What a Premium Tax Credit Does

A Premium Tax Credit is a federal payment that goes directly to your health insurance company to lower the monthly premium you pay. The credit is based on your household income and the cost of health plans in your area. You do not receive the money yourself — it flows from the IRS to your insurer, reducing what comes out of your paycheck or bank account each month.

The credit exists because the Affordable Care Act requires most people to have health insurance, but recognizes that premiums can be unaffordable. If your household income falls between 100% and 400% of the federal poverty line (the range varies by family size and state), you may receive a credit. The lower your income within that range, the larger the credit.

You claim the credit when you enroll in a plan through Healthcare.gov or your state's health insurance marketplace. You do not file a separate form or wait until tax time — the credit reduces your cost when ready, starting the month your coverage begins.

Key Takeaways

  • The Premium Tax Credit pays your health insurance company directly, not you, so your monthly bill is lower from the start.
  • You must enroll through Healthcare.gov or your state marketplace to receive the credit; plans bought outside the marketplace do not may have access to.
  • Your income determines the credit amount, and you must report changes in income, household size, or life events within 30 days to avoid overpayment.
  • When you file your tax return the following year, you reconcile what you received against what you were actually may have access to to, and you may owe money back if your income was higher than you estimated.

How Income Determines Your Credit Amount

The IRS calculates your credit based on your household income for the year you are enrolling. Household income includes your wages, self-employment income, investment income, and certain other sources. The IRS compares your income to the federal poverty line for your family size and state.

The credit covers a percentage of the cost of the second-lowest-cost Silver plan available in your area — a benchmark plan the government uses to set the credit amount. If you choose a cheaper Bronze plan, you keep the difference. If you choose a more expensive Gold or Platinum plan, you pay the difference out of pocket.

You estimate your income when you enroll. If your actual income turns out to be lower, you may receive a larger credit and owe nothing back. If your actual income is higher, you may have received too much credit and will owe the difference when you file your tax return.

Reporting Income Changes During the Year

Life changes affect your credit. If your income rises, falls, your household size changes, or you gain or lose other insurance coverage, you must report the change to the marketplace within 30 days. The marketplace will recalculate your credit and adjust your monthly payment.

Common changes that trigger a recalculation include a job loss or new job, a significant raise or pay cut, marriage or divorce, birth or adoption of a child, and loss of employer coverage. If you do not report a change and your income rises, you may receive more credit than you are may have access to to. When you file your tax return, you will have to repay the excess.

You can update your information on Healthcare.gov or your state marketplace website at any time during the year. The change takes effect the following month.

Reconciling Your Credit on Your Tax Return

At the end of the tax year, you receive a Form 1095-B from your health insurance company and a Form 1095-A from the marketplace. The 1095-A shows how much Premium Tax Credit you received during the year.

When you file your federal tax return, you report your actual household income for that year. The IRS compares it to the income you estimated when you enrolled. If you estimated correctly, nothing happens. If you estimated too low and received more credit than you should have, you repay the excess when you file. If you estimated too high and received less credit than you should have, the IRS sends you a refund.

The repayment amount is capped if your income is below 400% of the poverty line — meaning you will not owe back the entire excess, only a portion of it. The cap depends on your income and family size. Above 400% of the poverty line, there is no cap, and you repay the full excess.

Who Can Receive the Premium Tax Credit

You must meet three conditions. First, your household income must fall between 100% and 400% of the federal poverty line for your family size and state. Second, you must be a U.S. citizen or lawfully present immigrant. Third, you must enroll in a plan through Healthcare.gov or your state marketplace — plans bought directly from an insurance company or through a broker do not may have access to.

You cannot claim the credit if you are covered by Medicare, Medicaid (with limited exceptions), the Veterans Health Administration, or an employer plan that is considered affordable and provides minimum coverage. If your employer offers coverage, you generally cannot use the credit even if the employer plan is expensive, unless the plan costs more than a certain percentage of your household income (the percentage varies by year).

If you are self-employed or have variable income, you can still claim the credit. You estimate your income for the year, and the marketplace calculates your credit based on that estimate.

The Difference Between Advance and Reconciliation

The credit comes in two parts. The advance is the payment the marketplace sends to your insurer each month based on your estimated income. The reconciliation is the adjustment that happens when you file your tax return and report your actual income.

Most people receive the advance credit automatically once they enroll. You do not have to do anything to get it. The reconciliation happens the following year when you file taxes. If you want to avoid a large repayment, you can choose not to receive the advance credit and instead claim the full credit on your tax return — but this means paying the full premium each month and waiting for a refund later.

Common Mistakes to Avoid

The most common mistake is not reporting income changes. If you get a raise, start a new job, or experience a drop in income, tell the marketplace within 30 days. Waiting until tax time to report a large income increase can result in a substantial repayment.

Another mistake is enrolling outside the marketplace. Plans sold directly by insurance companies or through brokers do not may have access to for the credit, even if they are cheaper. You must enroll through Healthcare.gov or your state marketplace to receive the credit.

A third mistake is underestimating income. If you estimate too low to get a larger credit, you will owe the difference back when you file your return. Estimate conservatively based on what you expect to earn.

Frequently Asked Questions

Can I get the Premium Tax Credit if I have employer health insurance?

Generally no. If your employer offers coverage that is considered affordable (costs less than a certain percentage of your household income) and provides minimum coverage, you cannot claim the credit. However, if the employer plan is very expensive or does not meet minimum coverage standards, you may be able to use the credit. Contact the marketplace to discuss your specific situation.

What happens if I do not report an income change?

If your income rises and you do not report it, you will receive more credit than you are may have access to to. When you file your tax return, you will owe the excess back to the IRS. If your income falls and you do not report it, you will receive less credit than you could have, and you will miss out on savings. Report changes within 30 days to keep your credit accurate.

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

Yes. Self-employed people estimate their income for the year and enroll through the marketplace just like employees. Your credit is based on your estimated net self-employment income. When you file your tax return, you reconcile based on your actual net income from Schedule C.

What if my income drops significantly during the year?

Report the change to the marketplace when ready. Your credit will be recalculated based on your new income, and your monthly premium will likely decrease. You may also become newly may be able to access for Medicaid depending on your state and income level.

Do I have to take the full Premium Tax Credit I am may have access to to?

No. You can choose to receive less than your full credit or none at all. Some people do this if they expect their income to rise during the year and want to avoid a large repayment. You can adjust your credit amount on the marketplace website at any time.