Here’s what taxpayers need to know about a premium tax credit to get high-quality, affordable health insurance for them and their families.
In this article:
- What Is a Premium Tax Credit?
- What Is the Premium Tax Credit That’s Refundable?
- What Is the Health Insurance Marketplace?
- How Is the Premium Tax Credit Amount Computed?
- Who Qualifies for Premium Tax Credit?
- How Do You Define Domestic Abuse and Spousal Abandonment?
- How Do I Get Advance Payments of the Premium Tax Credit?
- What Happens to My Premium Tax Credits If My Family Circumstances Change During the Year?
Premium Tax Credit | Everything Taxpayers Need to Know
What Is a Premium Tax Credit?
What is premium tax credit? It’s a type of refundable tax credit for low- to moderate-income families to get health insurance.
Eligible families can use these refundable tax credits by purchasing health insurance policies through the Health Insurance Marketplace –or simply Marketplace. The Marketplace determines the size of an applicant’s premium tax credit by using a standard sliding scale.
Families with lower income get larger refundable credits to help compensate for their inability to purchase health insurance. Of course, there are other factors that the Health Insurance Marketplace considers.
While you may use a premium tax credit calculator, applicants can simply have the Marketplace compute the advanced premium tax credit or APTC. The APTC is the estimated credit your insurance company receives to lower your monthly premiums.
What Is the Premium Tax Credit That’s Refundable?
These are refundable tax credits because applicants may receive the difference between the credit amount and their tax liability.
If the net premium tax credit amount exceeds the applicant’s tax liability, they will receive the difference in a refund. Similarly, if the applicant does not owe any tax liability, then they can refund the full amount.
On the other hand, an applicant with advance premium tax credit exceeding their allowable credit will have the difference subtracted from their refund or added to their outstanding balance. The amount that the Marketplace subtracts is subject to certain repayment caps.
What Is the Health Insurance Marketplace?
The Health Insurance Marketplace, Exchange, or Marketplace is where taxpayers can:
- Do research on private health insurance options.
- Purchase their preferred health insurance.
- Seek help regarding premiums and other health insurance costs.
Taxpayers can purchase various health insurance options during a specific enrollment period. Keep in mind that you can only apply for the health insurance plans you and your family qualify for.
How Is the Premium Tax Credit Amount Computed?
To compute the premium tax credit, the Marketplace takes the premium of the second lowest costing silver plan and deducts a certain percentage of the applicant’s household income. The Marketplace uses the second-lowest cost silver plan applicable to your coverage family.
Of course, the tax credit cannot exceed the premium of the insurance plan that you and your family enroll in.
An applicant’s coverage family is:
- Covered family members enrolled through the Marketplace.
- Family members who cannot apply for coverage outside Marketplace. This includes institutions such as Medicaid, Medicare, or other cost-friendly, employer-sponsored coverage.
The applicant’s family members are the individuals they wish to claim a personal exemption deduction from their tax return on. This usually includes yourself, your spouse, and other dependents.
RELATED: How Do Education Tax Credits Work?
Who Qualifies for Premium Tax Credit?
As we said, there are certain requirements families have to meet to apply and use a premium tax credit. Applicants have to meet the following requirements:
- Applicants must not be filing separately under a married status. Of course, there are certain exceptions to these including spousal abandonment and domestic abuse.
- Applicants filing for a premium tax credit cannot be a dependent.
- The applicant or a tax-paying family member must have enrolled in a health insurance coverage through Marketplace for at least one month in the calendar year.
- Applicants must not qualify for other affordable employer-sponsored health plans that provide minimum value. Similarly, they should be eligible to enroll in government health care such as Medicaid, TRICARE, or Medicare.
- The applicant must have paid at least a month of their insurance plan’s premium by the original date of its return.
- An applicant’s family size.
- The cost of their available insurance coverage.
There are certain premium tax credit income limits that will determine where the applicant and their family will qualify under.
Generally, the household income of an applicant must be somewhere around 100% to 400% of the federal poverty line for their family’s size. Of course, there are certain exceptions for families below the 100% poverty line.
Keep in mind that falling under the income requirements does not translate to automatic approval. An applicant’s income affects their application for a premium tax credit in the following ways:
- The Marketplace measures the size of an applicant’s premium tax credit using a sliding scale. The lower the income, the greater the possible credits they may receive.
- The applicant may have to pay off excess liability if their APTC exceeds the allowable credit limit. If the applicant is above 400% the poverty line, they will have to pay off all their excess credit payments.
- Applicants should be careful with how much APTC they want the government to pay on their behalf. They should carefully assess how much of their refund they’d want to sacrifice.
Federal Poverty Line Definition: It is the minimum income set by the government that a family needs to provide for their needs, such as food and shelter.
Note: The Department of Health and Human Services determines the Federal Poverty Line or FPL on annual basis.
To make things easier, applicants can simply answer a yes-or-no chart on the IRS’ website. It’ll help you gauge how you fare on applying for a premium tax credit for your family.
How Do You Define Domestic Abuse and Spousal Abandonment?
Premium Tax Credits for Married Filing Separately
Legally married applicants filing separately cannot apply for premium tax credits. Exceptions to this rule include domestic abuse and spousal abandonment, among other cases.
Technically, the IRS considers a taxpayer unmarried if they:
- Have been living separately from their partner for the last six months.
- Maintain a household that served as the dependent’s home for more than half a year.
- Furnish more than half of the household’s costs and expenses during the current tax year.
Married taxpayers filing separately can seek relief to claim their premium tax credit if they meet all of the following:
- The applicant is living apart from their spouse when they filed their tax return.
- They cannot file a joint return because of spousal abandonment or domestic abuse.
- The applicant must certify that they are either a victim of domestic abuse or spousal abandonment.
Victims of domestic abuse are those who experienced psychological, sexual, physical, or emotional offenses. This includes efforts to isolate, humiliate, control, or intimidate the victim.
When determining whether someone is a victim of domestic abuse, both the IRS and Marketplace take all facts into consideration. They try to understand the underlying causes such as drug and alcohol abuse, among other forms of intoxication.
The IRS and Marketplace qualify a taxpayer under spousal abandonment if they truly cannot find their spouse even after reasonable diligence. Of course, they also take into account the facts of the circumstances.
How Do I Get Advance Payments of the Premium Tax Credit?
Using the information you sent the Marketplace, they will determine how much premium tax credit you can use during the tax year. After getting an estimate, taxpayers will decide how much of that amount the Marketplace will pay your insurance company.
Of course, using more APTC will make your monthly premiums lower. Afterward, you will file Form 8962 along with your tax return to confirm the amount of advance monthly payments you want the Marketplace to credit to your insurance policy.
On the other hand, ineligible applicants or those who didn’t opt for the APTC can choose to claim the credit instead.
File the Form 8962 along with your tax return to see if you’re qualified to claim your refundable tax credit. The credits will either increase your refund or lower the amount of taxes you owe.
What Happens to My Premium Tax Credits If My Family Circumstances Change During the Year?
Your premium tax credit may vary from the advanced credit initially estimated by the Marketplace. The credit amount will only change if the information on your tax return differs from the ones you submitted at the time of enrollment.
For example, if your family size grows from the time you applied for health insurance through the Marketplace, the allowable premium tax credit will change accordingly. The Marketplace might also need to see your new income and check how it fares against the standard poverty line.
For example, let’s say your new allowable credit limit far exceeds your advance tax credit. The excess will either increase your refund or lower your outstanding tax obligation.
On the other hand, let’s assume that your new allowable credit limit is much less than your advance tax credit. The difference will either decrease your refund or increase your tax balance due.
These are what taxpayers frequently ask about a net premium tax credit and how they can make use of it. The premium tax credit is a great way to maximize tax refunds and credits for the financial benefit of your family.
With this service, even low-income families can have access to private insurance institutions at more affordable rates. Contact the Marketplace to see how much premium you can save using a refundable tax credit.
Do you have any clarifications on how to apply and use premium tax credit? Post them in the comments section down below!
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