Health Insurance Marketplace® plan, you must file a tax return. The tax forms you need to file will depend on the type of health coverage you have. If you enrolled in a Marketplace plan and used premium tax credits to lower your monthly payments, you will need to file IRS Form 1095-A, Health Insurance Marketplace Statement, to get the highest federal tax return. This form will provide you with information about your health care coverage and the second lowest cost Silver plan, which affects the premium tax credit if you used it to lower your premiums during the year.
You will then need to use the information from Form 1095-A to fill out Form 8962, Premium Tax Credit. This form will help you reconcile your advance payments of the premium tax credit (APTC) with the amount you qualify for based on your final income. If you used too much, you will repay it via taxes. If you used too little, you can claim the difference as a credit. If you do not qualify for a premium tax credit, you do not need to include Form 8962 when you file your taxes.
For tax years other than 2020, health insurance providers may send Form 1095-B to individuals they cover, containing information about who was covered and when. Certain employers will send Form 1095-C to certain employees, providing information about what coverage the employer offered. Employers that offer "self-insured coverage" will send Form 1095-C to individuals they cover, which can be used to determine eligibility for the premium tax credit. These forms should not be attached to your tax return.
If you are claiming a net premium tax credit for 2020, you must file Form 8962 and attach it to your return. You should wait to file your income tax return until you receive Form 1095-A.
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Life changes
A qualifying life event is a life-changing situation that impacts your health insurance. These events allow you to update your health insurance outside the usual annual Open Enrollment Period. Typically, you will have 30 to 60 days during the Special Enrollment Period (SEP) after the life event to choose a new plan or add a dependent.
Qualifying life events can be planned or unexpected, and they generally fall into different categories depending on the type of change. Here are some common examples of qualifying life events:
- Change in residence: Moving to a different zip code, county, or state can change your health plan area and impact the insurance options available to you. This includes moving within California and gaining access to new Covered California health insurance plans.
- Change in family or household: This could include marriage, divorce, birth or adoption of a child, or a change in the eligibility of a household member for coverage under an existing plan. For example, losing a dependent due to divorce, legal separation, or death.
- Change in employment status: Losing your job or changing jobs usually means giving up the health plan provided by your previous employer. A change in employment status, whether voluntary or involuntary, can be a qualifying life event.
- Aging out of a parent's plan: Turning 26 is a milestone birthday, as it often means you can no longer stay on your parents' health insurance and need to find your own plan.
- Loss of health coverage: Losing your health insurance or expecting to lose your coverage within the next 60 days can qualify you for an SEP. This includes losing Medicaid or Children's Health Insurance Program (CHIP) coverage.
- Change in citizenship or legal status: Gaining U.S. citizenship or becoming a permanent legal resident can be a qualifying life event.
- Other life changes: Other circumstances that may qualify for an SEP include changes in income affecting eligibility for Medicaid, becoming eligible for tax credits that lower premiums, or being released from incarceration.
It's important to note that each health insurance plan has its own guidelines for handling qualifying life events. If you experience a major life change, be sure to review your plan materials, contact your insurer or employer, or refer to the phone number on your member ID card to understand your options and next steps.
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Credit score
A credit score is a number calculated based on multiple factors, including bankruptcies, debt, bill-paying habits, how long accounts have been open, and the amount of credit used on credit cards. Credit scores are used to predict how likely someone is to pay back a loan. Most credit scores range from 300 to 850, with a higher score being better.
Credit-based insurance scores, on the other hand, are different from credit scores. While they are calculated using information from credit reports, they are designed to estimate how likely someone is to file an insurance claim. Policyholders with good credit-based insurance scores generally file fewer or less expensive claims, according to industry research and claims history. As a result, insurance companies use these scores to determine insurance premiums. A low credit-based insurance score can affect your car insurance rates more than a DUI in some cases.
It is important to note that insurance companies do not use credit scores directly to determine insurance options or premiums. Instead, they use credit-based insurance scores, which are calculated differently and serve a different purpose. However, a person's credit score can impact their credit-based insurance score since it is calculated using information from their credit report.
Credit-based insurance scores typically range from 200 to 997. A score of 776 or above is generally considered good, while a score below 626 is considered below average or less desirable. A good credit score can help individuals obtain lower insurance rates, as insurers may offer lower premiums or monthly rates to those with higher credit-based insurance scores.
To improve their credit-based insurance scores, individuals should review their credit reports regularly and report any errors. They should also focus on improving their credit score by managing debt, maintaining good bill-paying habits, and using less than 30% of the credit available to them. Additionally, shopping around for insurance quotes can help individuals find lower rates, even with poor credit.
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Frequently asked questions
The premium tax credit (PTC) is a refundable tax credit that helps eligible individuals and families with low or moderate incomes afford health insurance purchased through the Health Insurance Marketplace (also known as the Exchange). The size of your premium tax credit is based on a sliding scale, where those with lower incomes get larger credits.
When you apply for Marketplace coverage, you will find out if you qualify for the premium tax credit. The amount of your premium tax credit depends on the estimated household income for the year you want coverage and the cost of Marketplace health plans in your area.
When you enroll in Marketplace insurance, you can choose to have the Marketplace compute an estimated credit that is paid to your insurance company to lower what you pay for your monthly premiums (advance payments of the premium tax credit, or APTC). Alternatively, you can choose to receive the entire benefit of the credit when you file your tax return for the year.
