Premium tax credits (a.k.a. advanceable tax credits) are insurance tax credits that may be used to pay for health insurance policies purchased through a state or federally run Health Insurance Exchange. Advanceable tax credits were established under the Affordable Care Act (a.k.a. Obamacare) to help make health plans available through Health Insurance Exchanges more affordable.
Lower-to-middle income families and individuals may be eligible for advanceable tax credits to help them pay for their insurance premiums. When used to lower the immediate premium for an insurance plan, the tax credit is paid directly to the insurer on behalf of the eligible individual, rather than the individual receiving a check in the mail. Payment of the premium tax credit directly to the insurer makes things much simpler for consumers who prefer to lower their costs up front.
Rather than being used immediately to lower premiums, consumers may also opt to pay their premiums in full and collect the insurance tax credit when they file their taxes (in the following year). A tax credit is more valuable than a tax deduction, because it reduces the amount of tax owed, rather than reducing taxable income. Advanceable tax credits are only available for health plans purchased through Health Insurance Exchanges established under Obamacare.
Premium tax credits (PTC) can be taken whole or just a portion in advance. If you take tax credits in advance, then your monthly premium can be reduced. Later, during tax time, you can take any remaining credits. To put this into effect, one must use Tax Form 8962 for Tax Credits.
It is important to remember that the credit will only apply to those whose household income is in the 100% to 400% range of the MAGI (modified adjusted gross income). If you are outside the range, then you will have to repay the disputed amount, come the end of the term.
Do You Qualify for Advanceable Tax Credits?
Individuals may qualify for an advanceable insurance tax credit if they meet the following criteria:
- Income Less Than 400% of the Federal Poverty Level (FPL) – In order to be eligible for an advanceable tax credit, individuals and families must have a combined household income that falls between 100% and 400% of the Federal Poverty Level.
- Enroll Through a Health Insurance Exchange – An individual must enroll in a health insurance plan that is offered through a state or federally run Health Insurance Exchange.
- Not Eligible for Other Acceptable Coverage – Advanceable tax credits are only available to individuals who do not qualify for Medicare, Medicaid, Children’s Health Insurance Programs (CHIP), military health insurance programs, or (in most cases) an employer-sponsored group plan. Individuals, as well as their dependents, who are eligible for employer-sponsored group coverage will only be eligible for premium tax credits if the cost of covering just the employee is more than 9.5% of the individual’s annual income, or if the plan pays for less than 60% of the cost of covered benefits.
- File Income Taxes – Although tax credits can be paid directly to the insurer in advance, they must ultimately be reconciled when the individual files their tax return (in the following year).
When applying for an advanceable tax credit, the amount awarded is based on a consumer’s estimated household income for the coverage year. If an individual or family is awarded a higher insurance tax credit than what they actually qualify for once their final yearly income has been calculated, they will have to repay the difference when they file their federal income tax return for the coverage year. If the amount awarded is less than the tax credit for which they qualify (based on the calculation of their final annual income), they will receive the balance as a refundable tax credit when they file their taxes for the coverage year.
Changes in Circumstance
If an individual buys health insurance coverage through a Health Insurance Exchange and gets help paying for premiums in the form of an advanceable tax credit, they must report certain major life events or changes in their income to the Exchange. Certain changes to an individual’s household income or family size that occur during the coverage year could result in the need for a tax credit adjustment. Alerting Health Insurance Exchanges to these changes quickly will help to prevent having to repay tax credits in circumstances where the credit is lowered, as well as help individuals to receive immediate financial relief when changes in circumstance result in eligibility for higher tax credits.
Changes that can have an impact on how much premium tax credit someone can receive include:
- Increases or decreases in household income, including bonuses or lump sum benefit payments.
- Marriage or divorce
- The birth or adoption of a child
- Gaining or losing eligibility for other healthcare coverage
- Gaining or losing employment-based coverage
- Moving to a new address where different insurers/plans are available
In addition to affecting advanceable tax credit eligibility, certain life events (known as Qualifying Life Events) will also allow an individual the ability to re-evaluate their coverage options and change health insurance plans outside of the Annual Open Enrollment Period. Learn more about these Qualifying Life Events, here.