What Is A Premium Tax Credit?

What Is A Premium Tax Credit? text overlaying image of a tax professionalA premium tax credit is a form of financial assistance designed to make health insurance more affordable for individuals and families with moderate incomes. Especially those purchasing coverage through the Health Insurance Marketplace established by the Affordable Care Act (ACA). This article aims to demystify the concept of premium tax credits, clarifying who qualifies for them, how they work, how to apply them. As well as providing valuable insight for those considering their health insurance options.

 

Understanding premium tax credits is crucial for navigating the complexities of health insurance costs. Especially for those purchasing coverage through the Health Insurance Marketplace. These tax credits are designed to make health insurance more affordable for individuals and families by reducing their monthly premium expenses. To grasp the full scope of premium tax credits, it’s important to delve into the details of their design, eligibility criteria, and the impact they have on health insurance affordability.

Design of Premium Tax Credits

Premium tax credits are structured to adjust based on an individual’s income relative to the Federal Poverty Level (FPL), the cost of health insurance plans in their area, and the size of their household. The ACA’s framework ensures that the lower an individual’s income (within the eligibility range), the larger the tax credit they receive, making health insurance premiums more manageable. The amount of the credit is calculated to cap the cost of the premium for a benchmark plan (the second-lowest-cost Silver plan available in the Marketplace) at a certain percentage of the individual’s household income. This ensures that individuals are not spending a disproportionate amount of their income on health insurance.

Eligibility for Premium Tax Credits

Eligibility for premium tax credits is a critical aspect of the Affordable Care Act (ACA). Designed to make health insurance more affordable for individuals and families. Understanding the nuances of eligibility can help potential beneficiaries navigate the system more effectively. This section delves deeper into the various criteria that determine eligibility for premium tax credits.

Income Range

The income range for eligibility is set between 100% and 400% of the Federal Poverty Level (FPL) for your household size. This range is pivotal because it targets financial assistance to those who are most in need of support to afford health insurance. But might not qualify for Medicaid. For example, in 2021, for a single individual, this range would translate to an annual income between approximately $12,760 and $51,040. It’s important to note that these figures are adjusted annually for inflation and can vary by state, especially in those that have expanded Medicaid coverage.

Health Insurance Marketplace Enrollment

Eligibility for premium tax credits is contingent upon purchasing health insurance through the Health Insurance Marketplace. This platform was established under the ACA to facilitate the comparison and purchase of health insurance plans by individuals and small businesses. The Marketplace is accessible in each state, either through a state-operated exchange or through the federal exchange.

Filing Status and Dependents

Your tax filing status significantly influences your eligibility for premium tax credits. Individuals who are claimed as dependents on someone else’s tax return are generally ineligible for these credits. Moreover, there are specific rules for married couples: they must file jointly to qualify for premium tax credits. This requirement aims to streamline the administration of the tax credits and ensure that household income is accurately represented.

Lack of Affordable Coverage Elsewhere

One of the key eligibility criteria is the lack of access to other affordable health insurance options. If you have access to affordable health insurance through an employer (either your own or a family member’s) that meets minimum essential coverage standards, you would not be eligible for premium tax credits. “Affordable” in this context is defined as a health plan costing less than 9.83% (as of 2021) of your household income for employee-only coverage. Similarly, eligibility is affected if you are enrolled in government programs like Medicare, Medicaid, or the Children’s Health Insurance Program (CHIP).

Legal Residency and Citizenship

Eligibility for premium tax credits extends only to U.S. citizens and lawfully present residents. This includes U.S. nationals and individuals with non-citizen status that the Department of Health and Human Services has approved for Marketplace coverage, such as green card holders, refugees, and asylum seekers. Unauthorized immigrants are not eligible for premium tax credits.

Special Considerations

There are special considerations and exceptions within these criteria. For instance, individuals who have experienced life changes such as marriage, divorce, the birth of a child, or loss of a job may have special enrollment periods during which they can apply for coverage and premium tax credits outside of the annual open enrollment period. Additionally, in some cases, individuals with incomes below 100% FPL may qualify for premium tax credits if they are not eligible for Medicaid due to their state not expanding Medicaid coverage under the ACA.

Calculating Premium Tax Credits

Calculating premium tax credits involves a detailed process that takes into account an individual’s or family’s income, the cost of health insurance plans in their area, and their family size. This calculation is designed to ensure that people eligible for these credits can afford health insurance by limiting their cost to a set percentage of their income. Let’s delve deeper into how these calculations are made.

Income and the Federal Poverty Level (FPL)

The cornerstone of the premium tax credit calculation is the individual’s or family’s income in relation to the Federal Poverty Level (FPL). The FPL serves as a baseline to determine the percentage of income that an individual or family can afford to spend on health insurance. The ACA has established that if your household income falls between 100% and 400% of the FPL, you’re likely eligible for some level of premium tax credit. The percentage of income you are expected to contribute towards your health insurance (your “income contribution”) scales with your income. For example, at the lower end of the income scale, you might be expected to contribute around 2% of your income towards premiums, whereas at the higher end, this contribution could rise to 9.5%.

The Benchmark Plan

The premium tax credit calculation uses the cost of the “benchmark” plan as a reference. The benchmark plan is the second-lowest-cost Silver plan available in the Marketplace in your area. The idea is that the premium tax credit should cover the difference between your income contribution (based on the sliding scale mentioned above) and the cost of the benchmark plan.

For instance, if the benchmark plan costs $300 per month and your calculated income contribution is $100 per month, your premium tax credit would be $200 per month.

Choosing a Different Plan

It’s essential to understand that you’re not restricted to enrolling in the benchmark plan. You can choose any Marketplace plan. However, your tax credit remains calculated based on the cost of the benchmark plan. This means if you choose a plan that costs less than the benchmark plan, you could pay less for your premiums. Conversely, if you choose a more expensive plan, you’ll pay the difference.

Adjusting for Family Size

The calculation also adjusts for family size, recognizing that larger families have higher living costs. The FPL is higher for larger families, which in turn affects the calculation of the premium tax credit. A family of four, for example, has a higher FPL threshold than a single individual, which can lead to a higher tax credit amount, all else being equal.

Geographic Variations

Because the cost of living and health insurance premiums vary widely across the country, the premium tax credit calculation takes into account geographic differences. The benchmark plan’s cost in a high-cost area will be higher than in a lower-cost area, which can lead to larger tax credits for residents of high-cost areas to ensure affordability.

Annual Adjustments

The ACA includes provisions for annual adjustments to the premium tax credit calculation to reflect changes in the economy, the cost of health insurance, and other relevant factors. These adjustments can affect the FPL, the percentage of income individuals are expected to contribute, and other parts of the calculation.

How to Use Premium Tax Credits

Using premium tax credits effectively is crucial for individuals and families looking to make health insurance more affordable. Once you’ve determined your eligibility for a premium tax credit and understand how much you’re entitled to, the next step is deciding how to apply this financial assistance to your health insurance costs. There are two primary methods for using premium tax credits: advance payments and claiming them on your tax return. Let’s explore these options in more detail.

Advance Premium Tax Credit (APTC)

The Advance Premium Tax Credit (APTC) is a popular choice for many individuals because it provides immediate financial assistance with monthly premium costs. When you opt for APTC, the estimated amount of your premium tax credit is paid directly to your health insurance company on your behalf each month. This reduces the amount you need to pay out-of-pocket for your monthly premiums.

 

  • Immediate Benefit: The most significant advantage of APTC is that it lowers your monthly insurance cost upfront, making it easier to manage your budget.
  • Estimation Based: The APTC amount is based on the income and household information you provide when you apply for coverage through the Health Insurance Marketplace. It’s crucial to provide accurate estimates to avoid issues during the reconciliation process.

Reconciliation at Tax Time

Choosing APTC requires a reconciliation process when you file your federal income tax return for the year. This process compares the amount of APTC you received based on your estimated income with the amount you’re eligible for based on your actual income.

 

  • Owing Money Back: If your actual income for the year is higher than you estimated, you might have to pay back some or all of the APTC payments made on your behalf.
  • Additional Credit: Conversely, if your actual income is lower than estimated, you may be eligible for a larger tax credit than you received. In this case, the difference will be credited to you when you file your tax return, potentially increasing your refund or reducing the amount of tax you owe.

Claiming the Full Amount on Your Tax Return

Alternatively, you can choose not to receive APTC and pay the full premium amount yourself each month. Then, when you file your federal income tax return, you can claim the full amount of the premium tax credit you’re eligible for based on your actual income.

 

  • Lump Sum Benefit: This option can be beneficial if you prefer to receive a larger refund at tax time or if you’re unsure about your income and want to avoid the potential need to repay any of the APTC.
  • Budget Consideration: However, this option requires that you have the financial means to pay the full monthly premium throughout the year, which may not be feasible for everyone.

Factors to Consider

When deciding how to use your premium tax credit, consider your financial situation, your ability to estimate your income accurately, and your preference for managing monthly expenses versus annual tax implications. Here are some factors to keep in mind:

 

  • Income Fluctuations: If your income is unpredictable, the APTC might lead to discrepancies that need to be reconciled at tax time.
  • Financial Planning: Paying full premiums and claiming the credit on your tax return might suit those who prefer a lump sum benefit and are comfortable with the upfront cost.
  • Tax Implications: Understand the tax implications of both options, including the potential need to repay APTC or the impact on your tax refund.

Reconciliation Process

The advance payment option requires a reconciliation process when you file your annual tax return. Since the advance payments are based on estimated income, any discrepancy between your projected and actual income must be settled. If your actual income is higher than estimated, you may have to repay some or all of the advance payments. Conversely, if your income is lower, you might be eligible for an additional credit.

Impact of the American Rescue Plan Act (ARPA)

The ARPA, enacted in 2021, expanded the eligibility for premium tax credits temporarily, allowing more individuals and families to qualify and increasing the amount of credit available. It’s important to stay updated on such legislative changes, as they can significantly impact your eligibility and the amount of your credit.

Applying for Premium Tax Credits

Applying for a premium tax credit is a critical step in securing affordable health insurance through the Health Insurance Marketplace. This process involves several key stages, from estimating your income to choosing how to apply your tax credit. Understanding each phase can help you navigate the application process smoothly and ensure you receive the appropriate level of financial assistance. Let’s delve into the details of applying for a premium tax credit.

Estimating Your Income

The first step in applying for a premium tax credit is to accurately estimate your household income for the year you will be covered by the health insurance plan. This includes all taxable income such as:

 

  • Wages
  • Salaries
  • Tips
  • Self-employment income
  • Alimony
  • Rental income
  • Investment returns.

Accuracy is key. It’s crucial to provide an accurate income estimate. Because your premium tax credit amount is based on this information. Overestimating or underestimating your income can lead to issues during the reconciliation process. Be prepared to provide documentation or evidence of your estimated income. Such as pay stubs, tax returns from previous years, or profit and loss statements if you’re self-employed.

Creating an Account on the Health Insurance Marketplace

To apply for a premium tax credit, you’ll need to create an account on the Health Insurance Marketplace website. This involves providing some basic information about yourself and your household, including your address, family size, and income information.

 

  • State-Specific Marketplaces: Some states operate their own Health Insurance Marketplaces. So you may need to visit your state’s Marketplace website instead of the federal site.
  • Assistance Available: If you need help during this process, assistance is available through navigators and certified application counselors who can guide you through the application.

Selecting a Health Insurance Plan

Once you’ve entered your information into the Health Insurance Marketplace, you’ll be presented with a range of health insurance plans to choose from. These plans are categorized into metal levels (Bronze, Silver, Gold, Platinum) based on their coverage and cost-sharing structures.

 

  • Consider Your Health Care Needs: When selecting a plan, consider your health care needs. Including the level of coverage you require and any preferred doctors or medical facilities.
  • Benchmark Plan: Remember that the premium tax credit calculation is based on the second-lowest-cost Silver plan available in your area. You can choose a different plan, but this will affect your out-of-pocket costs.

Choosing How to Apply Your Tax Credit

You have the option to apply your estimated premium tax credit directly to your monthly premiums (Advance Premium Tax Credit). Or to wait and claim the full amount on your annual tax return.

  • Immediate Reduction: Applying the tax credit directly to your monthly premiums can reduce your immediate out-of-pocket costs. Making health insurance more affordable throughout the year.
  • Tax Time Claim: Alternatively, paying full premiums and claiming the tax credit on your tax return may provide a lump sum benefit. Which could be useful for those who can manage the upfront costs.

Finalizing Your Application

After selecting your plan and deciding how to apply your tax credit, you’ll need to complete and submit your application. This will involve reviewing all the information you’ve provided, agreeing to the terms and conditions, and enrolling in your chosen health insurance plan.

  • Confirmation: Once your application is submitted, you’ll receive confirmation from the Marketplace. Along with details about your premium tax credit and your insurance plan.
  • Payment: To finalize your coverage, you may need to pay your first month’s premium directly to the insurance company.

Keeping Your Information Updated

After you’ve successfully applied for a premium tax credit and enrolled in a health insurance plan. It’s important to keep your information up to date. If there are any changes in your income, family size, or other relevant circumstances. You should report these changes to the Health Insurance Marketplace as soon as possible.

 

  • Adjustments: Reporting changes can help adjust your premium tax credit amount if necessary. Ensuring that you’re receiving the correct level of financial assistance and avoiding potential issues during the reconciliation process.

Maintaining Eligibility

Maintaining eligibility for premium tax credits is essential for ensuring that your health insurance remains affordable throughout the year. After initially qualifying for and applying the premium tax credit to your health insurance plan. It’s important to stay vigilant about any changes in your circumstances that could affect your eligibility or the amount of credit you’re entitled to. Let’s explore the key considerations and actions you need to take to maintain your eligibility.

Reporting Changes in Circumstances

One of the most critical aspects of maintaining your eligibility for premium tax credits is promptly reporting any changes in your circumstances to the Health Insurance Marketplace. These changes can include:

 

  • Income Fluctuations: Any significant increase or decrease in your household income can affect the amount of premium tax credit you’re eligible for. This includes changes due to job loss, a new job, a raise, or changes in self-employment income.
  • Family Size Changes: Events such as marriage, divorce, the birth or adoption of a child, or the death of a family member can change your household size. Which in turn can affect your premium tax credit.
  • Change of Address: Moving to a different area, especially if it’s to another state, can affect your premium tax credit. This is because insurance premiums vary by location.
  • Change in Employment Status: Gaining or losing access to employer-sponsored health insurance can affect your eligibility for premium tax credits.

The Importance of Accurate Reporting

Accurately reporting changes is crucial for several reasons:

  • Avoiding Repayments: If you end up receiving more premium tax credit than you’re eligible for due to unreported increases in income or other changes. You may have to repay the excess amount when you file your federal income tax return.
  • Maximizing Your Benefit: Conversely, if your income decreases or your family size increases. You might be eligible for a larger premium tax credit. Promptly reporting these changes can lower your out-of-pocket costs for premiums during the year.
  • Ensuring Continuous Coverage: Certain changes, like moving to a new state, require you to enroll in a new health plan. Reporting these changes promptly ensures there’s no lapse in your health insurance coverage.

How to Report Changes

Changes in circumstances can be reported through the Health Insurance Marketplace in several ways:

  • Online: The most convenient way to report changes is through your account on the Health Insurance Marketplace website.
  • Phone: You can also report changes by calling the Marketplace Call Center.
  • In-Person: For those who prefer in-person assistance, local navigators and certified application counselors can help you report changes.

Regular Review of Your Situation

Even if you don’t experience any significant life changes. It’s a good practice to regularly review your situation. And ensure that all the information the Marketplace has on file is accurate and up-to-date. This can be particularly important if you estimated your income at the beginning of the year and your actual earnings are turning out to be different than anticipated.

Special Enrollment Periods (SEPs)

Certain life events that involve changes in your circumstances, such as getting married, having a baby, or losing other health coverage, qualify you for a Special Enrollment Period (SEP). This allows you to enroll in or change your Marketplace plan outside the regular Open Enrollment Period. Understanding and utilizing SEPs can be crucial for maintaining your health coverage and premium tax credit eligibility throughout the year.

Conclusion

Premium tax credits play a pivotal role in making health insurance more affordable and accessible for millions of Americans. Understanding how they work, who qualifies, and how to apply them. Can empower individuals and families to make informed decisions about their health insurance coverage. By staying informed about legislative changes and maintaining accurate income and family size information with the Health Insurance Marketplace, you can maximize the benefits of premium tax credits and ensure your health insurance is both affordable.

 

Comparing plans is the best way to find an affordable plan that provides the right level of coverage for you. But before you start doing the work of comparing on your own, come to EZ. We will make the process quicker and easier by comparing available plans in your area in minutes. Our licensed agents work with all the top-rated insurance companies in the nation and can go over your budget and needs, and find the best plan for you and your family. We compare plans and offer guidance at no cost to you. To get free quotes, simply enter your zip code in the bar below. Or to speak directly with an agent, call 877-670-3557.

Check Your Eligibility For A Premium Tax Credit

In 2014, the Affordable Care Act established the premium tax credit so that individuals or families with low or moderate income can be able to pay for health insurance through the Health Insurance Marketplace. Premium tax credits help you pay for a portion of your monthly cost of insurance premiums. Individuals and families must meet an income requirement to enroll in a health insurance plan through a state-operated insurance marketplace, or a federally-operated marketplace.

There are multiple qualifications for a premium tax credit. One is to calculate your income with the number of people in your household.
There are multiple qualifications for a premium tax credit. One is to calculate your income with the number of people in your household.

Qualifications

  •         You must prove you do not have access to an affordable employer-sponsored program. This plan must meet minimum essential coverage meaning the employee contribution does not exceed 9.5% of the employee’s income.
  •         You must prove you are not eligible for Medicare, Medicaid, or TRICARE
  •         You cannot be claimed as a dependent by another taxpayer.
  •         In the same month, you or a family member must have health coverage through a Health Insurance Marketplace.
  •         You file a joint federal income tax return if you are married; you cannot file married filing separately tax return (unless a victim of domestic abuse or spousal abandonment).
  •         Have a household income that falls within a certain amount.

Income Requirements

In order to be eligible for the premium tax credit, you and your family size must be at minimum 100 percent below the poverty line, but no more than 400 percent. This means the income must be between $12,060 and $48,240 for an individual and between $24,600 and $98,400 for a family of 4 in 2018.

The amount of tax credit is based on a sliding scale. This means the lower your income, then the larger credits you receive.  If your income changes, then the amount of assistance you qualify for will change as well.

2019 Federal Poverty Levels
2019 Federal Poverty Levels

It is important to keep an eye on your household income and how much tax credit you receive. If the advance credit payments are more than the allowed credit, then you will have to repay some or all of the extra earnings. If your household income is more than 400% of the federal poverty line for your family size, then you are not allowed a premium tax credit. You will have to repay all of the advance credit payments.

Advance Tax Credits

A taxpayer can either choose to receive advanced payments, which is paid to the insurance company to lower monthly premium costs, or the taxpayer can wait to get all of the credit when they file their tax return. Eligibility for the advanced payments is determined when purchasing coverage through the marketplace. There is a difference between advance payments to your insurance company and your allowable premium tax credit amount. Form 8962 calculates your tax credit amount that is allowed when you file your tax return.