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How Do Premium Tax Credits Work?

What is a Premium Tax Credit in Healthcare? 

By purchasing coverage through the Health Insurance Marketplace, many people qualify for premium tax credits that significantly reduce their monthly premiums. Eligible candidates include:

  • Individuals and families within 100-400% of the federal poverty level (FPL)
  • Lawfully residing immigrants below 100% of the FPL who do not qualify for Medicaid due to their citizenship status
  • Companies that secure employee group health insurance through the Small Business Health Options Program (SHOP)
  • People collecting unemployment compensation.

Households with incomes above the FPL rarely qualify for government subsidies, nor do undocumented immigrants and their families. This article will explore how premium tax credits work for different populations, how the Marketplace calculates them, and your options and alternatives as a healthcare consumer.

How Do Premium Tax Credits Work?

Individuals, families, and businesses qualify for premium tax credits based on different criteria.

Eligibility

Regardless of how you purchase a Marketplace plan, the amount of your tax subsidy will almost entirely hinge on either your household income or the size of your business.

Individuals 

Individual applicants include anybody who files as “single” on their tax return and claims zero dependents. To qualify for the standard premium tax credit (PTC), these customers must meet the following criteria:

  • Have an annual income between 100-400% of the FPL 
  • US citizenship or legal residence in the country
  • Ineligible for affordable outside coverage like Medicaid, Medicare, or employer-sponsored insurance

The IRS considers you self-employed if you have an employee-free business that takes in taxable income. Freelancers, consultants, and independent contractors can all apply for a self-employed tax credit by filling out a Marketplace application and estimating their net income for the impending calendar year.

Families 

If you file taxes as a married couple or have financially dependent children, you must apply for Marketplace coverage as a family. Notably, the FPL ratio diminishes incrementally as households grow. For example, the 2023 FPL for an individual is $14,580, $19,720 for a family of two, and $50,560 for a family of eight. For families to receive the PTC, they must meet all the same criteria as individual tax filers.

Notably, if you qualify for employer-sponsored coverage deemed unaffordable by Marketplace standards, you can still retain eligibility for a PTC through the ACA Family Glitch Fix. Remember to report any changes to family size, eligible dependents, and income levels throughout the year to avoid revocation or reduction of your PTC.

Small Business Owners 

Under the ACA, only employers with over 50 full-time employees must legally provide them with health insurance. However, this legislation included the small business healthcare tax credit to encourage smaller companies to sponsor group health plans. Small business owners must meet the following criteria to gain eligibility:

  • Have fewer than 25 employees
  • Purchase insurance through the Small Business Health Options Program (SHOP)
  • Pay every employee less than $56,000 per year
  • Pay at least half the cost of every full-time employee’s health insurance premium

Companies with fewer employees earn higher percentage tax breaks than more fully staffed small businesses. The maximum health credit would cover 50% of your annual employee premiums.

Those Enrolled in Employer Coverage 

Unless you qualify for the ACA Family Glitch Fix, employer-sponsored health insurance freezes your eligibility for a PTC. The glitch in the ACA Family Glitch refers to a situation where some low-income family members are ineligible for premium tax credits because the cost of their employer-based coverage is deemed affordable, even if it’s unaffordable for the entire family. The fix is a proposed legislative change or policy adjustment to address this issue and allow these family members to access premium tax credits based on the overall family income rather than individual coverage affordability.

However, group health plans present their own unique tax benefits, as businesses usually pay for over half of their employees’ insurance premiums. Because these contributions are not subject to federal taxes and employees can distribute their share pretax, securing employer coverage ultimately lowers your taxable income.

There exist no income requirements to qualify for employer coverage. Though companies with 50 or more full-time equivalent employees must insure everybody working over 30 hours, some smaller businesses also provide healthcare benefits to recruit and retain a loyal workforce.

Understanding HCTCs, PTCs, and ATCs 

Until recently, Marketplace customers could receive tax credits in three ways:

  • The Health Coverage Tax Credit:  HCTCs once paid up to 72.5% of qualified health insurance premiums, but all expired on December 31st, 2021.
  • Premium Tax Credit:  The Marketplace determines your PTC based on annually reported income, allowing you to receive it as a refund on your tax return.
  • Advanced Premium Tax Credit:  The Marketplace calculates your APTC based on income estimates included on your application, allowing the government to send advance payments to your insurance carrier every month.

While both APTCs and PTCs ultimately serve the same purpose, APTCs immediately lower your premiums, while PTCs require you to pay them in full and wait for a refund.

How Are Tax Credits Calculated? 

To determine your tax credit, the Marketplace formula weighs your annual income against your state’s standard cost of health insurance. First, the Marketplace will calculate your expected required contribution to a benchmark Silver-tiered policy based on your estimated household earnings for 2023. For example, those between 100-150% of the FPL would owe nothing, and those nearing 400% of the FPL would owe 8.5% of their annual income.

Your tax credit will equal the dollar amount between this benchmark premium and your freshly calculated expected contribution. You can apply this discount to any tiered Marketplace policy – bronze, silver, gold, or platinum.  

Can You Access Credits If… 

You can only access tax credit health insurance if you make between 100-400% of the FPL and do not qualify for affordable coverage outside the Marketplace.

You Can Access Employer Coverage?

In most cases, no. Usually, working for an employer that provides split-premium health insurance disqualifies a person from receiving a PTC through the Marketplace. However, suppose your employer-sponsored coverage fails to meet “minimum standard value” or requires you to contribute more than a specific percentage of your household income. In that case, you could still access a PTC through the ACA Family Glitch Fix.

You Are Medicaid Eligible? 

No. Medicaid counts as minimum essential coverage, which means qualifying for benefits temporarily disqualifies you from a PTC. Because Medicaid coverage comes relatively standardized for all eligible beneficiaries on a state-to-state basis, typically costs nothing, and lasts as long as you remain below 138% of the FPL, the ACA makes zero exceptions.

Your State Did Not Expand Medicaid Coverage? 

Yes. Suppose you live in one of the ten states yet to expand Medicaid coverage. In that case, you can still purchase a policy from the Health Insurance Marketplace and qualify for a PTC, given you make an annual household income between 100-400% of the FPL and no one in your family has received another offer for minimal essential coverage deemed affordable under the law.

How Does the Credit Affect Your Taxes? 

If you opt into a standard PTC, you must continue paying your full-price premiums and wait for a lump sum reimbursement credit at the end of the year. For example, if your family of 4 qualifies for a monthly credit of $461, you get $5,531 back when you file your tax return. Or, if your small business spent $80,000 on health insurance, you could receive up to $40,000 back with your refund.

Notably, APTCs often require beneficiaries to reconcile disproportionate payments with their tax return. If you underestimated your annual earnings, you must repay any excess credit when filing your tax return. Similarly, you can claim the difference and collect any owed funds if you overestimated your actual income.

What Tax Forms Do You Need? 

Individuals and families utilizing tax credit health insurance must refer to and complete multiple annual forms.

Form 1095-A 

The Health Insurance Marketplace sends Form 1095-A to all individuals, families, and businesses enrolled in Marketplace coverage. Commonly referred to as the “Health Insurance Marketplace Statement,” this sheet details important information regarding coverage dates, premium costs, and viable health credits. Though only necessary as a reference point for your tax return, always keep it on hand in case of an IRS audit.

Form 8962 

Form 8962, or the Premium Tax Credit form, is required from all individuals and families who received their credits as monthly APTCs.  Form 8962 helps you calculate your correct PTC against the estimate provided on your Marketplace application, informing you of whether or not you need to reconcile funds. You must file Form 8962 with your federal income tax return to avoid fraud, repay anything you owe, and collect any potential unused credits.

Does Catastrophic Health Insurance Feature a Credit? 

No.  Only bronze, silver, gold, and platinum Marketplace policies feature premium tax credits. Because catastrophic health insurance sets very low premiums, significantly high deductibles, and limited benefits, it allows people to purchase affordable coverage for “worst-case scenarios.”  Though a helpful alternative, people within 100-400% of the FPL typically save more money and gain greater healthcare access by enrolling in conventionally tiered and credited Marketplace coverage.

How Do Changes In Life Circumstances Affect the Subsidy? 

Significant life changes during your benefit year can directly alter your eligibility for a premium tax credit or the sum of your discount. Examples of relevant circumstances include:

  • Marriage
  • Divorce
  • Birth or adoption of a child
  • Moving to a different state
  • Getting a new job
  • Gaining or losing health insurance coverage

For example, if you or your spouse got a high-paying job, you would likely lose your PTC. In contrast, if you had a child, your increased family size would skew your household income in relation to the FPL and qualify you for a larger subsidy. Regardless of how it might affect you, always report changes to the Marketplace immediately to ensure proper distribution of funds.

Other Ways to Save On Health Insurance 

Those unqualified for a PTC can still save money on health insurance by applying for cost-sharing reductions, joining health savings accounts, or enrolling in Medicaid or CHIP.

Cost-sharing reductions (CSRs) 

CSRs, also known as “extra savings,” help lower the amount Marketplace customers pay in deductibles, copayments, and coinsurance. Upon completing your general application, the Marketplace will inform you of your eligibility for CSRs or a premium tax credit.

Individuals and families that qualify for CSRs must enroll in Silver-tiered plans to access them. CSRs also lower the total covered medical costs you must share annually, also known as your out-of-pocket maximum. Your insurance carrier must pay for 100% of all covered services if you spend beyond this dollar amount.

Health Savings Accounts 

HSAs allow members to contribute pretax funds into private accounts for later use on qualified medical expenses, such as deductibles, copayments, coinsurance, and non-covered procedures like dental work or vision care.

To contribute to an HSA, you must already have enrolled in a High-Deductible Health Plan (HDHP), a type of insurance coverage that requires significantly high cost-sharing for non-preventative services. Because the IRS cannot tax any funds, interest, and other earnings in HSAs, they often prove a viable alternative to PTCs.

Medicaid and CHIP 

Medicaid offers free or low-cost healthcare to low-income Americans. The Children’s Health Insurance Program (CHIP) extends and reinforces benefits for children of Medicaid-eligible families. You will likely qualify for either government program if you earn below 138% of the federal poverty level.  

Both Medicaid and CHIP are administered by states, according to federal guidelines. Because coverage generally costs nothing out-of-pocket, Medicaid often proves more advantageous than subsidized Marketplace coverage for qualifying families.

All in All 

Congress enacted the Affordable Care Act in 2010 to expand access to affordable healthcare nationwide. As part of this initiative, they created the Health Insurance Marketplace, an online shopping center featuring policies with premium tax credits for individuals, families, and companies that meet specific criteria regarding their annual income, household size, and business expenditures.

Premium tax credits can significantly lower your health insurance premiums or manifest as lump sum refunds on your federal income tax return. Simply apply to join the Health Insurance Marketplace to discover your eligibility for a PTC and how much you can save.

FAQ

No. Utilizing premium tax credits on your health insurance policy does not affect your EITC or other potential tax breaks. The EITC came from an anti-poverty measure designed to provide tax relief to low and moderate-income households by calculating their earnings together. It is designed for working-class low and moderate-income households. Many people who qualify for an EITC also qualify for and take advantage of a PTC. 

Yes, you must renew your eligibility for premium tax credits every year during the Open Enrollment Period between November 1st and January 15th. If you live in a state utilizing Healthcare.gov, you can auto-renew your health coverage and APTC eligibility. While this feature can save time, it only serves individuals and families with no relevant household or income changes.

Non-Medicare-eligible retirees can still purchase benefits through the Health Insurance Marketplace and apply for a premium tax credit during the Open Enrollment Period. If you lose job-based coverage when you retire, you will qualify for a Special Enrollment Period that allows you to apply outside the conventional window. However, if you already have retiree benefits, you must drop them before regaining PTC eligibility.

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