What Is a Premium Tax Credit?

Premium Tax Credits Explained

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The premium tax credit is a federal refundable tax credit that lowers your monthly premiums on plans from the Health Insurance Marketplace. Your premium tax credit amount depends on your household income and other factors.

Let’s take a closer look into what the premium tax credit is, how it works, and how you can qualify. 

Definition and Examples of Premium Tax Credits

The premium tax credit was created to provide affordable health insurance to eligible families and individuals with low to moderate incomes. It’s available only for health insurance purchased through the Health Insurance Marketplace (also known as the Exchange and HealthCare.gov). One of the primary qualifications is that your income must fall between 100% and 400% of the poverty line for your household size. (Other eligibility criteria are discussed below.)

The premium tax credit works on a sliding scale, so the lower your income, the bigger the credit. It’s also a refundable tax credit, so you could get a refund when you file your federal income tax if your credit is larger than your tax liability. 

  • Acronym: PTC

How Premium Tax Credits Work

When you enroll in a Marketplace plan, you can choose to receive your premium tax credit either in advance to lower your monthly premium or when you file your next tax return. If you accept it in advance, the Marketplace calculates your estimated credit amount based on the application information. If you use less than your allotted tax credit, you’ll get a refundable credit on your tax liability when you file.

If you use more tax credits than you qualify for based on your final yearly income and household size, you must repay the difference when you file your income tax return. There are repayment caps based on your income and filing status, but if your income is 400% or more above the federal poverty line, you’ll owe the full amount.

To claim the premium tax credit, you’ll need to file Form 8962 and attach it to your Form 1040 during tax season.

How to Qualify for a Premium Tax Credit

You may be eligible for a premium tax credit if you meet the following criteria:

  • You or a family member have a plan through the Marketplace.
  • You or members of your household aren’t eligible for employer- or government-sponsored health insurance coverage.
  • Your household income is between 100% and 400% of the federal poverty line, based on your family size (though you may potentially still qualify if your household income is below 100% if you meet all the requirements outlined by the IRS).
  • You aren’t eligible to be claimed as a dependent on another person’s tax return.
  • If you’re married, you’ll file a joint tax return unless you qualify for an exception.
  • You paid all your health insurance premiums.

Premium Tax Credits in 2021

The maximum health insurance premium you’d pay for a Marketplace insurance plan is typically the premium of the second lowest cost Silver plan (SLCSP) available to you on the Marketplace, minus a specific percentage of your household income based on your federal poverty level. Your premium tax credit is then the difference between your maximum premium contribution and the plan’s gross premium. The SLCSP is sometimes also called the “benchmark plan.”

Your SLCSP premium is usually noted on Form 1095-A, a tax form the Marketplace will send you by February if someone in your household had a Marketplace plan the previous year.

Here’s how much of the SLCSP premium you’re responsible for, based on the tax-filing year and your income compared to the poverty line. Remember that the premium tax credit works on a sliding scale, so the percentage of SLCSP premiums you pay directly correlates to your income level.

Income as a Percentage of the Federal Poverty Line Percentage of SLCSP Premium You Pay on Income Earned in 2021 and 2022
<150% 0%
150%-199% 0%-2%
200%-249% 2%-4%
250%-299% 4%-6%
300%-400% 6%-8.5%
>400% 8.5%

A Premium Tax Credit Example

Suppose you live in one of the 48 contiguous United States and want to calculate your premium tax credit for a Marketplace health insurance plan that you’re purchasing in 2021.

Federal poverty guidelines show that your family of three’s poverty line is $21,960. You estimate your household income for 2021 to be $54,900, which puts you at 250% of the poverty line ($54,900 / $21,960 = 2.5, 2.5 x 100% = 250%). That means you’re responsible for paying between 4% and 6% of the SLCSP.

Now suppose the benchmark plan available to you costs $10,000 for the year. If your maximum premium contribution is 4%, you’d only pay $400 per year and your premium tax credit would be $9,600 ($10,000 – $400).

Your premium tax credit remains the same regardless of which type of Marketplace plan you choose (Bronze, Silver, Gold, or Platinum) and how much that health plan costs. But if you purchase one that’s more expensive than the SLCSP, the tax credit won't cover as much of your premium.

Only Silver plans are eligible for cost-sharing reductions, which reduce out-of-pocket expenses. Cost-sharing reductions are available to those with household incomes of 100% to 250% of the federal poverty line.

Key Takeaways

  • The refundable premium tax credit lowers health insurance premiums for Marketplace plans for eligible individuals and families with low to moderate incomes. 
  • Your premium tax credit is the cost of the SLCSP minus your maximum premium contribution amount.
  • Any unused credit is deducted from your tax liability when you file. If a change of circumstances or another reason led you to use more of the credit than you were eligible for, you might have to repay all or a portion of the difference.
  • If you purchased health insurance through the Marketplace, you’ll receive tax Form 1095-A during tax time. If you claim the premium tax credit, you’ll need to file Form 8962 and attach it to your Form 1040 when filing your taxes.

Article Sources

  1. Internal Revenue Service. "Questions and Answers on the Premium Tax Credit," Questions 1, 7.

  2. Internal Revenue Service. "Questions and Answers on the Premium Tax Credit," Question 27.

  3. Internal Revenue Service. "Premium Tax Credit Flow Chart: Are You Eligible?"

  4. Internal Revenue Service. "Instructions for Form 8962 (2020)."

  5. Internal Revenue Service. "Questions and Answers on the Premium Tax Credit," Question 20.

  6. HealthCare.gov. "Second Lowest Cost Silver Plan (SLCSP)."

  7. Congress.gov. "American Rescue Plan Act of 2021," Page 183.

  8. Department of Health and Human Services. "Poverty Guidelines."

  9. Georgetown University Health Policy Institute. "How Premium Tax Credits And Cost-Sharing Reductions Work."