In this recent post, we covered some of the essentials for understanding the relationship between health insurance and taxes. These key areas include: important paperwork (1095-A and 8962 forms), how the IRS verifies coverage, and how to file taxes if you did not have health insurance for any point in the year. Health insurance tax credits were briefly mentioned, but they deserve their own dedicated article here.
If you are familiar with plans offered through the Health Insurance Marketplace, you may be familiar with the term Premium Tax Credit (also referred to as an Individual Health Insurance Tax Credit). If this tax year marks your first time determining your credit, never fear. This piece will unpack all of the basics, including what it is, how it’s earned, and circumstances that may affect the amount you receive.
What is the Premium Tax Credit?
The Premium Tax Credit (hereafter referred to as “tax credit”) is a credit designed to assist eligible individuals and families in paying their health insurance premium for plans purchased through their state’s Marketplace.
To oversimplify (and we will get into more detail below), the tax credit helps those with lower income and/or a larger household size to cover the cost of their health insurance. The amount credited operates according to a sliding scale based on those two factors. Upon enrollment in a Marketplace plan, individuals can elect to have an estimated credit applied upfront (advance premium tax credit), or choose to receive credit benefits at year’s end when completing their tax return. In either case, Form 8962 will play a part (more on all of this addressed in the “How” section later).
Who is eligible for this credit?
As mentioned above, tax credit eligibility is contingent on a few items. You must have enrolled in a health insurance plan through your state’s Marketplace. You can learn more about plans offered by your state here (select your state from the drop-down). Secondly, your total household income must fall between 100-400% of the federal poverty level according to household size.
This table, adapted from IRS.gov, outlines the Federal Poverty Line (FPL) as it applies to 2017 tax returns and several average household sizes. For more ranges of different household sizes, HealthCare.gov has a variety of numbers here.
| Household Size | 100% of FPL | …up to… | 400% of FPL |
| Individual | $11,880 | $47,520 | |
| Family of 2 | $16,020 | $64,080 | |
| Family of 4 | $24,300 | $97,200 |
There are two additional requirements for determining tax credit eligibility. If married, you must file your tax return with the status “Married”. Individuals filing “Married Filing Separately” are ineligible to receive a tax credit, unless an exemption is met. Victims of domestic abuse or spousal abandonment may still qualify, and the flow chart on page 5 of Publication 974 will help confirm this eligibility.
Finally, you cannot be claimed as a dependent by another person filing taxes and still qualify as eligible.
How do I use my tax credit?
When you first apply for health insurance in the Marketplace, you will learn if you qualify for a tax credit based on your stated income and household size. Next, you can elect to apply the estimated credit to your premium to lower your monthly premiums. You can choose to apply all, some, or none of the estimated credit upon enrollment. Using the credit early is referred to as an “advanced payment of the premium tax credit” (APTC). Depending on the amount you choose to apply, you will need to “reconcile” at the end of the year when filing taxes, and this will determine how much is owed or refunded.
Note: if your year-end income or household size is different than from when you first applied for insurance, this affects what you owe or are refunded when filing taxes. More on this in the next section.
What if my income or household changes throughout the year?
If you experience a change in income or household size in a given year, it’s likely that your health insurance tax credit will change as well. For example, say your income increased or you lost a member of your household. This will likely lower your monthly premium tax credit. Report the changes to HealthSherpa or your state’s Marketplace as soon as possible, so they may adjust your credit accordingly. Of course, same goes for lowered income or addition of a household member, in that your monthly premium tax credit will likely increase.
Say you did not report these adjustments to the Marketplace in real time. At year’s end when you’re filing taxes, you may have to pay the difference in credit attributed to your change in income or household size. If you used less credit than you qualified for, you will receive the difference as part of your return.
How do I claim the credit on my tax return?
If you elected to receive your credit in advance, and your final income determines a higher premium tax credit than you used, you will receive the remaining credit with your tax refund. If your final income determines a lower premium tax credit than before, the remaining balance is paid back in your tax return.
Say you chose to receive your credit at the year’s end upon filing. You will claim the final calculated amount which will either increase or lower your tax refund. It’s worth noting that both scenarios are fairly similar, the difference is whether you chose to apply the credit in advance or at the end of the year.
Form 8962 will determine how much credit you are eligible to receive. Refer back to our previous piece for more on using this form for reconciliation.
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Taxes can feel overwhelming, but we hope this piece illustrates how fairly simple it is to determine credit eligibility. To briefly summarize, you learn your estimated tax credit when applying for health insurance through your state’s Marketplace. It will be based upon your provided income and household size. This tax credit amount is adjustable at any time, depending on changes to your income and household size. Report these changes in real-time to HealthSherpa or your state’s Marketplace. When filing taxes at the end of the year, complete Form 8962 to reconcile your tax credit. That is, provide updated income or household size information to determine the amount for refund.