What is the premium tax credit?
The premium tax credit is a refundable tax credit that can help lower your insurance premium costs when you enroll in a health plan through the Health Insurance Marketplace.
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You can receive this credit before you file your return by estimating your expected income for the year when applying for coverage in the Marketplace. This counts as the advance premium tax credit. You can also claim the premium tax credit after the fact on your tax return with your actual income.
The amount of credit you receive depends on your estimated income and your household information, which you'll report on any application you file with the Marketplace.
If your estimated income falls between 100% and 400% of the federal poverty level for a household of your size, you can claim the premium tax credit. You may use some or all of this credit in advance to lower your monthly premium costs, leaving money in your pocket.
If you use more of your premium tax credit than your final taxable income allows, you'll need to repay the difference when filing your Form 1040 at tax time. But if you use less of the premium tax credit during the year than you qualified for, you'll receive the difference as a refundable credit on your return.
It is important to note that for the tax year 2020, the American Rescue Plan Act of 2021 suspended the requirement to repay any excess of the advance payments of the Premium Tax Credit when filing your Form 1040.
Eligibility requirements for the premium tax credit
You must meet all of the following criteria to qualify for the premium tax credit:
- You must get your health care coverage through the Marketplace
- You can't be eligible for health care coverage through alternative options such as your employer or the government
- Your income needs to fall within a certain range
- Another person can't claim you as a dependent on their return
- You must file a joint return if you're married
Changes in income and family size may affect your eligibility, so report these to the Marketplace to ensure you receive the appropriate tax credit. The premium tax credit program uses the federal poverty line to determine the income ranges that qualify you for the credit.
The U.S. Department of Health and Human Services reports the annual federal poverty levels, which vary depending on whether you live in the contiguous 48 states and the District of Columbia, Hawaii, or Alaska.
The range is 100% to 400% of the federal poverty line amount for the size of your family for the current tax year.
For example, an individual earning between $12,880 and $51,520 in 2021 meets the income criteria to qualify, while a family of four qualifies with household earnings between $26,500 and $106,000.
Even if your income makes you eligible, you must meet the other qualification criteria as well. You'll use Form 8962 to determine your full eligibility to claim the premium tax credit.
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What is Tax Form 8962?
If you purchased health insurance from the Healthcare.gov site — or your state healthcare marketplace if you live in a state that maintains one — you'll need to use Tax Form 8962. This form has two parts you'll need to fill out:
- Determining your eligibility for the credit
- Claiming the premium tax credit
Form 8962 is also used to reconcile the premium tax credit you might be eligible for with any advanced premium tax credit payments you’ve already received.
The first part of the form determines your annual and monthly contribution amount based on your family income and tax family size. Your tax family generally includes you and your spouse if filing a joint return and your dependents. You must include all of your family's or household's income.
After filling in this information and determining your applicable federal poverty level, you can figure out the amount of credit you can claim. You have two choices for how to claim it:
- A credit to reduce your monthly payments on your health insurance premiums
- A credit to reduce your taxes on your return
If you choose the monthly payments, the government pays your insurer over the course of the year, which lowers your monthly premium costs.
If you can claim the premium tax credit and your insurer received advanced payments from the government, the second part of Form 8962 compares how much credit you used and your final available credit. There are three possible scenarios:
- If you elected to receive the refundable premium tax credit on your tax return, you can claim it against your tax liability
- If you have more available credit than the payments made to your insurer on your behalf, you can claim the remaining balance on your return to reduce your taxes
- If you underestimated your income and the government paid out more than your actual credit value, you'll need to repay the difference when you file your taxes
When you buy health insurance from the Marketplace, you need to provide information about your family size and income to determine your premium tax credit eligibility. During the year, you may experience changes in income that differ from what you expected when filling out the Marketplace application.
As a result, you might face different circumstances at the end of the year, meaning you might have credit leftover or you might need to repay some of your credit. However, the American Rescue Plan Act of 2021 suspended the requirement to repay any excess of the advance payments of the Premium Tax Credit for the tax year 2020.
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