Posted by The TaxAdvocate Group, LLC

What Is A Premium Tax Credit?

What Is A Premium Tax Credit?

The premium tax credit is a refundable tax credit that reduces the monthly premiums for plans in the health insurance market. The figure of the premium tax credit depends on household income and other factors.

Let's take a closer look at what a premium tax credit is, how it works, and how you can qualify.


Definition and examples of premium tax credits

The Premium Tax Credit was created to provide affordable health insurance for low to moderate-income families and individuals. It is only available for health insurance underwritten in the health insurance market (Exchange and HealthCare.gov). One of the primary requirements is that your income must be between 100% and 400% of the poverty line for your family size (other eligibility criteria are described below).

The premium tax credit works on a sliding scale, so the lower the income, the higher the credit. It's also a refundable tax credit, so you can get a refund when you file your federal income tax return if your credit is more than your tax payable.


How premium tax credits work

When you sign up for a plan, you can choose to receive the premium tax credit to reduce your monthly premium or when you submit your next tax return. If you agree in advance, the issuer calculates the estimated amount of credit based on the information at their disposal. If you use less than the allocated tax credit, you will receive a refundable credit for your tax payable at the time of submission.

If you use more tax credits than you are entitled to based on your final annual income and family size, you have to pay the difference when you file your tax return. There are repayment limits based on income and process status, but if your income is 400% or more above the federal poverty line, you will need the full amount.

To claim the premium tax credit, you will need to complete Form 8962 and attach it to Form 1040 during the tax season.


How to qualify for a premium tax credit

You may be entitled to a premium tax credit if you meet the following criteria: 

  • If married, you must file a joint income tax return unless you qualify for an exception.

  • You cannot be declared dependent on someone else's tax return.

  • You have paid all health insurance premiums.

  • You or a member of your family have a plan through the market.

  • You or your family members are not eligible for an employer or government-sponsored health insurance.

  • Your family income is between 100% and 400% of the federal poverty line, depending on the size of your family (although you may still be eligible if your family income is less than 100% if you meet all the requirements set by the IRS). 


Premium Tax credits for 2020 and 2021 

The maximum health insurance premium that you would pay for an insurance plan is typically the first of the Second Lowest Money plan (SLCSP) available in the market, less a specified percentage of your family's income based on the federal poverty level. Therefore, the premium tax credit is the difference between the maximum gross premium contribution and the plan premium. The SLCSP is sometimes also called the "benchmark plan."

Premium tax credit = gross cost of the SLCSP - your maximum premium contribution

Your benchmark plan premium is also written on Form 1095-A, a tax form that Marketplace will send in February if a family member signed up for a Marketplace plan the previous year.

Here is how much you are responsible for the first SLCSP, based on the fiscal year and income relative to the income level.

Income as a Percentage of the Federal Poverty Line

Percentage of SLCSP Premium You Pay on Income Earned in 2020

Percentage of SLCSP Premium You Pay on Income Earned in 2021

100%-132%

2.06%

2.07%

133%-149%

3.09%-4.12%

3.10%-4.14%

150%-199%

4.12%-6.49%

4.14%-6.52%

200%-249%

6.49%-8.29%

6.52%-8.33%

250%-299%

8.29%-9.78%

8.33%-9.83%

300%-400%

9.78%

9.83%

  


An example of a premium tax credit

Suppose you live in one of the states of the United States and want to calculate your premium tax credit for a market health insurance plan that you purchase in 2021. Federal Poverty Guidelines show that the poverty line in a family of three is $21,960. Your income for 2021 will be $54,900, which puts you at 250% of the poverty line ($54,900 / $21,960 = 2.5, 2.5 x 100% = 250%). This means that you are responsible for paying between 8.33% and 9.83% of the SLCSP.

Now, suppose the benchmark plan available to you costs $10,000. If your maximum premium contribution is 8.33%, you would only pay $833, and your premium tax credit would be $9,167 ($10,000 - $833).

Your premium tax credit remains the same regardless of what type of Marketplace package you choose (Bronze, Silver, Gold, or Platinum) and the cost of that health package. But if you buy a more expensive one than the SLCSP, the difference between those plans will add up to your monthly insurance bill.

Only Silver plans are eligible for cost-sharing reductions, which reduce direct costs for items such as additional and deductible costs. Cost-sharing reductions are available for people with family income between 100% and 250% of the poverty line.


Summary

  • Any unused credit is deducted from your tax liability at the time of processing. If a change in circumstances or some other reason caused you to use more credit than was eligible, you might be required to reimburse all or part of the difference.

  • If you have purchased health insurance in the market, you will receive tax form 1095-A during the tax period. If you claim the premium tax credit, you will need to complete Form 8962 and attach it to Form 1040 when you file your taxes. 

  • The premium tax credit corresponds to the second Silver plan's cost, the lowest price minus the maximum price contribution.

  • The refundable premium tax credit reduces the health insurance premiums of market plans for eligible low- and middle-income individuals and families.


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