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The advance premium tax credit helps reduce health insurance costs for people with Affordable Care Act marketplace plans.

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Health insurance is expensive, especially if you don't have coverage from an employer. But premium tax credits can help if you get coverage through the Affordable Care Act marketplace.

These subsidies, which were created as part of the ACA, help reduce the premiums for people who buy health insurance through Healthcare.gov or their state insurance marketplace. You may pay significantly less than the sticker price for your health insurance, depending on your income. Congress expanded the subsidies in 2021 and 2022 so more people with ACA marketplace plans can receive the tax credit.

Here's more about how these tax credits work, who is eligible, and how much you can save.

What is an advance payment of premium tax credit?

The advance premium tax credit (APTC) reduces health insurance payments of the premium for those with ACA marketplace plans.

When you buy health insurance on Healthcare.gov or from the 14 states (and the District of Columbia) that run their own insurance marketplaces, you can receive a subsidy to help reduce your premiums based on your income.

This subsidy is technically a tax credit paid in advance. The federal government can send the money directly to your health insurance company to reduce your monthly premiums rather than having people wait to receive the money when you file your income tax return.

The lower your income, the larger the tax credit -- and the less you'll pay each month.

Key Takeaways

  • The federal government offers advance premium tax credits to those with plans from the health insurance marketplace.
  • People who get insurance through an employer, Medicare or any other source aren’t eligible for the subsidies.
  • The Affordable Care Act marketplace will factor in the tax credit when estimating your health insurance premiums for the coming year.
  • The health insurance tax credit is based on your household income. 
  • The American Rescue Plan expanded the subsidy for 2021 and 2022, so now everyone with a marketplace plan is eligible for the tax credit.

How does the advance premium tax credit work?

When getting a marketplace plan, you estimate your household income for the current year -- including yourself, your spouse, and your dependents. That income figure will determine the size of the tax credit.

The subsidy will be applied directly to your monthly premiums. You only have to pay the difference. You can request to have the entire tax credit applied to your premiums or you can receive a portion of it in premium reduction and the remainder of the credit when you file your income-tax return for the year.

When you file your tax return, you reconcile your estimated income with your actual income.

  • If you end up earning less than expected, you could be eligible for a larger tax credit. In that case, you may get the extra money back as a refund. 
  • If you earn more than expected and don't qualify for as large a tax credit as you had received, you may need to repay excess advance payments when you file your income tax return.

Repayment of extra credits was suspended temporarily in 2020 because of the job instability from COVID. However, the regular rules are scheduled to resume for tax year 2021.

"There are no plans currently in Congress to suspend the premium tax credit repayments again this year," says Mark Steber, chief tax information officer at Jackson Hewitt.

How to qualify for the advance premium tax credit

To qualify for the advance premium tax credit, you must have health insurance coverage through Healthcare.gov or your state insurance marketplace. You can't be claimed as a dependent on another person's tax return.

You also aren't eligible if you file your tax return using the status of married filing separately. You additionally can't receive this tax credit if you get your health insurance through your employer.

In the past, you could only qualify for the tax credit if your income was less than 400% of the federal poverty level. However, the American Rescue Plan Act of 2021 (also known as the COVID-19 stimulus bill passed in March) eliminated that income cap for 2021 and 2022. The size of the tax credit still varies based on your income, but you may receive a tax credit even at higher income levels.

The lower your income, the larger the tax credit. If you received any unemployment compensation in 2021, you can also receive a larger tax credit for the year.

How to calculate the advance premium tax credit

The tax credit is based on your income and the calculation assumes that a household shouldn’t pay more than 8.5% of their income for health insurance premiums. The lower your income, the smaller percentage of the cost you’re expected to pay.

The American Rescue Plan expanded this subsidy for 2021 and 2022. In the past, the calculation assumed you wouldn't pay more than 9.8% of your household income for health insurance premiums. The new calculations can increase the subsidies by hundreds -- and sometimes thousands -- of dollars for the year.

The calculation is based on the premiums for a Silver-level health insurance policy in your area for your age and family size. Health insurance policies sold on the marketplace are divided into four different metal levels:

  • Bronze policies generally have the lowest premiums but the highest deductibles and out-of-pocket costs.
  • Silver policies have mid-level premiums and deductibles.
  • Gold and Platinum policies tend to have the highest premiums and lowest deductibles and out-of-pocket costs.

The tax credit is calculated based on premiums for a Silver-level policy, but you can then use the money to buy any type of policy available on the marketplace. For instance, if you buy a Bronze policy, you may end up paying even less for coverage.

Advance premium tax credit example

Let’s look at an example. A 40-year-old Philadelphia couple who have two young children and earn $70,000 for the year can receive a subsidy worth about $1,156 per month, leaving them to pay $274 per month for a Silver-level plan. They could pay $0 for a Bronze-level plan.

You can quickly estimate your tax credit and the cost of coverage in your area using the Kaiser Family Foundation's Health Insurance Marketplace Calculator. You can get specific costs you would pay for the policies in your area at your state marketplace, and most have calculators to help you run a quick estimate, too. You can find links to each state's marketplace at Healthcare.gov.

How to apply for the advance premium tax credit

When you buy health insurance at Healthcare.gov or your state marketplace, you estimate your income for the year, which is used to calculate your subsidy.

When you apply for coverage, you can choose how much of the premium tax credit to apply to your premiums now. You can receive the remainder of the tax credit when you file your income-tax return for the year.

How to claim the advance premium tax credit on your taxes

When you file your income tax return, you need to fill out IRS Form 8962 Premium Tax Credit to determine how much you should receive based on your actual income for the year, rather than the estimated income you used when you applied for coverage from the marketplace.

You should receive Form 1095-A Health Insurance Marketplace Statement before you file your taxes, which provides the amount of advance premium tax credit already paid to the insurance company, says Steber.

Use Form 8962 to reconcile the amount you should have received based on your actual household income compared to the subsidy applied to your health insurance premiums during the year based on your estimated income.

If your income ended up being less than originally expected, you can receive the extra money when you file your tax return. It will either increase your refund or decrease the tax you owe. If your income was higher than expected, you may have to pay back some of the money with your taxes.

Frequently Asked Questions

Who qualifies for the APTC?

People who buy health insurance through Healthcare.gov or their state insurance marketplace can qualify for the advance premium tax credit based on their income.

You aren't eligible for the credit if you can be claimed as a dependent on another person's tax return or if you use the married filing separately filing status. You also can't receive this credit if you get health insurance in another way, such as Medicare or through your job.

What is excess advance premium tax credit?

The size of the advance premium tax credit is based on the household income estimate you provided when you applied for health insurance at Healthcare.gov or your state marketplace. So, you may find that you received excess advance payments.

You need to reconcile that amount with your actual income for the year and file Form 8962 with the IRS when you file your income tax return. If your actual income is higher than your estimate, you received a larger advance premium tax credit than was needed.

You usually need to repay the extra tax credit when you file your tax return. However, the federal government suspended the requirement to repay excess payments for 2020.

How do you know if you get the advance premium tax credit?

When you apply for health insurance at Healthcare.gov or your state marketplace, you'll find out whether you qualify for the advance premium tax credit based on your estimated income. You'll also see how much you'll need to pay in premiums after the credit is applied to the cost of the policies available in your area.

Where can you use the advance premium tax credit?

You can only use the advance premium tax credit on health insurance from Healthcare.gov or your state insurance marketplace. You can't use it for health insurance you receive from an employer.