What is the premium tax credit and how does it work?
The subsidy that lowers your monthly Marketplace premium, how it is calculated, and why the estimate you give matters at tax time.
The premium tax credit is the main financial help in the Marketplace. It is a tax credit, but you do not have to wait until you file to get it. Most people take it in advance, applied every month against their premium.
How the amount is decided
The credit is built around a benchmark: the second lowest cost silver plan available at your address. The rules set what share of your household income you should have to pay toward that benchmark plan, and the credit covers the rest.
Two things follow from that, and they surprise people.
- The credit is tied to the benchmark plan, not to the plan you pick. You can apply it to any metal level.
- Because premiums rise with age, an older applicant usually gets a larger credit for the same income. The credit is calculated against the cost of coverage, not income alone.
So do not rule yourself out on income. See whether you qualify.
Advance payments, and the catch
When you take the credit in advance, it is based on the income you estimate for the coming year. At tax time, the IRS compares your estimate against what you actually earned.
- Earned less than you estimated: you get the difference back as a refund.
- Earned more: you pay some of the credit back.
This is the single most common unpleasant surprise in Marketplace coverage. It is entirely avoidable. Report income changes to the Marketplace when they happen instead of waiting for April, and your monthly credit adjusts going forward.
Who cannot use it
- People with an offer of affordable employer coverage that meets minimum value
- People eligible for Medicare, Medicaid or CHIP
- People who do not file a federal tax return, or who are married and file separately, with limited exceptions for domestic abuse and abandonment
- People who are not lawfully present in the United States
Using it well
- Estimate your income for the coverage year as honestly as you can. If you are self employed, use income net of business expenses.
- Include everyone in your tax household, even people who will not be on the plan.
- Take the credit monthly unless your income is very unpredictable. If it is, consider taking less in advance and collecting the rest at tax time.
- Update the Marketplace within 30 days of any income or household change.
- Keep Form 1095-A when it arrives. You need it to file, and Form 8962 is where the credit is reconciled.
See what Marketplace coverage costs and how income limits work.
Common follow-up questions
Do I get the credit as a check?
Not usually. Most people have it paid directly to the insurer each month, which lowers the premium. You can also take it all at tax time instead.
What if I overestimate my income?
You get the difference back when you file. Overestimating is the safer direction to be wrong in.
Does the credit change if I pick a cheaper plan?
No. The credit is fixed by the benchmark plan. Pick a cheaper plan and you keep the same credit, so your monthly cost drops.
Want this looked at properly?
We are an independent agency in McAllen serving Hidalgo, Cameron and Starr counties. No cost to talk it through.
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