Overview of the Premium Tax Credit

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The health insurance premium tax credit is part of the Affordable Care Act (the ACA, which is also known as Obamacare). It's often referred to as a premium subsidy, and it's designed to help make health insurance premiums more affordable for middle and low-income people (the terms "low-income" and "middle class" are subjective; to clarify, premium tax credits are available for people with household incomes as high as 400% of the poverty level. In the lower 48 states, that's $103,000 for a family of four obtaining coverage for 2020 (the prior year's poverty level numbers are used, so that's based on the 2019 poverty guidelines).

Most people who buy their coverage through the ACA's health insurance exchanges are receiving premium subsidies. And for enrollees who receive subsidies, the subsidies cover the majority of the monthly premiums.

The premium subsidy is often referred to as "the ACA subsidy," but there's another ACA subsidy that applies to cost-sharing and shouldn't be confused with the premium tax credit.

The ACA's Premium Tax Credit

The subsidy is only available to people with modified adjusted gross incomes from 100 to 400% of federal poverty level (in the 35 states and DC where Medicaid has been expanded under the ACA, the lower eligibility threshold for the premium tax credit is 139% of the poverty level, because Medicaid covers people below that level). Additionally, the subsidy is only available for those buying health insurance through the government-run health insurance exchange in each state.

[Note that the premium tax credit is available for recent immigrants who are lawfully present in the US but who have an income below the poverty level. This provision was included in the ACA because recent immigrants are not eligible for Medicaid until they've been in the US for at least five years.]

Most people who are eligible for the premium tax credit subsidy choose to have it paid in advance directly to their health insurance company each month. This lowers the amount they have to pay for premiums each month. When enrollees choose this option, the subsidy is referred to as an advance premium tax credit, or APTC.

But enrollees also have the option to pay full price for a plan purchased through the exchange, and then receive the full amount of their premium tax credit from the IRS when they file their tax return. When tax filers take this option, the subsidy is simply called a premium tax credit, or PTC.

APTC and PTC both refer to the same thing—a premium subsidy to offset the cost of health insurance obtained in the exchange. And either way, it's a refundable tax credit, which means you get it even if it exceeds the amount you owe in federal taxes.

And regardless of whether you receive APTC or PTC, you have to complete Form 8962 with your tax return. This is how you reconcile the amount that was paid on your behalf during the year or claim the credit in full after the year is over.

Who Qualifies?

As described above, the premium tax credit is only available to households whose modified adjusted gross income (an ACA-specific calculation) doesn't exceed 400% of the federal poverty level, and is at least 100% of the poverty level (139% in states that have expanded Medicaid).

In addition, the premium tax credit is only available if it's necessary in order to make the benchmark plan (the second-lowest-cost silver plan in your area) affordable based on the ACA's guidelines. And the premium tax credit is only available to people who aren't eligible for affordable, minimum value employer-sponsored health insurance.

Federal poverty level changes every year and the exact number depends on the number of people in the household.

The previous year's FPL figures are used to determine eligibility for the premium tax credit. So for example, anyone applying for 2020 coverage will use the 2019 FPL numbers. This is true regardless of whether they enrolled in November 2019 or are enrolling in July 2020 as a result of a qualifying event.

Using 2019 FPL levels:

  • You can qualify for the health insurance subsidy as an individual with an income of $12,490-$49,960 (the lower threshold is $17,361 if you're in a state that has expanded Medicaid).
  • Couples qualify with an income of $16,910-$67,640 (the lower threshold is $23,505 if you're in a state that has expanded Medicaid). 
  • A family of three earning $21,330-$85,320 qualifies (the lower threshold is $29,649 if you're in a state that has expanded Medicaid).

In order to figure out how much your premium tax credit will be, you must know:

  1. Your expected contribution toward the cost of your health insurance. Your expected contribution depends on your income.
  2. The cost of your benchmark health plan. Your benchmark plan is the silver-tiered health plan with the second-lowest monthly premiums in your area. Your health insurance exchange can tell you which plan this is and how much it costs.

Your premium tax credit (aka premium subsidy) amount is the difference between your expected contribution and the cost of the benchmark plan in your area. The exchange will make this calculation for you. The software determines whether you qualify for a premium subsidy, and if so, how much it will be. If your income ends up being different from what you projected when you enrolled, you will reconcile the difference with the IRS when you file your taxes. That can result in you having to pay back some (or all) of your subsidy if it was too big, or receiving a lump-sum payment from the IRS if the subsidy that was paid on your behalf during the year was too small.

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Article Sources
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  1. U.S. Department of Health and Human Services. U.S. Federal Poverty Guidelines Used to Determine Financial Eligibility for Certain Federal Programs.

  2. U.S. Department of Health and Human Services. Centers for Medicare and Medicaid Services. First Half of 2019 Average Effectuated Enrollment Data. Published December 11, 2019.

  3. Center for Labor Research and Education, University of California, Berkeley. Modified Adjusted Gross Income under the Affordable Care Act. Updated July 2019.

  4. U.S. Internal Revenue Service. The Premium Tax Credit - The Basics. Updated February 18, 2020.

  5. Healthinsurance.org. Will you receive an Obamacare premium subsidy? Published January 25, 2020.

  6. Healthinsurance.org. I thought subsidies were available for anyone with incomes up to 400 percent of poverty level, but the calculators I’ve used say our family doesn’t qualify. Why? Published January 7, 2018.

  7. Healthinsurance.org. Is the IRS changing how much I’ll have to pay for my health insurance next yer? Published August 14, 2019.

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