Health Insurance Premium Tax Credit

Calamities happen by chance. Insurance is designed to mitigate the risk of economic loss from calamities by having a group of people, the insured, paying premiums to pay for economic losses suffered by the few among the group. However, if only the people at high risk for the calamity pays into the insurance fund, then it will be much more expensive. On the other hand, insurance companies want to profit. Therefore, they will attempt to eliminate high risk customers — the people who would need the insurance the most — from their insured pool. Since healthcare costs are extremely high, most people without insurance would be unable to afford the cost of healthcare, forcing those in need to declare bankruptcy or to simply not pay their bill. The government may pay the healthcare providers for the services they provided; otherwise, without government intervention, health insurance will not work for society. Those at low risk will not want to pay the high premiums, and those at high risk cannot afford the premiums. The Affordable Care Act (ACA) was designed to rectify this fundamental flaw in health insurance by forcing most everyone to pay into the system. Recognizing that most poor people cannot afford to pay health insurance premiums, the ACA also allows the government to pay subsidies, in the form of a tax credit, to those people to make the premiums more affordable.

The Affordable Care Act now allows you to be covered by health insurance that provides minimum essential coverage, which is the typical coverage provided by employers or government organizations, if the premiums are affordable and out-of-pocket costs do not exceed a statutory maximum. To help lower-income taxpayers afford health insurance, a health premium tax credit (PTC) is available to offset the high cost of health insurance. Taxpayers can elect to have the government pay the tax credit directly to the insurance company, called the advanced premium tax credit (APTC), to lower the cost of premiums as they pay it. Since the tax credit is based on household income and family size for the covered year, household income must be estimated for that year to determine the amount of the available credit. If an APTC is paid, then the Marketplace must be notified if any of these changes:

• household income
• employment status
• gaining or losing eligibility for minimum essential coverage provided by an employer or a government organization
• birth or adoption
• change in marital status
• any other changes affecting the composition of the tax family

Therefore, when filing a tax return, you must determine how much of the health insurance premium tax credit you may be entitled to, based on the income that was actually earned for that year. If an APTC was applied to lower the cost of premiums, then the APTC amount must be reconciled with the PTC amount that you were actually entitled to. If the applied tax credit was less, then the remaining credit can be used to lower tax liability, or even increase a refund; if the applied tax credit was greater, then you may have to pay additional taxes, depending on the actual discrepancy.

The premium tax credit (PTC) is available to any taxpayer with income ranging from 100% to 400% of the federal poverty line (FPL) of the previous tax year when open enrollment began. Taxpayers or their families with incomes below the applicable FPL do not qualify for the credits since it is presumed that they will qualify for other government assistance, primarily Medicaid. To qualify for the premium tax credit, these requirements must be satisfied:

• a qualified health plan — bronze, silver, gold or platinum plan — was obtained from either the Health Insurance Marketplace or 1 of the state exchanges
  • catastrophic insurance or other insurance that does not meet the minimum coverage requirements are not considered qualified plans
• no other employer or government health plan is available
• income is at least 100% but less than 400% of the federal poverty line of the previous tax year
  • The poverty level used is listed in the Instructions for Form 8962.
  • Alaska and Hawaii have slightly higher incomes for poverty levels.
  • A temporary provision, which expires after 2025, may allow a credit for household incomes exceeding 400% of the federal poverty level if the cost of the benchmark plan exceeds 8.5% of household income.
• the taxpayer cannot be claimed as a dependent by another
• the taxpayer cannot file a tax return as married filing separately unless they are a victim of domestic abuse

The tax family includes all members of a household who is either a spouse or a claimed dependent. The PTC depends on household income, which is the sum of the modified adjusted gross income (MAGI) of all members of the tax family whose income exceeds filing requirement income thresholds.

The coverage family is all members of the family enrolled through a qualified health plan, and who are not eligible for coverage by employer-provided insurance or government insurance that meets the minimum coverage requirements. Only members of the coverage family are entitled to the PTC.

The tax credit can be paid directly to insurance companies to lower the monthly premiums or received when the tax return is filed, which will either increase a refund or lower the balance due. The PTC is a fully refundable credit, meaning that even if tax liability is 0, the taxpayer will receive a refund.

Income, for purposes of calculating the PTC, can be reduced by contributing to a retirement plan, such as a 401(k), 403(b), or a traditional IRA.

Premium Tax Credit

The PTC is not based on the chosen plan — it is based on the second lowest cost silver plan (SLCSP) in the Marketplace that applies to the coverage family.

Form 1095-A, Health Insurance Marketplace Statement

If health insurance was purchased through the Health Insurance Marketplace, then you will receive a Form 1095 – A, Health Insurance Marketplace Statement by early February before the tax filing deadline, showing coverage details, including the covered period, the premium, and the amount of the advanced premium tax credit. Form 1095-B reports coverage provided by an employer and Form 1095-C reports purchases outside of the Health Insurance Marketplace. If the information on Form 1095-A is incorrect, then contact the Marketplace, not the IRS.

Form 8962, Premium Tax Credit

Most people who purchased insurance through the exchanges received subsidies in the form of the APTC. The subsidy amount was based on estimated income but it must be reconciled to actual earnings for the year. As already noted, the PTC also depends on household income, the size of both the tax family and the coverage family. Therefore, the discrepancy must be reconciled on Form 8962, Premium Tax Credit (PTC), which must be filed if:

• any family member received an APTC
• an APTC was received for someone who they thought would be claimed as a dependent but was not claimed and no one else claims that person as a dependent
• a family member bought insurance in the Marketplace but wants to claim a PTC that was not advanced.

The information from Form 1095-A used in Form 8962, Premium Tax Credit includes:

• the annual premium charged by the insurance company
• the annual premium of the second lowest cost silver plan (SLCSP)
• the total APTC paid to the insurance company for the year.

This information is then used on Form 8962 to calculate how much of the PTC you are actually entitled to, based on household income, and how much of a refund, if any, you will get or how much you must pay, if the APTC was excessive.

The net premium tax credit calculated on Form 8962 is transferred to Schedule 3, Additional Credits and Payments of Form 1040, then to the Payments section of Form 1040. However, if an excessive amount of the APTC was paid, then that additional tax is transferred to Schedule 2, Additional Taxes of Form 1040 and to the Tax and Credits section of Form 1040.

The 1^st step is calculating household income as a percentage of the federal poverty level (FPL), which must be less than 400%. For instance, if the applicable poverty level is $13,590 and earnings = $14,000, then earnings = 103% (=$14,000/$13,590, this percentage is rounded down rather than up, per the Instructions for Form 8962) above the poverty level. With this information, you look at the table for the Form 8962 instructions to find the decimal fraction corresponding to the percentage of income over the poverty line, which ranges from 0% for anyone earning less than 150% of the poverty level to 8.5% for those earning 400% or more of the poverty level. This is then multiplied by the household income to calculate the annual contribution amount, which is subtracted from the SLCSP to yield the annual maximum premium assistance. The annual PTC allowed will be the smaller of the Annual Maximum Premium Assistance or the total enrollment premium charged by the insurance company. The total of the payments advanced to insurance companies during the course of the year are then subtracted from the allowable PTC to yield the fully refundable premium tax credit that was not used to pay for insurance premiums.

APTC Repayment Limits

If an excessive amount of the APTC was paid, as calculated on Form 8962, then you will have repay some or allthat excess, depending on filing status and the percentage that your income exceeds the poverty level:

So if you were married, and your joint income was less than 200% of the federal poverty level, then your maximum repayment will be $750 in 2024 or 2025.

The requirement that income be between 100% and 400% of the federal poverty line has 2 exceptions:

1. people who were estimated to have income in the required range, but who ended up with less than 100% FPL at year-end
2. lawfully present immigrants with incomes less than the FPL who are also ineligible for Medicaid because of their immigration status.

There is also an alternative calculation if you got married and for which an excessive APTC was paid for an individual in your tax family. This alternative calculation, detailed in the Form 8962 instructions, may yield a lower required repayment amount.

Simplified Summary for Calculating the Premium Tax Credit

1. Form 1095 – A, Health Insurance Marketplace Statement is sent by February of the next year to those who used the Marketplace and will report:
   1. annual premium charged by the insurance company
   2. annual premium of the second lowest cost silver plan (SLCSP)
   3. annual total of the advance payment of the PTC to the insurance company
2. On Form 8962, Premium Tax Credit (PTC), you will need information on both the actual premium you are entitled to and the amount of your refund, which will be based on the premiums charged by the insurance company, the APTC payment to the insurance company during the tax year, and the income earned by your household:
   1. Calculate PTC Household Income by adding the MAGIs of all tax family members whose income exceeds the filing requirement threshold.
   2. Income as a Percentage of Poverty Level = Household Income/Applicable Poverty Level
      1. Use this percentage to find the applicable poverty level and the applicable Decimal Fraction in Form 8962 Instructions (ranges from 0.000 to 0.085)
   3. Annual Contribution Amount
      1. = Household Income
      2. × Decimal Fraction
   4. Annual Maximum Premium Assistance
      1. = Annual Premium Amount of SLCSP
      2. − Annual Contribution Amount
   5. Annual PTC Allowed
      1. = Lesser of
         1. Premium Amount Charged by Insurance Company
         2. Annual Maximum Premium Assistance
   6. Refundable PTC
      1. = Annual PTC Allowed
      2. − Annual Advance Payment of PTC

Shared Policy Allocation

If you receive a Form 1095–A that lists people from your tax family and from another tax family, or if the form does not accurately represent your tax family, then enrollment premiums, SLCSP premiums, and/or the APTC must be allocated to correct the amounts. These allocation rules apply if the Marketplace was not notified of changes in your tax or coverage family. Often, policy amounts must be allocated because of divorce or because you claimed an APTC for a child living with your ex-spouse who claims that child as a dependent, or because your ex-spouse claimed an APTC for a child that you claim as a dependent. An allocation may also be necessary because a married couple filed separately instead of jointly. Multiple allocations may be necessary if family circumstances changed more than once during the year.

Divorced spouses can agree to any allocation they wish, but if no agreement is possible, then the allocation percentage is 50% to each, meaning that spouse can claim only 50% of the enrollment premiums, SLCSP premiums, and the APTC listed in their Form 1095 – A, Health Insurance Marketplace Statement.

An allocation may also be necessary if the spouses were married at year-end but file separate returns. If you or someone in your tax family was enrolled in the same policy as your spouse or some other individual in your spouse's tax family at any time during the tax year, then the allocation percentage is 50% to each spouse.

A married spouse filing separately can only claim the PTC if she files as single or head of household and the separate filing was because she lived separately from her spouse or because of domestic abuse or spousal abandonment. Unless one of these exceptions apply, a spouse filing separately cannot claim the PTC and must repay any APTC paid on his behalf.

Another allocation situation arises if the taxpayer indicates to the Marketplace that 1 or more people would be claimed as dependents but were claimed by someone else, instead. In these cases, the 2 taxpayers can agree to any allocation percentage, which may vary by the month, but the percentage must apply to enrollment premiums, applicable SLCSP premiums, and the APTC.

Detailed instructions for shared policy allocations are found in the Form 8962 instructions.