What Is the Healthcare Premium Tax Credit?

Kelly Hernandez
A stethoscope, calculator, and pen sit on top of some medical tax records.

The premium tax credit is a refundable credit that was designed to help low- to middle-income families afford health insurance premiums for policies purchased through the health insurance marketplace. The insurance tax credit reduces the premium paid for eligible candidates who purchase this health insurance by providing a tax credit and/or refund. The amount of the credit is calculated on a sliding scale and is determined by certain characteristics, such as income and family size.

The healthcare premium tax credit is issued to qualifying taxpayers to assist in paying health insurance premiums. However, if a candidate qualifies for a tax credit that’s more than the premium itself, he or she may be provided with a tax refund for the excess amount.

Eligible taxpayers may decide to receive this tax credit as “advanced payments” that are issued directly to the health insurance company to pay the policy’s premium. The tax filer is responsible for completing the necessary forms so the health insurance marketplace can examine the claimant’s income and household characteristics. The amount of credit is estimated and the filer can decide to distribute all, part, or none of the credit to the health insurance company to help pay the premium.

Who Is Eligible for the Premium Tax Credit?

Eligibility for the health care tax credit is based on a family’s income and size. Generally, a family is eligible for the credit if its annual adjusted gross income (AGI) is at least 100% but no more than 400% of the federal poverty line (FPL), based on the number of family members.

A claimant cannot qualify for the tax credit if he or she files a “married filing separately” tax return or is claimed as a dependent by another person. The claimant or family member also must enroll in coverage through the marketplace in the same month the claim is filed.

To qualify for the credit, the filer cannot be eligible to enroll in qualifying employer-sponsored health insurance coverage or a government health insurance program, such as Medicaid, Medicare, the Children’s Health Insurance Program (CHIP), or TRICARE. The filer must be willing and able to pay the remaining health insurance premiums that are not covered by the tax credit.

Change of Circumstances

To ensure the premium tax credit you are receiving is accurate, you must notify the health insurance marketplace of any change in circumstances to your family or income while claiming the credit. Changes that may increase or decrease the amount of tax credit you qualify for include:

  • Increases or decreases in your household income, including additional government benefits or debt forgiveness.
  • Divorce.
  • Marriage.
  • The birth or adoption of a child.
  • Changes in eligibility for an employer-sponsored health insurance program.
  • Moving to a new home.
  • Other household characteristic changes.

If one of these changes occurs, you must contact the health insurance marketplace to report it immediately. This will ensure your credit amount is modified to accurately reflect your eligibility.

How to Apply for and Calculate the Premium Tax Credit

To apply for the health care tax credit, you must file a federal tax return. You are also required to complete Form 8962 (Premium Tax Credit) and attach it to your tax return. It’s important to complete these forms and submit them before you obtain credits for your health insurance premium.

If you receive these credits but fail to file the necessary paperwork, you will not be eligible to receive these advance credits in future years and will be responsible for paying your health insurance premiums in full. You may also be required to pay back some of the advanced credit payments that were already made to your insurance company.

Key Documents and Forms

To receive an accurate health insurance tax credit, you must include all necessary documents and forms, such as:

  • 1095-A Health Insurance Marketplace Statement: This form confirms your enrollment in a health insurance marketplace plan and provides information on your health insurance policy.
  • Form 8962, Premium Tax Credit: This form helps you calculate your health tax credit and must be attached to your tax return.
  • Form 1040: When you file a regular federal tax return with the IRS, you will more than likely complete Form 1040.
  • Pub. 974, Premium Tax Credit: This publication provides extensive and updated information on the premium tax credit, including how to calculate your credit and the application process.

How to Allocate the Premium Tax Credit

The Affordable Care Act tax credit is unlike a regular tax credit that is usually calculated and applied to a tax filer’s tax liability, or the taxes he or she owes. Instead, this credit is calculated and sent directly from the government to the health insurance company where the claimant currently is enrolled in a health insurance plan.

How Advanced Credit Payments Affect Tax Refunds

An advanced credit payment is made on a qualifying claimant’s behalf by the government during the year and is provided directly to the health insurance company to lower health insurance premium payments. A taxpayer who opts for advanced credit payments is receiving the tax credit he or she qualifies for throughout the year. Therefore, he or she may not be provided a tax refund or may be issued a smaller refund through the health insurance tax credit program at the end of the year.

If the credit doesn’t cover the entire premium, the taxpayer is responsible for providing the rest of the premium payment for health insurance each month. If the credit a claimant qualifies for is more than the premium he or she is responsible for, a tax refund for the excess is issued.

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