The United States tax code gives a refundable tax credit to individuals and families with self-reported earnings in the lowest income group to support the purchase of health insurance provided via federal and state health benefit exchanges.
The American Rescue Plan Act of 2021 extended the credit to additional people in 2021 and 2022. 2 The Build Back Better Act, which was approved by the United States House of Representatives in November 2021 and is presently pending in the Senate, would prolong the ARPA amendments for three more years and make further technical adjustments. 34
- The premium tax credit (PTC) is a refundable tax credit intended to assist eligible people and families in purchasing qualifying health insurance via federal or state exchanges.
- The PTC for an exchange plan is established at the time of enrollment and is typically based on the applicant’s tax return from two years before. 5
- Form 8962 must be submitted with Form 1040, 1040-SR, or 1040-NR to get the PTC, even if the claimant is not otherwise required to file a tax return. 6
- Individuals qualified for employer-sponsored plans other than individual health reimbursement arrangements (HRAs) cannot renounce coverage and claim the PTC for another plan unless the employer plan is either costly or inadequately covered. 6
Understanding the Premium Tax Credit (PTC)
As an advance payment PTC, or APTC, the premium tax credit is often paid in advance to the insurer offering the eligible plan. The APTC is applied to premiums for eligible plans, which are those sold via the Health Insurance Marketplace (state and federal health exchange plans). 7 Instead of receiving an APTC, qualified persons may choose to pay their premiums out of pocket and claim the PTC on their tax return for the year.
The monthly premium tax credit for 2021 is equal to 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
|Percentages Applicable to PTC Calculation for Household Incomes at FPL Ranges|
|Household income percentage of federal poverty line||Initial percentage||Final percentage|
|Less than 150%||0.0||0.0|
|At least150% but less than 200%||0.0||2.0|
|At least 200% but less than 250%||2.0||4.0|
|At least 250% but less than 300%||4.0||6.0|
|At least 300% but less than 400%||6.0||8.5|
|At least 400% and higher||8.5||8.5|
If you get an APTC or claim a PTC for 2021 or later, you must complete Internal Revenue Service (IRS) Form 8962 along with Form 1040.9. If you received an APTC in 2021, you must reconcile it with the permitted PTC when filing your return. If your APTC exceeds your permitted PTC, you must normally return the difference. If the APTC is less than the PTC, you may claim a credit for the difference, lowering your tax burden or receiving a refund. 6
Although the IRS postponed the payback obligation for excess APTC in 2020, it did not extend the deferral in 2021. However, the amount of excess APTC that taxpayers must repay if their family income falls below certain percentages of the FPL is capped. 10 The maximum necessary payback is $600 for households earning less than 200% of the FPL; $1,500 for those earning more than 200% but less than 300% of the FPL; and $2,500 for those earning more than 300% but less than 400% of the FPL. 11
The APTC is calculated by the US Department of Health and Human Services (HHS) upon enrollment in a qualifying plan, generally based on your tax return for the previous two years. Individuals who qualify for the APTC may also be eligible for reduced cost sharing, including as lower deductibles and co-pays.
If your circumstances change after enrolling, you must notify the exchange as soon as possible.
Who Can Take the PTC?
Married couples filing a combined return and single people filing their own taxes are both eligible for the PTC, providing they and their insurance plans fulfill certain conditions. Individuals identified as dependents on a tax return, as well as married couples filing separately, are normally ineligible for the PTC. Certain victims of domestic violence or spousal abandonment, as well as those persons who qualify as married living separated under the head of household requirements, are exempt.
In general, to qualify for the PTC in 2020, your household income had to be at least 100% of the FPL for your family size, but no more than 400%. The American Rescue Plan, passed in March 2021, completely erased the 400% cap for 2021 and 2022. 13 The maximum credit reduction percentage utilized in the PTC computation was also reduced from 9.5% in 2020 to 8.5% in 2021 and 2022. 14 With the top percentage rate reduced and the qualifying maximum of 400% of the FPL eliminated, more people and families are eligible for the PTC. If the Senate passes the Build Back Better Act with the present PTC provisions, the modifications for 2021 and 2022 will usually be in force until 2025. 15
For the purposes of the PTC, household income is defined as modified adjusted gross income (MAGI).It is computed by subtracting nontaxable income from your adjusted gross income, such as tax-exempt interest, the amount excluded from income by citizens or residents residing abroad, and the nontaxable component of Social Security payments (AGI).HHS issues poverty criteria on a yearly basis, with unique levels for the 48 contiguous states, the District of Columbia, Alaska, and Hawaii. 16
Persons who are not US citizens or nationalities, as well as undocumented individuals who are not legally present in the US, are not eligible for exchange plans and hence the PTC.17
Which Health Plans Qualify for the PTC?
To claim the PTC, you must be insured by a qualifying plan in addition to satisfying the personal status and income criteria. Qualified plans are those that are available via federal and state health insurance marketplaces. If you, your spouse, or your dependent(s) are eligible for coverage under a plan that provides MEC from a source other than an exchange, the plan is not a qualifying plan, and you, your spouse, or your dependent(s) are not eligible for the PTC. 6
Most employer-sponsored plans, whether you enroll or not, are considered to provide MEC, as are Medicaid, the Children’s Health Insurance Program (CHIP), and comparable government-sponsored health care. You are not eligible for the PTC if your company provides an individual health reimbursement plan (HRA) and you accept it. However, if the HRA does not qualify as affordable under the PTC regulations and you refuse such HRA coverage, you may still be eligible for the PTC—as long as other conditions are satisfied. 18 If your company provides COBRA (Consolidated Omnibus Budget Reconciliation Act) or retiree coverage and you decline, you may still be eligible for the PTC for other qualifying plan coverage.
Even if an employee is qualified for employer-sponsored health insurance, he or she may be able to claim the PTC in certain instances. If an employer-sponsored plan is determined to be unaffordable for an employee or to provide less than minimum value—for example, it covers too little of the employee’s healthcare costs—the employee can decline such coverage while still claiming the PTC on premiums for a qualified plan obtained through an official exchange. 18 In general, a plan is deemed unaffordable if the yearly cost for self-only coverage exceeds a statutorily defined proportion of the employee’s family income. The affordability percentage for 2021 was 9.83%, while the figure for 2022 is set at 9.61%. 1920
Health Coverage Tax Credit: Limited Eligibility
For a limited number of people, the tax bill also includes a 2021 tax credit for health insurance premiums paid via different state, COBRA, and other sources. 21 Individuals who are certified as displaced workers by the US 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 who are 55 or older and receiving benefits from the Pension Benefit Guaranty Program are ineligible. Family relatives of such persons are also eligible for the credit. A taxpayer must complete IRS Form 8885.22 to get the credit, which amounts to 72.5% of premiums.
If I don’t owe income taxes for 2021, can I still receive the premium tax credit?
Yes, if you match the qualifying conditions, you may still obtain this refundable credit. You must file both Forms 1040 and 8962.6. You may apply for the credit and get a refund if there is a deficiency in the amount of advance premium tax applied against your 2021 premiums for coverage on a health insurance exchange plan.
Can I claim a tax credit for premiums paid for my employer group health plan?
No, the credit cannot be used to premiums paid for employer-sponsored group health plan coverage in 2021. If your employer plan does not meet legal requirements for affordability and minimum essential coverage (MEC) in future years, you may be able to waive employer coverage, choose a plan on your local health exchange, and receive the premium tax credit—provided you meet income and other eligibility requirements. Most organizations, however, design their group health insurance policies to pass both the affordability and MEC requirements.
Can I get other tax benefits for health premiums if I’m not eligible for the credit?
Health insurance premiums and co-pays, along with other medical expenditures, are deductible medical expenses, subject to certain limits. Medical expenses may be deducted, but only if you itemize and to the extent that they exceed 7.5% of your adjusted gross income. 23
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