Premium Tax Credit: What It Is, How It Works

There aren’t many tax credits that can help lower your expenses throughout the year, but the premium tax credit (PTC) is a notable exception.

The PTC helps taxpayers afford the premiums of health insurance plans from the health insurance marketplace. Taxpayers can choose between getting the credit at tax time or getting it “in advance” throughout the year in the form of lower premiums.

Here are the details on the PTC, its eligibility criteria, the pros and cons of choosing the advance premium tax credit (APTC), and the tax forms you’ll need to claim the credit.

The premium tax credit is a refundable tax credit that helps cover the cost of health insurance premiums. It’s available to taxpayers who have purchased a health insurance plan from the health insurance marketplace — the network of online health insurance exchanges established by the Affordable Care Act.

Refundable tax credits can lower or eliminate your taxes owed — plus, if the credit amount exceeds your taxes owed, the government will refund you the overage of the credit.

If you buy a health plan from the marketplace and are eligible for the PTC, you’ll be prompted to choose between receiving it as a tax credit when you file your return or paying it to your insurer in exchange for lower monthly premiums throughout the year. You can also choose to receive part of it as a credit and the rest in the form of lower premiums.

To qualify for the premium tax credit, your health insurance situation, tax situation and income need to meet certain criteria.

The PTC helps taxpayers afford health insurance marketplace plans — so to qualify for it, you’ll need one of those.

To get more specific, you or someone in your tax family must have enrolled in a health insurance plan through the marketplace for at least one month of the calendar year in question.

You might not qualify for the PTC if other health insurance options are available to you — for example, employer-sponsored insurance or another government program such as Medicare.

You also might not qualify for the credit if you do not pay your share of the marketplace plan premium (if the credit does not cover it all)^[0]

You’ll need an income above the federal poverty line to be eligible for the PTC. If your income is below the federal poverty line, other government health care programs such as Medicaid may better suit your situation.

Traditionally, your income also needed to be below 400% of the federal poverty line to qualify for the PTC, but Congress has temporarily eliminated this rule for tax years 2021 through 2025 and substituted it with a slightly more complicated income-based eligibility requirement^[0]

The new income requirement is based on the principle that no one should have to pay more than 8.5% of their modified adjusted gross income (MAGI) to afford the second-lowest-cost Silver plan in their marketplace, which is also called the “benchmark plan.”

The subsidy brings the annual cost of the benchmark plan down to that 8.5%-of-MAGI level, which is called the “applicable percentage,” if 8.5% of your MAGI is too low to afford the benchmark plan without the subsidy.

The applicable percentage is 8.5% for people who earn more than 300% of the federal poverty line, and it’s even lower for people who earn less. Below is a table of applicable percentages for different income levels.

Source: Internal Revenue Service^[0]

So if, for example, you make more than 400% of the federal poverty line, and 8.5% of your MAGI is less than the annual cost of the second-cheapest Silver plan in your marketplace, you may still receive a premium tax credit that is big enough to bring the cost of that benchmark plan down to 8.5% of your MAGI.

The federal poverty line varies based on the size of your household. Below is a table of the minimum PTC-eligible incomes (in other words, the federal poverty line) for different household sizes. The old maximum incomes are also shown, although these are suspended through tax year 2025.

Source: United States Department of Health and Human Services^[0]

If you’re married filing separately, you cannot receive the PTC unless you are a victim of domestic abuse or spousal abandonment.

You also can’t receive it if another taxpayer claims you as a dependent.

The process of claiming the premium tax credit will differ slightly, depending on whether you’re using the advance premium tax credit (APTC) to lower your monthly premiums, receiving the regular PTC as a tax credit or doing some mix of the two.

In each case, when you enroll in health insurance through the marketplace, you’ll be prompted to choose whether to use some, all or none of your PTC to lower your health insurance premiums^[0]

If you choose to receive any amount of advance payments, your marketplace will automatically notify your insurer and start paying them the amount of APTC specified so your premiums decrease.

The following year, you’ll need to file Form 8692 with your tax return to “reconcile” your adjusted gross income (AGI) for the year with your projected income when you signed up for health insurance. If your AGI was lower than your projected income, you may get an additional PTC from the IRS as a refund or credit to lower your taxes. If it was higher, you may owe the IRS some money back.

If you choose not to receive any APTC, then you’ll need to file Form 8692 and indicate that you’ve received $0 in advance PTC payments so the IRS can apply your full PTC on your tax return. If you owe less in taxes than the credit amount you’re entitled to, your tax bill may shrink, or you may get the excess refunded.

Form 8692, “Premium Tax Credit,” is the tax worksheet you use to settle up your PTC situation with the IRS.

APTC users must check their Form 1095-A, Health Insurance Marketplace Statement, which they receive from their marketplace, add up the total amount of APTC received for the year on Form 8692, and compare this to the amount of PTC they were actually eligible for that year based on AGI to determine whether there was any overpayment or underpayment.

PTC users who are receiving their entire credit when filing their returns can simply indicate that they received no APTC during the year and then calculate the amount of PTC they will receive as a credit or refund, based on income. Tax software can simplify the process of filling out this form and claiming your PTC, and the IRS recommends that taxpayers file electronically.

The question of whether it’s better to receive the APTC or get the full PTC at tax time will depend on your circumstances. Fundamentally, it’s a question of whether you’re willing to put up with a more complicated tax situation to save some money.

• Immediately lower monthly health insurance premiums. The most obvious upside of choosing the APTC is that it lowers your monthly health insurance bill right away — you don’t have to wait until refund time to get it.

• Keeping your money is mathematically better than getting a bigger refund. The IRS does not pay interest on the money it holds until tax time — and meanwhile, the value of that money is decreasing slightly due to inflation. If you save your whole PTC in hopes of getting a bigger refund, that money is worth slightly less than if you choose the APTC and receive it throughout the year in the form of lower premiums.

• Possibility of owing money at tax time. If your income increases during the year, the amount of PTC you can receive might decrease. If you use the advance payments and this happens, you may find at tax time that you received more APTC than you were actually allowed based on your total income for the year. In that situation, you may have to pay back the excess amount of APTC you received. A recent analysis of IRS data by HealthInsurance.org showed that 2.6 million taxpayers had to repay some of their APTC in 2021, with the average repayer owing $1,464.

• More complicated tax return. If you like your taxes to be simple, you may not like all the hassle that comes with choosing to receive some or all of your PTC in advance. Even if you don’t end up owing money, the Form 8692 reconciliation process involves some fairly tedious bookkeeping work for APTC users, who have to calculate their income, APTC received, and any overpayment or underpayment for each month of the year. If you’re unsure how to do this, you may want to consult a tax preparer.