The Premium Tax Credit is a federal subsidy that lowers your monthly health insurance bill

The Premium Tax Credit is money the federal government sends directly to your insurance company each month to reduce what you pay for coverage. You do not receive it as a refund or a check — it works by shrinking your premium (the monthly bill you owe) before you even see the invoice. The credit is available only if you buy insurance through the Health Insurance Marketplace, not through an employer or a plan you find on your own.

The amount you receive depends on your household income, the cost of the second-cheapest Silver plan in your area, and the number of people on your policy. If your income is between 100 and 400 percent of the federal poverty line, you almost certainly may have access to for at least some credit. The credit is refundable, meaning if it is larger than your tax bill, you receive the difference as a refund when you file taxes.

Key Takeaways

  • The Premium Tax Credit is a monthly subsidy sent to your insurance company, not a payment you receive directly or claim later.
  • You must buy your plan through the Health Insurance Marketplace to use the credit; employer plans and off-marketplace plans do not may have access to.
  • The credit amount is based on your expected household income for the year, so you must report changes (job loss, marriage, new child) within 30 days to avoid overpayment.
  • You can claim the credit in advance (the insurer reduces your bill each month) or claim it when you file taxes; most people use advance credit to lower their monthly cost.
  • If your actual income turns out higher than you estimated, you may have to repay some or all of the credit when you file taxes.

How the credit is calculated and what determines your amount

The federal government calculates your credit using three pieces of information: your household income for the year, the number of people covered, and the cost of the second-cheapest Silver plan available in your county. The credit is designed so that you pay a percentage of your income toward the premium, and the government covers the rest.

The percentage you are expected to pay increases with income. For example, someone at 150 percent of the poverty line might pay 0 to 2 percent of their income toward insurance, while someone at 350 percent of the poverty line might pay around 9 percent. The government then calculates what the second-cheapest Silver plan costs in your area and subtracts your expected contribution from that amount. That difference is your credit.

If you choose a plan cheaper than the second-cheapest Silver, you keep the difference as a savings. If you choose a more expensive plan, you pay the difference out of pocket. This is why the second-cheapest Silver plan is called the "benchmark" — it is the reference point the government uses to set your credit amount.

Advance credit versus claiming the credit on your tax return

You have two ways to use the Premium Tax Credit. The first is advance credit, where you tell the Marketplace what you expect to earn, and the government sends money to your insurer each month to reduce your bill immediately. The second is to claim the full credit when you file your taxes the following year, paying the full premium yourself each month and then getting reimbursed.

Most people use advance credit because it lowers their monthly cost right away. To use it, you estimate your household income when you enroll, and the Marketplace calculates your credit based on that estimate. Your insurer then reduces your premium by that amount each month. When you file taxes the next year, you reconcile — if you earned less than you estimated, you may get an additional refund; if you earned more, you may owe some back.

Claiming the credit only at tax time makes sense if your income is unpredictable or if you want to avoid the risk of owing money back. However, you lose the benefit of lower monthly payments, so this route is less common.

What happens if your income changes during the year

Your credit is based on your expected income for the entire year. If your actual income changes — you lose a job, get a raise, get married, have a child, or experience another major change — you should report it to the Marketplace within 30 days. Reporting changes allows the Marketplace to recalculate your credit so your monthly bill stays accurate.

If you do not report a change and your actual income ends up higher than you estimated, you will owe back some or all of the credit when you file taxes. The repayment is capped depending on your income level, but it can still be a significant amount. If your income drops, reporting it means your credit increases, lowering your monthly bill sooner.

You can report changes by logging into your Marketplace account or calling the Marketplace customer service line. Keep documentation of the change — a termination letter, a new job offer, a birth certificate, or a marriage license — because the Marketplace may ask for proof.

The reconciliation process at tax time

When you file your federal income tax return, you reconcile the advance credit you received with the credit you actually may have access to for based on your real income. The IRS uses Form 8962 (Premium Tax Credit Reconciliation Statement) to compare the two amounts.

If you received more credit than you may have access to for, you owe the difference back. However, there are repayment caps that limit how much you have to repay based on your income level. For example, someone with income between 200 and 300 percent of the poverty line might owe back no more than $650 (the cap changes yearly). If the cap is lower than what you owe, you keep the extra credit as a refund.

If you received less credit than you may have access to for, the difference is added to your tax refund. This can happen if your income dropped during the year or if you underestimated how many dependents you would have.

Who qualifies for the Premium Tax Credit

To receive the Premium Tax Credit, you must meet four requirements. First, your household income must be between 100 and 400 percent of the federal poverty line (some states have expanded this to 400 percent and above). Second, you must be a U.S. citizen or a may have access to immigrant. Third, you cannot be claimed as a dependent on someone else's tax return. Fourth, you must enroll in a plan through the Health Insurance Marketplace.

You do not may have access to if you have access to affordable employer-sponsored insurance. The Marketplace will ask whether your employer offers coverage and whether the employee premium is affordable (generally defined as less than 9.12 percent of your household income, though this percentage changes yearly). If your employer offers coverage that meets the affordability standard, you are not may be able to access for the credit, even if you choose not to take the employer plan.

Some people with very low income (below 100 percent of the poverty line) may not may have access to for the credit but may may have access to for Medicaid instead, depending on their state.

How the credit affects your taxes and what to expect

The Premium Tax Credit is treated as a refundable tax credit, meaning it can reduce your tax bill to zero and result in a refund. However, using advance credit does not change how much you owe in taxes — it only changes how much you pay for insurance each month. The reconciliation happens when you file.

If you owe money back at tax time, it reduces your refund or increases the amount you owe. If you are may have access to to more credit, it increases your refund. Many people are surprised to learn they owe money back, so it is important to report income changes during the year to avoid a large bill in April.

You will receive Form 1095-B from your insurer and Form 1095-A from the Marketplace. Form 1095-A shows the advance credit you received and is required to file your taxes if you used advance credit. Keep these forms and any documentation of income changes when you file.

Frequently Asked Questions

Can I use the Premium Tax Credit if my employer offers health insurance?

No, if your employer offers coverage and the employee premium is considered affordable (generally less than 9.12 percent of your household income), you are not may be able to access for the credit. However, if the employer plan is unaffordable or does not meet minimum coverage standards, you may be able to use the credit even if the offer exists. Contact the Marketplace to discuss your specific situation.

What happens if I do not report a job loss or income drop?

If your income drops and you do not report it, you will continue paying the same monthly premium based on your old income estimate. When you file taxes, the Marketplace will recalculate your credit based on your actual (lower) income, and you will receive the difference as a refund. Reporting the change sooner means you benefit from the lower premium immediately.

Can I get the Premium Tax Credit if I am self-employed?

Yes. Self-employed people calculate their income using their net business income (revenue minus business expenses). You must enroll through the Marketplace and meet the income requirements. Self-employed income can be unpredictable, so reporting changes during the year is especially important to avoid a large reconciliation at tax time.

What if I owe money back at tax time and cannot pay it?

If you owe money back, the IRS will treat it like any other tax debt. You can request a payment plan, ask for an offer in compromise, or explore other options through the IRS. The repayment is capped based on your income, so the amount you owe is limited. Contact a tax professional or the IRS for help managing the debt.

Does the Premium Tax Credit cover dental or vision insurance?

No. The credit applies only to medical coverage (health insurance plans). Dental and vision coverage are separate products. Some Marketplace plans include dental or vision add-ons, but the credit does not reduce the cost of those add-ons — it applies only to the medical portion of the plan.