A premium tax credit is money the federal government sends to your insurance company each month to reduce what you pay for coverage

The premium tax credit is a subsidy tied to your income. If your household income falls between 100% and 400% of the federal poverty line, you may receive monthly payments that go directly to your insurer. You never see the money — it simply lowers your monthly bill. The credit is only available if you buy coverage through the Health Insurance Marketplace (also called the Exchange) in your state, not through an employer or directly from an insurance company.

The amount you receive depends on your household income, family size, and the cost of the second-cheapest Silver plan available in your area. The government calculates how much you are expected to contribute based on your income, then covers the difference between that amount and the benchmark plan cost. If your actual income turns out to be different from what you reported when you enrolled, you may owe money back or receive a refund when you file taxes the following year.

Key Takeaways

  • Premium tax credits only work with Marketplace plans, not employer coverage or off-Marketplace insurance.
  • The credit amount is based on your household income, family size, and the cost of the second-cheapest Silver plan in your county.
  • The government sends the credit directly to your insurer each month, reducing your premium payment.
  • You must report your expected household income when you enroll, and any difference between your estimate and your actual income is settled when you file taxes.
  • Your credit can change during the year if your income or family size changes, and you can update your information anytime.

How the credit amount is calculated

The federal government uses a formula that compares two numbers: your expected contribution and the benchmark plan cost. Your expected contribution is a percentage of your household income — the percentage increases as your income rises, ranging from about 2% to 8.5% depending on the year and your income level. The benchmark plan cost is the monthly premium for the second-cheapest Silver plan in your county. The credit is the difference between these two numbers.

For example, if the benchmark Silver plan costs $400 per month and your expected contribution is $150, the credit would be $250. That $250 goes to your insurer each month. If you choose a plan that costs less than $400, you keep the difference as a lower premium. If you choose a plan that costs more, you pay the extra amount on top of your $150 contribution.

The benchmark plan changes every year, and so does the percentage used to calculate your expected contribution. This means your credit amount can shift even if your income stays the same.

Income limits and how they affect your credit

You can only receive a premium tax credit if your household income is between 100% and 400% of the federal poverty line. The poverty line changes each year and varies by family size. For 2024, the poverty line for a single person is about $14,600, which means the income range for a credit is roughly $14,600 to $58,400. For a family of four, the range is roughly $30,000 to $120,000.

Your credit amount decreases as your income increases. At the lower end of the range, the credit covers most or all of the benchmark plan cost. As your income rises toward 400% of poverty, your expected contribution grows, and the credit shrinks. At exactly 400% of poverty, the credit may be very small or zero.

If your income is below 100% of the poverty line, you do not may have access to for a premium tax credit through the Marketplace. You may be directed toward Medicaid instead, depending on your state's rules.

What happens if your income changes during the year

When you enroll in a Marketplace plan, you report your expected household income for that year. If your actual income turns out to be higher or lower, the difference is settled when you file your federal income tax return. If you received more in credits than you should have based on your actual income, you owe the overage back to the IRS. If you received less than you should have, you get a refund.

You do not have to wait until tax time to report a change. If your income increases or decreases during the year — because you lost a job, got a raise, got married, had a child, or any other reason — you can contact the Marketplace and update your information. The Marketplace will recalculate your credit based on your new income and adjust your monthly payment going forward. This prevents you from owing a large amount back at tax time.

Life changes like birth, marriage, divorce, or loss of other coverage also let you update your enrollment outside the annual open enrollment period. Report these changes as soon as they happen so your credit stays accurate.

Premium tax credits versus other tax credits and deductions

The premium tax credit is different from the out-of-pocket cost-sharing reduction, which is a separate subsidy that lowers your deductible and copays if you choose a Silver plan and your income is below 250% of poverty. You can receive both at the same time.

The premium tax credit is also different from the self-employed health insurance deduction, which is a tax deduction (not a credit) available to self-employed people who buy their own coverage. A deduction reduces your taxable income; a credit reduces the tax you owe. The premium tax credit is more valuable because it directly reduces what you pay for insurance each month, not just at tax time.

If you have access to employer coverage, you generally cannot use the premium tax credit. The IRS considers employer coverage "affordable" if the employee's share of the premium is less than about 8.5% of household income. If your employer's plan meets this test, you are not may be able to access for a Marketplace credit, even if the employer plan is expensive relative to your income.

How to report your income correctly when you enroll

When you create a Marketplace account, you will be asked for your expected household income for the current year. Use your best estimate based on what you think you will earn. If you are self-employed or have variable income, average your earnings over the past two years or use your most recent tax return as a guide. If you expect a significant change — a new job, a job loss, a spouse's income — factor that in.

The Marketplace may verify your income using IRS records, Social Security Administration data, or other sources. If there is a mismatch, the Marketplace will ask you to explain or provide documents like recent pay stubs, a tax return, or a letter from your employer. Provide these documents promptly so your enrollment is not delayed.

Reporting your income honestly and as accurately as possible protects you from owing money back at tax time. If you are unsure about your income, report a conservative estimate — slightly higher rather than lower — to reduce the risk of an overpayment.

When you lose the premium tax credit

Your credit ends if your income rises above 400% of the federal poverty line, if you gain access to affordable employer coverage, or if you lose Marketplace enrollment. If you move to a different state, your credit continues, but it is recalculated based on the benchmark plan in your new state, which may be higher or lower.

If you are incarcerated, you lose your credit and your Marketplace coverage ends. If you become a non-citizen or lose your lawful presence status, you also lose access to the Marketplace and the credit. If you die, your coverage and credit end as of the date of death.

If you voluntarily cancel your Marketplace plan, your credit stops. If you switch to a different Marketplace plan, your credit continues and applies to the new plan. If you are terminated from your plan for non-payment, your credit ends, though you may be able to re-enroll and restore it if you catch up on missed premiums.

Frequently Asked Questions

Do I have to pay back the premium tax credit if my income was higher than I reported?

Yes, if your actual income for the year was higher than what you reported when you enrolled, you received more in credits than you were may have access to to. The overage is treated as a tax liability and you owe it back when you file your return. The amount owed depends on how much higher your income was and how much extra credit you received.

Can I get the premium tax credit if I have a job that offers health insurance?

Only if your employer's coverage is not considered affordable. Affordable means the employee's share of the premium is less than about 8.5% of your household income. If your employer's plan meets this test, you cannot use the Marketplace credit. If the employee share is higher than 8.5%, you may be able to decline the employer plan and use the Marketplace instead.

What is the difference between the premium tax credit and the cost-sharing reduction?

The premium tax credit lowers your monthly insurance bill. The cost-sharing reduction lowers your deductible, copays, and coinsurance. You can receive both if you choose a Silver plan and your income is below 250% of the federal poverty line. The cost-sharing reduction is only available with Silver plans, but the premium tax credit works with any plan level.

Can I update my income information after I enroll?

Yes. You can update your income anytime through your Marketplace account if your circumstances change — a job loss, a raise, marriage, divorce, or a new child. The Marketplace will recalculate your credit based on your new income, and your monthly payment will adjust going forward. This prevents a large bill at tax time.

What happens to my premium tax credit if I move to a different state?

Your credit continues, but it is recalculated based on the benchmark plan cost in your new state. Some states have higher or lower plan costs, so your credit amount may increase or decrease. You must update your address in your Marketplace account and may need to re-enroll in a plan available in your new state.