Posted by Abundant Wealth Planning LLC

Premium Tax Credit

Premium Tax Credit

Due to the Affordable Care Act (ACA), millions of Americans are entitled to a premium tax credit that helps pay for health coverage. This question and answer explain who qualifies for the tax credit, how an individual's or family's credit amount is calculated, how changes in mid-year income and family size affect the eligibility for the credit, and how the amount of the tax credit a person receives and the amount to which they were entitled will be reconciled.

What is the premium tax credit?

The ACA formulated a federal tax credit that assists people in purchasing health insurance in the health insurance (also known as exchange) markets. The premium tax credit is available immediately after joining an insurance plan so families can get help when needed, instead of waiting to file their taxes. People can choose to have insurers pay the tax credit portion of their monthly health insurance premiums or wait to file their taxes to claim them.


Who is qualified for a premium tax credit?

The Premium Tax Credit is accessible to families and individuals with incomes between the federal poverty line and 400% of the federal poverty line who purchase health insurance coverage in their state. A premium tax credit is also available for legally resident immigrants with incomes below the poverty line who are not qualified for Medicaid because of their immigration status.

To be eligible for a premium tax credit, individuals must be U.S. citizens or legally reside in the United States. They cannot claim a premium tax credit if they are entitled to some other "essential minimum coverage," which includes most other health insurance types, such as Medicare or Medicaid, or coverage sponsored by the employer, which is considered appropriate and practical.

What type of health insurance in the market can you purchase with the credit?

Families and individuals can use their premium tax credit to purchase four different types of plans offered in the market in their state: bronze, silver, gold, and platinum. All plans sold in the market must meet standards to ensure adequate coverage. However, plans vary, with bronze plans providing the lowest coverage and platinum plans providing the most comprehensive.

Bronze plans typically require the most extensive "cost-sharing - costs like deductibles and copayments. Platinum plans would have the lowest overall cost share. For instance, a bronze plan will most likely have a higher deductible than that of a silver plan, while a platinum plan will most likely have a lower deductible than that of a silver plan. People can buy one of four types of plans. But cost-sharing cuts, which are available to people with incomes up to 250% of the poverty line that reduces deductibles and total direct costs depending on the plan, are only available to people who buy a silver plan. 

Markets also have catastrophic plans that are less comprehensive than Bronze plans, but only available to people under the age of thirty (30) and those granted a market exemption due to the difficulty or lack of an affordable insurance option. A premium tax credit cannot be used to purchase these plans.

Premium Credit Calculation:

Premium credit effectively limits family contributions as part of the income of those who purchase mid-size "referral" plans. In 2020, maximum family contributions ranged from 2.06% of income for poor households to 9.78% for households between 300 and 400% of the federal poverty line. The premium credits are equal to the difference between the gross premiums and the maximum family contributions.

For instance, consider a family of four with 200% FPL income in 2020 that purchases an insurance plan that costs $ 15,000. By multiplying your family income (here, $ 51,500) by the maximum applicable premium of 6.49%, you receive a family contribution of $ 3,342, then a premium credit of $ 11,658 ($ 15,000 - $ 3,342).

The example above assumes that the family purchases the second cheapest plan (Silver) from the Bronze, Silver, Gold, and Platinum health plan menu offered on Marketplaces. If the family bought a more expensive plan, the loan would remain unchanged, and the family would pay the total premium difference.

The premium tax credit is not affected by the zeroing of personal exemptions.

The IRS made it clear that the taxpayer's ability to claim the health premium tax credit is not affected by the zero reduction in the personal exemption deduction for years of 'taxation from 2017 and before 2026, even if the calculation of the tax credit for the premium depends in part on the personal exemptions of the taxpayer.

The Service did not modify the settlement proposals issued in May 2020 and noted that no comments had been received and that no public hearing on the settlement proposals had been requested. 

Some primary tax credit rules depend in part on whether taxpayers claim a personal exemption deduction under Section 151 for themselves, their spouse, and any other dependents. The rules affected by personal exemptions include eligibility for the premium tax credit, how the premium tax credit is calculated, reconciliation of advance credit payments, and tax reporting requirements concerning the tax credit on the premium.

The final regulation provides that the reduction to zero of the deduction of the personal exemption per the law, known as the law on tax reductions and employment, does not affect in any way Section 36B premium tax credit. This is in line with the fact that taxpayers can always deduct Section 151 from personal exemptions for other purposes, as provided for in Sec 151 (d) (5) (B).

Taxpayers must correctly indicate on their tax return the persons for whom they are claiming a deduction for personal exemption. A person is declared in the taxpayer's income tax return if their name and identification number are indicated on the 1040 income tax return form.

The final rules apply for years ending on or after 31 December 2020. However, taxpayers may apply final rules for tax years to which Article 151 (d) (5) applies before 31 December. December 2020.



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