Unlike tax deductions and exemptions, which reduce the amount of taxable income, tax credits are incentives that allow taxpayers to subtract specific amounts of money from the amount they owe the state and federal governments when filing taxes. The premium tax credit (PTC) is one of many different credits the government offers to incentivize taxpayers by reducing the amount they pay for health insurance premiums each month when they purchase insurance from the Health Insurance Marketplace.
Other examples of tax credits that incentivize taxpayers include the child tax credit, American Opportunity Tax Credit, and earned-income tax credit. Each has its own qualifications and benefits, but below we’ll break down the premium tax credit. Read on to see whether or not you will qualify for this credit come tax time.
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What Is a Premium Tax Credit?
The premium tax credit is a refundable credit that helps individuals cover their premiums for health insurance. The tax credit you receive is based on your estimated income and household information provided on your Marketplace application, which is filled out to obtain health insurance.
The premium tax credit was introduced in March 2010 under the Patient Protection and Affordable Care Act, more commonly known as Obamacare. Unlike typical tax credits, which reduce your tax liability and sometimes results in a refund, the premium tax credit is calculated and sent directly to healthcare providers to compensate taxpayers with a discount on the monthly premiums they pay for healthcare.
Eligible individuals do not have to pay the full amount of their healthcare premiums upfront. Instead, they pay the discounted amount that remains after their healthcare provider receives the premium tax credit amount. Your eligibility for this tax credit and the amount of credit you receive is based on your income. To put it simply, if you earn more, your credit is less and if you earn less, your credit is more.
Premium Tax Credit Eligibility
If your health insurance coverage is purchased through the Health Insurance Marketplace, you may be eligible for the premium tax credit. In order to qualify, you must be ineligible for employer-sponsored health insurance. In addition, you must also be ineligible for healthcare programs like Medicaid or the Children’s Health Insurance Program (CHIP).
Your income must also fall within a certain range to qualify. If your income is between 100% and 400% of the federal poverty line (per your family size), you are eligible for the premium tax credit. Additional requirements state that you cannot be claimed as a dependent by another person when filing their tax return. If you are married, your taxes must be filed jointly to qualify.
Premium Tax Credit Amount
The amount of credit received changes from individual to individual. For example, if you have a family of four and earn $25,750 or less for the 2019 tax year, you may qualify for the premium tax credit. Individuals have to earn much less — $12,490 — in order to qualify.
This Federal Poverty Level chart breaks down the income amount based on family size:
- $12,490 for individuals;
- $16,910 for a family of 2;
- $21,330 for a family of 3;
- $25,750 for a family of 4;
- $30,170 for a family of 5;
- $34,590 for a family of 6;
- $39,010 for a family of 7;
- $43,430 for a family of 8;
How to Apply for the Premium Tax Credit
As with many of the tax credits, the PTC is not just something that you automatically get. If you meet all of the eligibility requirements for the premium tax credit, there are two ways you can apply. Note that how you choose to receive the tax credit will affect how it is reported on your tax return.
When you sign up for health insurance through the Marketplace, you can sign up for the premium tax credit. The government will use the information you provide (family size, income, dependent status) to calculate the amount of credit you are eligible for. Signing up through the Marketplace allows you to take a monthly discount on your healthcare premiums, which can be reconciled on your taxes the following year. If your discount is less than the amount you owe, you could stand to get a tax refund. If your credit is more, you are liable for what is owed.
Another way to apply for and obtain the premium tax credit is to dictate how much of the credit is allocated towards your premiums to avoid a larger tax liability at the end of the year. If you’re not sure which amount will be most beneficial because your income fluctuates, the other option is to pay the premiums and claim the credit when you file your taxes. Taking this route entitles you to claim the calculated credit amount in full.
To apply for the premium tax credit, first ensure that you meet all of the qualifications. Doing so could save you an exponential amount on the costs associated with healthcare and even provide you with a substantial refund come tax time.
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