Did you know that claiming Premium Tax Credit will require you to file taxes?

Did you know that claiming Premium Tax Credit will require you to file taxes?

What is the Premium Tax Credit?

The premium tax credit – also known as PTC – is a refundable credit that helps you pay the premium for yourself and your family’s health insurance purchased through the Health Insurance Marketplace. The tax credit formed a part of the Affordable Care Act tax provisions, introduced in 2014, with the intention of extending health insurance coverage to lower and middle-income Americans. You can claim it as an advance – the advance premium tax credit (ATPC) – during the tax year or take it as a refund while filing your tax return. In either case, you are mandatorily required to file form 8962 Premium Tax Credit along with your tax return. The amount of the tax credit you are eligible for is based on your estimated income for the year, the healthcare plan you choose, and the size of your family. For this purpose, the family includes yourself, your spouse if filing jointly, and all other individuals whom you claim as dependents.

A ‘tax credit’ is the amount you, as a taxpayer, can subtract directly from taxes owed as against a ‘deduction’ which you can subtract from your total income. While deductions reduce the amount of taxable income, tax credits reduce the actual amount of tax owed.  The PTC is a refundable tax credit; essentially what it means is that if the tax credit you claimed is more than the tax you owe, you will get a refund of the difference.

The Health Insurance Marketplace, also called simply the Marketplace – administered by the Department of Health and Human Services – is where you will find information about private health insurance options and purchase health insurance. Generally, you can purchase health insurance at the Marketplace only during an open enrollment period.  While enrolling for a plan, the Marketplace will determine your eligibility for receiving the APTC based on the information you provide on your application form. The APTC is directly paid monthly to your insurance company on your behalf.

Who is eligible for the PTC?

To be eligible for the premium tax credit, you will need to meet all of the following requirements.

  • You must be a US citizen or be a lawfully resident in the US.
  • Your household income for the year should be at least 100 percent but not more than 400 percent of the federal poverty line for your family size. For the years 2021 and 2022, you would be eligible even if your household income is more than 400 percent.
  • You do not file a tax return using the filing status of Married filing separately. There is however an exception for victims of domestic abuse and spousal abandonment. (Details below)
  • You cannot be claimed as a dependent by another person in their tax return.
  • You or one of your family members has health insurance coverage through the Marketplace.
  • You are not able to get affordable coverage through an eligible employer-sponsored plan that provides minimum value.
  • You are also not eligible for coverage through a government program, like Medicaid, Medicare, CHIP, or TRICARE.
  • You pay the share of premiums not covered by advance credit payments.

[If you file your tax return using the filing status married filing separately, you would be eligible for the premium tax if you are a victim of domestic abuse and spousal abandonment.  You can claim this relief from the joint filing requirement if you are living apart from your spouse at the time you file your tax return and therefore unable to file a joint return and you certify on your return that you are a victim of domestic abuse or spousal abandonment. It is not necessary for you to attach any documentation to your tax return but should keep documentation along with your tax return records.]

Household income eligibility

You are eligible for the premium tax credit if your household income for the year is between 100 percent and 400 percent of the federal poverty line or FPL.  The range of your household income is provided by the Department of Health and Human Services annually usually on the first day of the open enrollment period. For the year 2021, income values falling between the 100% and 400% federal poverty line (for residents of any one of the 48 contiguous states or Washington D.C.) are:

  • $12,880 – $51,520 for one individual
  • $17,420 – $69,680 for a family of two
  • $21,960 – $87,840 for a family of three
  • $26,500 – $106,000 for a family of four
  • $31,040 – $124,160 for a family of five
  • $35,580 – $142,320 for a family of six
  • $40,120 – $160,480 for a family of seven
  • $44,660 – $178,640 for a family of eight.

For families/households with more than eight persons, you should add $4,540 for each additional person.

It is possible that, during the year, there are changes in circumstances in your household that would affect the amount of your actual premium tax credit.  Examples of such changes can be:

  • Your household income increases or decreases significantly due to certain unforeseen events.
  • Marriage or divorce
  • Birth or adoption of a child
  • Other changes such as a change in the dependent status of one of your family members
  • Your eligibility for government-sponsored or employer-sponsored health care coverage changes
  • Change of address

Your household income is calculated as your adjusted gross income plus all other excluded incomes like foreign income, nontaxable social security benefits, tax-exempt interest received, etc. To this modified adjusted gross income, you have to add the adjusted gross income of every other family member who is required to file a federal income tax return.

How is the PTC arrived at?

You will need to provide the Marketplace with complete information about yourself, your family, and your household income.  This will enable them to estimate the credit amount you can claim on your tax return. You can use this estimate and choose either to have them pay the credit directly to your insurance company in advance as monthly premiums or claim the credit at the end of the tax year when you file your tax return. You can even choose to have a part of the credit rather than the full tax credit paid in advance to the insurance company. Your credit amount will be based on an income scale i.e.,lower-income households and individuals get a larger credit and those with higher incomes will be entitled to a smaller credit.

You can buy any one of the four types of federal health insurance plans in the US, accessible through the Health Insurance Marketplace. These are bronze, silver, gold, and platinum. Bronze through platinum plans ranges between the least comprehensive coverage and the most comprehensive. You cannot purchase a catastrophic plan offered in the Marketplace through the PTC. Once you provide the Marketplace with details of your family size and household income, the Marketplace will calculate your eligible PTC.  All four plans have sub-plans and your PTC will be based on the ‘benchmark plan’ available to you and all your family members which is the second-lowest-cost silver plan.  Your entitlement to the credit will be the difference between the cost of the benchmark plan and your expected contribution to the coverage.  Your expected contribution is arrived at on the basis of the FPL range (100 percent to 400 percent) of your income which would be between 2.07% to 9.83% of your household income for 2021.If you choose either gold or platinum plans, you should note that these will have higher premiums than the silver benchmark plan and therefore you will have to pay more than your expected contribution.

Filing your tax return

You will receive Form 1095-A Health Insurance Marketplace Statement from the Marketplace. You will need to use this form to reconcile your premium amounts and your advance credit payments.  This has to be done in form 8962 Premium Tax Credit.  You will normally receive the 1095-A statement by January 31 following the year of coverage. For the 2021 tax year, you should receive a statement by January 31, 2022.  You should file your tax return in form 1040, form 1040-SR, or form 1040-NR and necessarily attach form 8962.  You will have to file your tax return even if you are otherwise not required to.  Else, you will not be able to claim the PTC from the next year.

On filing your return, if you had chosen to claim advance credit payments, if the amount of your advance credit payments received is more than the tax credit you are entitled to, the difference will be either subtracted from any refund due to or will be used to cover any shortfall in the tax you need to pay.  If the advance payments you received are less than your tax credit, you will either get the difference as a refund or reduced from your tax liability. Filing your return after duly reconciling these payments on form 8962 will enable faster processing of your tax return.

On the other hand, if you had chosen not to receive advance credit payments, you will be entitled to receive the difference between your eligible tax credit and your tax liability, if your credit is more than your tax liability.If your tax liability is zero, then you will get back the full amount of credit.

Credits can change the amount of tax you owe drastically. There are other credits like the Foreign tax Credit as well that will come into the picture if you are a resident of one country but earning your income from another. For this purpose, you will require the assistance of a CFO consulting service to help you navigate through the filing process without any bumps.