Premium Tax Credit: What it Means, How it Works

The Premium Tax Credit is a tax credit intended to subsidize the purchase of health plans offered through the federal and state health benefit exchanges. The size of your credit will depend on the income you report through the Health Insurance Marketplace.

The American Rescue Plan Act of 2021 made the credit available to more individuals for 2021 and 2022, and those changes were extended through 2025 as a result of the Inflation Reduction Act.

Understanding the Premium Tax Credit (PTC)

The premium tax credit is generally paid in advance to the insurer issuing the qualified plan as an advance payment PTC, or APTC. The APTC is credited monthly against premiums for qualified plans; i.e., plans offered through the Health Insurance Marketplace—that is, state and federal health exchange plans. In some cases, eligible individuals can elect to pay their premiums out of pocket and claim the PTC in their tax return for the year, instead of benefiting from an APTC.

The amount of the monthly premium tax credit for 2023 (with the extension of the 2021 policy) is the lesser of (1) the monthly premium for a qualified plan in which the taxpayer, the taxpayer’s spouse, and dependents are enrolled, or (2) the excess, if any, of the premium for the second-lowest-cost silver plan for the same individuals that is available on the exchange in the taxpayer’s area, over an amount equal to 1/12th of a specified percentage of the taxpayer’s household income for the year, in accordance with the brackets of the applicable federal poverty level (FPL) in the following table:

Whether you receive an APTC or claim a PTC, you must file Internal Revenue Service (IRS) Form 8962 with your Form 1040.

If you benefited from an APTC in a given year, it must be reconciled with the allowable PTC when you file your return. If the APTC exceeds the allowable PTC, you generally must repay the difference. If the APTC is less than the PTC, you can claim a credit in the amount of the difference and reduce your tax liability or receive a refund.

The amount of excess APTC that must be repaid by taxpayers whose household incomes fall below specified percentages of the FPL is limited. For household incomes below 200% of the FPL, the maximum required repayment is $600; if at least 200% but less than 300% of the FPL, $1,500; and if at least 300% but less than 400% of the FPL, $2,500.

Eligibility for—and the amount of—the APTC is estimated by the U.S. Department of Health and Human Services (HHS) upon enrollment in a qualified plan, usually on the basis of your tax return for two years earlier. Individuals who are eligible for the APTC also may be eligible for reduced cost sharing—for example, reduced deductibles and co-pays.

Who Can Take the PTC?

Married individuals who file a joint return and single individuals who file their own returns are eligible for the PTC, provided that they and their insurance plans meet additional requirements.

Individuals listed as dependents on a return and married individuals filing separately are generally not eligible for the PTC. Special exceptions apply for certain victims of domestic abuse or spousal abandonment and for some individuals who qualify as married living apart under the head of household rules.

Previously, to qualify for the PTC, your household income had to be at least 100%—but no more than 400%—of the FPL for your household’s size. The American Rescue Plan, enacted in March 2021, eliminated the 400% ceiling entirely for 2021 and 2022. The law also changed the highest credit reduction percentage used in the PTC calculation from 9.5% to 8.5%. The decrease in this top percentage rate and the elimination of the eligibility ceiling of 400% of the FPL make more individuals and families eligible for the PTC.

Household income is defined for the PTC as modified adjusted gross income (MAGI). It is calculated by adding back nontaxable income, such as tax-exempt interest, the amount excluded from income by citizens or residents living abroad, and the nontaxable portion of Social Security benefits, to your adjusted gross income (AGI). HHS publishes poverty guidelines annually with three separate levels: the 48 contiguous states and the District of Columbia, Alaska, and Hawaii.

Exchange plans, and thus the PTC, are not available to individuals who are not U.S. residents or nationals, nor to undocumented individuals who are not lawfully present in the U.S.

Which Health Plans Qualify for the PTC?

In addition to meeting the personal status and income requirements, you must be covered by a qualified plan to claim the PTC. Qualified plans are plans offered on federal and state health insurance exchanges. In most cases, if you, your spouse, or your dependent(s) are eligible for coverage under a plan that offers minimum essential coverage (MEC) from a source other than an exchange, the plan is not a qualified plan, and you, your spouse, or your dependent(s), respectively, are not entitled to the PTC.

Plans treated as offering MEC include most employer-sponsored plans whether or not you enroll, as well as Medicaid, the Children’s Health Insurance Program (CHIP), and similar government-sponsored health coverage. If your employer offers an individual health reimbursement arrangement (HRA) and you accept it, you are not eligible for the PTC. However, if the HRA does not qualify as affordable under the PTC rules and you decline such HRA coverage, then you can be eligible for the PTC—provided other requirements are met.

In some cases, an employee still might be able to claim the PTC even though the employee is eligible for employer-sponsored health coverage. If an employer-sponsored plan is determined either to be unaffordable for an employee or to provide less than minimum value—for example, it covers too small a portion of healthcare costs—then the employee can decline such coverage and still claim the PTC with respect to premiums for a qualified plan obtained through an official exchange.

Generally, a plan is considered unaffordable if the employee’s annual cost for self-only coverage exceeds a statutorily set percentage of the employee’s household income. For 2023, the affordability percentage was 9.13%.

Health Coverage Tax Credit: Limited Eligibility

The tax law also provides a tax credit for health insurance premiums for coverage through various state, COBRA, and other sources for limited categories of eligible individuals.

Eligibility is restricted to individuals who are certified as displaced workers by the U.S. Department of Labor and who are on leave from training in a federally funded trade adjustment assistance program (or receiving unemployment compensation in lieu of training), and individuals who are age 55 or older and are receiving benefits from the Pension Benefit Guaranty Program. The credit also is available for such individuals’ family members. To get the credit, which amounts to 72.5% of premiums, a taxpayer must file IRS Form 8885.

The Bottom Line

The premium tax credit, now in effect with its expansion through 2025, can potentially help you better afford to pay for health insurance if you meet certain requirements. You can use this money in advance to lower your monthly premium amounts, or receive it as an annual tax credit for the year you paid for you health insurance. Consider consulting a tax professional to guide you through how to take advantage of the premium tax credit and other credits and deductions as they apply to your situation.