The Premium Tax Credit: What You Need To Know

The premium tax credit is a helpful way for individuals and families to make health insurance more affordable. However, figuring out if you qualify and how to claim the credit can be a bit tricky. This guide is here to make it simple for you. We’ll walk you through everything you need to know, from checking your eligibility to the steps for claiming the credit correctly. Consider this your go-to resource for straightforward information on the premium tax credit, making it easier for you to understand and utilize this valuable financial tool.

What is the Premium Tax Credit?

The premium tax credit is a refundable tax credit that helps eligible individuals and families afford health insurance purchased through the Health Insurance Marketplace (also known as the Exchange). The amount of the credit is based on your income and family size – the lower your income, the larger your credit.

When you enroll in Marketplace coverage, you can choose to have the estimated credit amount paid directly to your insurance company to lower your monthly premiums (these payments are called advance payments of the premium tax credit, or APTC). Or, you can choose to claim the entire credit when you file your tax return for the year.

If APTC was paid on your behalf, you must file Form 8962 with your tax return to reconcile the APTC payments with the actual premium tax credit you can claim based on your final income and family size. Exceptions apply for 2020 returns – see the 2020 special rules section .

This reconciliation may result in you needing to repay excess APTC if your actual allowable credit is lower than the APTC payments. Or, it may result in an additional credit added to your refund if your allowable credit is higher than the APTC payments.

The credit is “refundable” because if the amount of the credit is larger than what you owe in taxes, you can get the remainder refunded to you.

 

What is the Health Insurance Marketplace?

The Health Insurance Marketplace (or just “Marketplace”) is where you can shop for private health insurance plans, enroll in coverage, and find out if you qualify for premium tax credits and other savings on out-of-pocket costs.

The Department of Health and Human Services (HHS) oversees the Marketplace requirements and plans. You generally enroll during open enrollment periods, though some qualifying life events allow special enrollment periods.

Visit official website Healthcare.gov to find out about eligibility for special enrollment periods, learn more about the Marketplace, and enroll in coverage.

 

How to Get Advance Payments of the Premium Tax Credit?

When you apply for Marketplace coverage, the Marketplace will estimate the premium tax credit you may be eligible for based on the income and household details you provide.

With this estimate, you can decide if you want some or all of the estimated credit paid directly to your insurance company to lower your monthly premiums (APTC).

If you choose APTC, you’ll later file Form 8962 with your tax return to compare the APTC received to the actual premium tax credit based on your final income and household details.

If you don’t choose APTC or the Marketplace determines you’re ineligible, you may still be able to claim the credit if your circumstances change. To do so, file Form 8962 with your tax return.

 

What Happens if Income or Household Changes During the Year?

If your final income or family size differs from the Marketplace estimate, your actual premium tax credit will differ from your APTC.

The bigger the difference between your Marketplace estimate and your final details, the bigger the difference between your APTC and actual credit will be.

If your actual credit is less than your APTC, you’ll need to repay the excess APTC amount, subject to repayment limits. If your actual credit exceeds your APTC, the difference will increase your refund or lower your balance due.

Notifying the Marketplace about changes as soon as possible allows your APTC to be updated and minimize discrepancies between APTC and your final credit amount.

 

Changes that can affect your actual credit include:

• Increases or decreases in household income
• Marriage or divorce
• Birth or adoption of a child
• Gaining/losing eligibility for other health coverage
• Moving to a new address

 

Who is Eligible for the Premium Tax Credit?

To be eligible for the premium tax credit, you must meet all of these requirements:

• Have household income within a certain range (see this section for details)
• Not be claimed as a dependent
• File as anything but Married Filing Separately
• You or a family member enrolls in qualified health coverage through the Marketplace
• You or family members are not eligible for other minimum essential coverage like Medicaid or Medicare
• You pay your portion of premiums not covered by APTC

Additionally, for 2021 returns, if you or your spouse (if married filing jointly) received unemployment compensation during 2021, your household income can exceed the usual cap and you still qualify.

 

What Are the Income Limits?

For most, your household income must be between 100% and 400% of the federal poverty line for your family size to get premium tax credits.

For 2021 returns, if you or your spouse received unemployment compensation, your household income is treated as no higher than 133% of the federal poverty line. This temporary expansion under the American Rescue Plan Act allows more taxpayers to qualify for credits.

The federal poverty guidelines set poverty levels based on family size. HHS updates these each year for inflation. You can find the guidelines published annually in the Federal Register.

Eligibility for a year’s credit is based on the poverty guidelines in effect on the first day of the previous year’s open enrollment period. For example, 2021 credits use the 2020 guidelines.

 

 

What is Household Income?

For the premium tax credit, household income is your modified adjusted gross income (MAGI) plus that of all family members required to file a tax return.

MAGI is your regular adjusted gross income plus any foreign income, non-taxable Social Security benefits, and tax-exempt interest received. Supplemental Security Income (SSI) does not count.

Income from Puerto Rico and income connected with a trade or business in Puerto Rico also does not get included in household income for the credit calculation.

 

 

How to Claim the Credit if Married Filing Separately?

Generally, no. But there are exceptions for certain victims of domestic violence and spousal abandonment.

You may qualify for relief from the joint filing requirement if you meet all of the following:

• You live apart from your spouse at tax time
• You cannot file jointly due to domestic abuse or abandonment
• You certify on your return that you are a victim

Check the box at the top of Form 8962 to certify you qualify. Keep any documentation of abuse or abandonment with your records, but do not attach documentation to your return.

This relief can be claimed for no more than three consecutive years. See the Form 8962 instructions for more details.

 

Unemployment Compensation Rules for 2021

Some special rules apply to unemployment compensation for the 2021 tax year. These temporary provisions come from the American Rescue Plan Act.

Unemployment Compensation and Household Income

All unemployment compensation you or your spouse received in 2021 counts as household income, even if you paid no federal income tax on it.

This is a change from prior rules that excluded unemployment compensation from household income if you paid no federal tax on it.

However, there is an income cap exception if you or your spouse received unemployment compensation in 2021.

 

Income Cap Exception

If you or your spouse received unemployment compensation in 2021, your household income can exceed the usual income cap for premium tax credits, and you still qualify.

Instead of the usual 400% federal poverty line cap, your household income is treated as no higher than 133% of the federal poverty guidelines for your family size.

This means more taxpayers who received unemployment compensation can qualify for premium tax credits, even with household incomes over 400% of the poverty line.

 

Repayment Protection

Normally, if your actual allowable premium tax credit on your return is less than the APTC you received, you must repay the excess APTC. For 2021 only, repayment of excess APTC is not required for taxpayers whose household income is under 400% of the federal poverty line.

The repayment cap is also increased for 2021 returns. For those with household incomes over 400% of the poverty guidelines, repayment is capped at $2,000 for single filers and $4,000 for joint filers.

 

Filing Requirements Relaxed for 2020

Usually, if APTC is paid on your behalf during the year, you must file Form 8962 with your tax return to report and reconcile the APTC. However, for 2020 only, Form 8962 is not required if:

• APTC was paid on your behalf in 2020
• Your actual 2020 premium tax credit is less than the APTC received
• You have no repayment of excess APTC

This relaxed filing rule aims to reduce burden for 2020 returns. Taxpayers who meet these criteria can skip filing Form 8962 and do not need to determine their actual 2020 credit amount.

Plan Ahead to Avoid Repayment of Excess APTC

The best way to avoid needing to repay excess APTC is to report changes in income, family size, and household circumstances to the Marketplace as soon as possible.

This allows the Marketplace to update your information and premium tax credit estimate. Getting your APTC adjusted during the year.

Note: Consult the official IRS Website for precise information. This overview is for informational purposes only.

FAQs: The Premium Tax Credit

 

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