When the government tells you that you must do something, it’s nice to receive a little financial help for complying. The Premium Tax Credit is designed to help some earners meet the requirement of the Affordable Care Act that you must carry mandatory health insurance. If you qualify, it will pay a portion of your health insurance premiums so you don’t have to do so.
The best part is that you won’t even have to go through a laborious process of trying to figure out if you qualify for it. The government will take care of that for you when you apply for health insurance.
You’re Limited to the Health Insurance Marketplace
You have no choice but to purchase your health care coverage through the Health Insurance Marketplace – aka the “Exchange” – administered by the Department of Health and Human Services.
When you apply for insurance, the Marketplace will automatically calculate whether you’re eligible for the Premium Tax Credit and, if so, how much of a credit you’re likely entitled to.
Some Other Qualifying Rules
Of course, we’re talking about income taxes here so you know there are going to be a lot more rules.
- You can’t have access to an “affordable” plan through your employer or other sources. You can’t decline that insurance and opt in for Marketplace insurance instead so you qualify for the credit, at least unless the government agrees that the policy is out of your price range. COBRA, or the Consolidated Omnibus Budget Reconciliation Act, coverage is an exception to this rule.
- You can’t qualify for any coverage offered by a government program, such as Medicare or Medicaid.
- You can only purchase insurance through the Marketplace during open enrollment periods, or if you’ve just experienced a pretty significant life event like marriage, divorce or the birth of a baby.
How Much Is the Credit?
The PTC is based on your estimated household income – note the term "household" here – and the cost of the second-lowest silver plan offered by the Marketplace in the area where you live. A percentage of your household income is subtracted from the annual premium to determine your credit amount.
You have a right to appeal the decision if you think the Marketplace has calculated the amount of your credit wrong, or if the Marketplace tells you that you don’t qualify for the credit. You can find the appropriate forms for an appeal on the HealthCare.gov website.
Household Income Requirements
The Internal Revenue Service makes a distinction between what you earn and what everyone in your household earns collectively, at least when it comes to qualifying for the Premium Tax Credit. The credit is based on what all of you earn. Households that earn less receive more of a credit than those that earn more.
Your family’s income must be no less than 100 percent but no more than 400 percent of the federal poverty level for its size, and this is based on your household income the year before you apply for the credit. In other words, you’d use the 2018 FPL figures if you’re applying for the credit in 2019. HHS determines these amounts annually. You can check to see if you fall into the PTC parameters on the HHS website.
Read More: What Are the 5 Largest Income Tax Credits?
So What Is Your Household Income?
This calculation starts with your modified adjusted gross income. For purposes of the Premium Tax Credit, your MAGI is your adjusted gross income plus any nontaxable Social Security benefits you receive, tax-exempt interest income and any foreign income you might have excluded when preparing your tax return.
You can find your AGI on line 7 of the 2018 Form 1040.
If you live alone, that’s it – you’re done. This is your household income. Otherwise, you must add the MAGIs of every other earner in your household: your spouse if you’re married, and anyone else who lives with you whom you can claim as a dependent. This spouse-and-dependents rule also determines your family size for purposes of the federal poverty guidelines.
The “Affordable” Insurance Rule
The IRS says that an employer-sponsored health insurance plan is affordable for you if the annual premium is 9.86 percent or less of your income as of 2019, but this isn’t quite as black-and-white as it seems. The premium is based on self-only health coverage, but again, we’re talking household income here.
About “Minimum Value” Plans
The affordability rule is based on another ACA term – the cost of a "minimum value" plan that might be available through your employer. This term is defined as a plan that pays 60 percent or more of the expected cost for the services it covers as of 2019.
If you’re unsure whether your plan offers minimum value, ask your employer. Technically, companies are supposed to provide this information to employees in writing upon hiring.
The PTC Is Refundable – Sort of
OK, you qualify. Now what? The PTC is a unique tax credit in that it’s paid in advance, before you actually file your tax return. Yes, you read that correctly. How’s that for a gift from the IRS? Unfortunately, you won’t actually see the money if you elect this option.
Let’s say that the Marketplace offers open enrollment for 2020 coverage in the fall of 2019. You don’t have to file your 2019 tax return until April 2020. You’re applying for insurance – and for the PTC – well in advance based on what you think your household's income will be at year’s end.
If you qualify, the Marketplace will calculate how much of a credit you’ll likely be entitled to, and the IRS will begin paying it out toward your January 2019 insurance coverage, well before tax day rolls around. But that money goes to your insurance company, not to you.
You’re only responsible for paying any portion of the monthly premiums that remain after applying the monthly amount of your advance payment PTC.
It’s Your Call
Maybe you’d really rather have your hands on that tax credit cash instead. You can do that. The IRS won’t force you to let them send the money to your insurer in advance. But if you want to actually claim this refundable tax credit personally, you won’t get it until you file your income tax return. That PTC option is not an advance payment.
You Might Have to Pay Some of the Credit Back
Now let’s fast-forward to tax filing time. We’ll presume that you elected to have your PTC applied directly to your insurance premiums, but your income calculations weren’t exactly on target.
If it turns out that you received too much of a tax credit when you file your tax return with your actual income figures, you’ll have to pay a portion of the credit back. The difference will either be deducted from any tax refund you’re entitled to for that year, or the amount will be added to any existing federal income tax liability you owe.
If there’s any good news here, it’s that you might not have to pay back all the difference between what you would have qualified for and what your insurer actually received. The amount of your repayment is based on a sliding scale determined by where your income falls on the federal poverty level chart.
How to Claim the Credit – Form 8962
You'll still have to account for the PTC when you file your tax return. This means completing and filing Form 8962 with your Form 1040. In fact, you must submit Form 8962 if your insurer received advance payments of the credit. You’ll have the necessary information for doing so because the Marketplace will send you a Form 1095-A with all the information you must enter on Form 8962.
- IRS: The Premium Tax Credit – The Basics
- IRS: Questions and Answers on the Premium Tax Credit
- Healthcare.gov: How to Save on Your Monthly Insurance Bill With a Premium Tax Credit
- TurboTax: What Is the Premium Tax Credit?
- Tax Policy Center: What Are Premium Tax Credits?
- IRS: About Form 1095-A
- IRS: About Form 8962
- IRS: About Form 1040
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.