Advanced Premium Tax Credit

What Is the Advanced Premium Tax Credit?

The advanced premium tax credit is a federal tax credit for individuals that reduces the amount they pay for monthly health insurance premiums when they buy health insurance on the Marketplace.

Understanding the Advanced Premium Tax Credit

The advanced premium tax credit is a credit in the Patient Protection and Affordable Care Act (ACA), also referred to colloquially as Obamacare, which was signed into law on March 23, 2010, by President Barack Obama.

The tax credits are not like regular tax credits that must be calculated and applied to the taxpayer’s tax liability and either refunded or used to reduce liability when taxes are filed for the previous year.

In contrast, the Advanced Premium Tax Credit is calculated and sent directly from the government to the health insurance companies that insure individuals who are eligible for the credit. The individual gets a discount on monthly premium payments in the amount of the tax credit. Anyone eligible for this tax credit receives an amount determined by income.

Those who make more will receive a smaller credit and a smaller monthly discount, while those with less income will receive larger credits and a larger discount on healthcare premiums. Because this tax credit is a direct payment, individuals who receive it do not have to pay the full amount of their monthly health insurance premium up front, but can pay the discounted amount.

Taxpayers get a discount on the monthly premium payments in the amount of the tax credit.

The qualifications for the Advanced Premium Tax Credit are that you are ineligible for either Medicaid or the Children’s Health Insurance Program (CHIP), ineligible for employer-sponsored health insurance, and have a modified adjusted gross income (AGI) of between 100% and 400% of the federal poverty level.

The American Rescue Plan Act of 2021 removes the cap on income for the advanced premium tax credit for 2021 and 2022. The act limits the premiums for these plans to 8.5% of the payer’s modified adjusted gross income on the top-end (i.e. for those with adjusted gross incomes above 400% of the poverty level).

How to Apply for the Advanced Premium Tax Credit

To claim the Advanced Premium Tax Credit, you must enroll in health insurance coverage through the Marketplace. The tax credit is not automatic; you either must apply for it when you sign up for insurance by having the Marketplace website calculate the amount of the credit based on information supplied at that time, or you can pay all the normal premiums and then claim the tax credit back on the tax return when filing the next year.

If you take the monthly discount, you must reconcile that actual credit with the discount received on your tax return the next year. IRS Form 8962 Premium Tax Credit is the form to use to claim or reconcile this tax credit.

If the discount taken monthly is less than the amount of the credit, you are eligible for a refund. If the discount was more than the credit amount, this becomes part of your tax liability, and you must repay the amount when filing your tax return.

If you buy health insurance on the Marketplace, you are allowed to choose how much of your Advance Premium Tax Credit you would like to apply to your health insurance premiums. You are not obligated to apply the full tax credit to your premiums. If you are not sure how much money you will earn over the course of the year, or if your income fluctuates during the year, you can adjust how much of your tax credit to apply to your premiums and avoid a larger tax liability at the end of the year.