Overview of the Premium Tax Credit

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The premium tax credit is part of the Affordable Care Act (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 percent of the poverty level. That's $98,400 for a family of four in 2018)

Although Republican lawmakers spent much of 2017 trying, unsuccessfully, to repeal the ACA, nothing about the law has changed for the time being. The ACA's premium tax credit is still available for 2018, and in most states, the credits are much larger for 2018 than they were in prior years. So let's take a look at what the premium tax credit is and how it works:

The ACA's Premium Tax Credit

The subsidy is only available to people with modified adjusted gross incomes from 100 to 400 percent of federal poverty level (in the 31 states and DC where Medicaid has been expanded under the ACA, the lower eligibility threshold for the premium tax credit is 139 percent 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 added into the ACA because recent immigrants are not eligible for Medicaid until they've been in the US for at least five years.]

If you’re eligible for the premium tax credit subsidy, you can choose to have it paid in advance directly to your health insurance company each month. This will lower the amount you’ll have to pay for premiums each month. Or, you can choose to get it as a lump sum included with your federal income tax refund. Either way, it's a refundable tax credit, which means you get it even if it exceeds the amount you owe in federal taxes.

Also Known As

If you pay full price for your exchange-purchased coverage throughout the year and then claim the credit on your tax return, it's called the premium tax credit (PTC).

But most people choose to have the credit paid in advance, directly to their health insurance carriers each month (that reduces the amount the enrollee has to pay in monthly premiums). In that case, it's called an advance premium tax credit (APTC).

Either way, the tax credit is often referred to as a premium subsidy, or sometimes just "the ACA subsidy" (although there's another ACA subsidy that applies to cost-sharing and shouldn't be confused with the premium tax credit).

Who Qualifies?

As described above, the premium tax credit is only available to people whose modified adjusted gross income doesn't exceed 400 percent of the federal poverty level, and is at least 100 percent of the poverty level (139 percent 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.

Federal poverty level changes every year and is based on your family size.

The previous year's FPL figures are used to determine eligibility for the premium tax credit. So for example, anyone applying for 2018 coverage will use the 2017 FPL numbers. This is true regardless of whether they enrolled in November 2017 or are enrolling in July 2018 as a result of a qualifying event.

Using 2017 FPL levels:

  • You can qualify for the health insurance subsidy as an individual with an income of $12,060-$48,240 (the lower threshold is $16,643 if you're in a state that has expanded Medicaid).
  • Couples qualify with an income of $16,240-$64,960 (the lower threshold is $22,412 if you're in a state that has expanded Medicaid). 
  • A family of three earning $20,420-$81,680 qualifies (the lower threshold is $28,180 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 (it depends on your income)
  2. The cost of your benchmark health plan
    1. 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.

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