A tax credit for health insurance reduces what you owe in federal income taxes

A tax credit for health insurance is money the federal government subtracts from your tax bill if you bought health coverage through the Health Insurance Marketplace (also called HealthCare.gov or your state's marketplace). The credit is based on your household income and the cost of the second-lowest-cost Silver plan available where you live. You do not have to choose that plan — you can buy any plan on the marketplace — but the credit amount is calculated using that benchmark plan's price.

The credit works differently from a tax deduction. A deduction reduces your taxable income. A credit reduces the actual tax you owe, dollar for dollar. If you owe $2,000 in federal income tax and you have a $1,500 tax credit, you owe $500. If your credit is larger than what you owe, you may receive the difference as a refund.

The government calls this credit the Premium Tax Credit or PTC. It is the main financial help available to people who buy their own health insurance rather than getting it through an employer or a government program like Medicare or Medicaid.

Key Takeaways

  • The Premium Tax Credit reduces your federal income tax bill based on your household income and the cost of the second-lowest Silver plan in your area.
  • You must buy coverage through the Health Insurance Marketplace to claim the credit; employer plans and plans bought outside the marketplace do not may have access to.
  • Your credit amount is recalculated each year based on your current income, and you can update your income estimate during the year if your situation changes.
  • You can receive part of the credit in advance when you enroll, which lowers your monthly premium, or claim the full amount when you file your tax return.

Who can claim the Premium Tax Credit

To claim the credit, you must meet three conditions. First, you must have bought health coverage through the Health Insurance Marketplace during the tax year. Coverage from your employer, COBRA, Medicaid, Medicare, or the Veterans Health Administration does not may have access to. Second, you must be a U.S. citizen or national, or a lawfully present immigrant. Third, you cannot be claimed as a dependent on someone else's tax return.

Your household income must fall between 100 percent and 400 percent of the federal poverty level for your family size. (Some states have expanded this range.) The poverty level changes each year. For 2024, 400 percent of the poverty level for a single person is approximately $55,500 per year; for a family of four, it is approximately $114,500. If your income is below 100 percent of the poverty level, you may be covered by Medicaid in your state instead.

Income includes wages, self-employment income, investment income, and certain other sources. The IRS uses your Modified Adjusted Gross Income (MAGI) to calculate the credit, which is slightly different from your standard adjusted gross income. When you enroll in a marketplace plan, you estimate your household income for that year. The credit is based on that estimate.

How the credit amount is calculated

The government sets a percentage of your household income that it considers affordable to spend on health insurance premiums. This percentage is called the applicable percentage. It rises with income but is capped at a maximum. For 2024, the applicable percentage ranges from 2.05 percent of income for the lowest-income households to 8.5 percent for households at 400 percent of the poverty level. These percentages change each year.

The credit is the difference between what you are expected to pay and what the second-lowest Silver plan actually costs. Here is the formula: the government multiplies your household income by the applicable percentage to find your expected contribution. It then subtracts that from the price of the second-lowest Silver plan in your area. The result is your credit amount.

Example: If your household income is $35,000 and the applicable percentage is 4 percent, the government expects you to contribute $1,400 per year ($35,000 × 0.04). If the second-lowest Silver plan in your area costs $4,800 per year, your credit is $3,400 ($4,800 − $1,400). If you choose a cheaper plan, you keep the savings. If you choose a more expensive plan, you pay the difference out of pocket.

Advance credit versus claiming the credit on your tax return

You have two ways to use the Premium Tax Credit. You can receive part of it in advance each month to lower your premium payments while you are enrolled. This is called an advance premium tax credit or APTC. When you enroll in a marketplace plan, you tell the marketplace what you expect your income to be that year, and the marketplace sends the credit directly to your insurance company each month. Your monthly bill is reduced by that amount.

Alternatively, you can decline the advance credit and pay your full premium each month. Then, when you file your tax return the following year, you claim the entire credit as a reduction to your tax bill. This approach makes sense if you expect your income to change during the year or if you want to avoid having to reconcile the credit when you file your return.

Most people use the advance credit because it lowers their out-of-pocket costs when ready. However, the advance credit is an estimate. If your actual income for the year turns out to be higher than you estimated, you may have to repay some of the credit when you file your tax return. If your actual income is lower, you may receive a larger refund.

What happens if your income changes during the year

Your credit is based on your estimated household income for the year. If your income changes — because you got a raise, lost a job, got married, had a child, or for any other reason — you can update your income estimate with the marketplace. The marketplace will recalculate your credit and adjust your monthly advance credit starting the next month.

You are not required to report changes, but it is important to do so if your income rises significantly. If you receive more advance credit than you are may have access to to based on your actual income, you will have to repay the overage when you file your tax return. The repayment amount is capped depending on your income, but the cap can still be several hundred dollars.

If your income drops, updating your estimate means you will receive a larger credit going forward, which lowers your monthly premium. You can update your income as many times as you need during the year through your marketplace account.

Tax credits versus cost-sharing reductions

The Premium Tax Credit and cost-sharing reductions are two separate forms of financial help. The tax credit lowers your premium — the monthly amount you pay for coverage. Cost-sharing reductions lower your deductible, copayments, and coinsurance — the amounts you pay when you actually use care.

To receive cost-sharing reductions, you must enroll in a Silver plan and your household income must be between 100 and 250 percent of the federal poverty level. You do not have to do anything special to claim cost-sharing reductions; if you are enrolled in a Silver plan and you are may be able to access, they are built into your plan automatically.

You can receive both the Premium Tax Credit and cost-sharing reductions at the same time. The credit reduces your premium; the cost-sharing reductions reduce what you pay when you use care. If your income is above 250 percent of the poverty level, you can still claim the Premium Tax Credit, but you will not receive cost-sharing reductions.

Reconciling the credit when you file your tax return

When you file your federal income tax return, you report how much advance credit you received during the year. The IRS compares that to how much credit you were actually may have access to to based on your final income for the year. This process is called reconciliation.

If you received less advance credit than you were may have access to to, the difference is added to your tax refund. If you received more advance credit than you were may have access to to, the difference is subtracted from your refund or added to what you owe. You report this information on Form 8962, Premium Tax Credit (PTC), which you attach to your tax return.

To reconcile accurately, you need to know your actual household income for the year, the number of people in your household, and the total amount of advance credit you received. The marketplace sends you a statement called Form 1095-B showing the months you were enrolled and the advance credit paid on your behalf. Keep this form with your tax records.

Frequently Asked Questions

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

No. You can only claim the credit if you bought coverage through the Health Insurance Marketplace. If your employer offers coverage and you turn it down to buy marketplace coverage instead, you are generally not may be able to access for the credit. However, if your employer's coverage is considered unaffordable (the employee premium exceeds a certain percentage of household income), you may still may have access to.

What happens to my credit if I get married or have a baby during the year?

Your household size and income both affect your credit amount. When your household changes, you should update your information with the marketplace as soon as possible. The marketplace will recalculate your credit based on your new household size and your updated income estimate. Your new credit amount will take effect the following month.

Do I have to pay back the entire advance credit if my income is higher than I estimated?

Not necessarily. The amount you have to repay is capped based on your household income. For 2024, if your household income is below 200 percent of the poverty level, the cap is $300 for an individual or $600 for a family. At higher incomes, the cap increases. You still owe the difference, but it may be less than the full overage.

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

Yes. Self-employed people can claim the credit if they meet the income and other requirements. Your income includes your net self-employment income. When you enroll in a marketplace plan, estimate your net income for the year based on your business projections. You can update this estimate if your actual earnings change significantly.

What if I did not claim the credit when I filed my tax return — can I claim it now?

You can claim the credit for prior years by filing an amended return using Form 1040-X. You have generally three years from the original return due date to file an amended return and claim the credit. Contact a tax professional or the IRS for guidance on your specific situation.