Starting in 2014, individuals and families can take a new premium tax credit to help them afford health insurance coverage purchased through a Health Insurance Marketplace. The premium tax credit is refundable, so taxpayers who have little or no income tax liability can still benefit. The credit also can be paid in advance to a taxpayer’s insurance company to help cover the cost of premiums.
Who Is Eligible for a Premium Tax Credit?
The premium tax credit is generally available to U.S. citizens and legal residents with incomes between 100% and 400% of the Federal Poverty Level (FPL). This means that middle-income individuals and families, as well as those in lower-income groups, will receive financial help in purchasing private health plans through the Health Insurance Marketplace. The premium tax credit makes up the difference between the amount an individual is required to pay and the amount the plan charges in premiums. Specific requirements include:
- Household income betweeen 100% and 400% of the FPL.
- Covered individuals must enroll in a qualified health plan through a state Health Insurance Marketplace.
- Covered individuals must be legally present in the United States and not incarcerated.
- Covered individuals must not be eligible for other qualifying coverage, such as Medicare, Medicaid, or affordable employer-sponsored health coverage.
- Individuals who are eligible for , but not enrolled in employer-sponsored health insurance if (a) the insurance is unaffordable (i.e., the self-only premium exceeds 9.5% of income); or (b) the insurance doesn’t provide a minimum value (i.e., it fails to cover 60% of total allowed costs.
What Is the Premium Tax Credit Amount?
The premium tax credit amount is generally equal to the difference between the premium for the benchmark plan and the taxpayer’s expected contribution:
- Benchmark Plan: The benchmark plan is the second-lowest-cost plan in the Marketplace that would cover an individual or family at the “silver” level of coverage.
- Income Eligibility: Income eligibility for the premium tax credit will be based on the previous year’s income tax return. It may also be possible to verify income through pay stubs or other documentation.
- Expected Contribution: The expected contribution is a specified percentage of the taxpayer’s household income… the amount the taxpayer is expected to pay toward the premium. The expected contribution will increase as household income increases:
|Income (as a % of FPL):||Up to 133%||133% – 150%||150% – 200%||200% – 250%||250% – 300%||300% – 400%|
|Expected (premium) Contribution:||2% of income||3-4% of income||4-6.3% of income||6.3-8.05% of income||8.05-9.5% of income||9.5% of income|
- Limits: If a plan is less expensive than the benchmark plan is chosen, the actual amount paid for coverage will be less than the expected contribution. Since the premium tax credit is based on a benchmark plan, older Americans (ages 55 – 64) who face higher premiums will receive a greater premium tax credit. The credit is capped at the premium for the plan chosen… no one will receive a credit that is larger than the amount they actually pay for their plan.
How Is the Premium Tax Credit Paid?
The premium tax credit is advance-able, refundable and subject to reconciliation each year.
- Advance-able: An advance-able tax credit allows people to receive the benefit of the credit at the time they purchase health insurance, rather than paying the premium out of pocket and waiting to be reimbursed when filing their income tax return. The premium tax credit will be paid directly to insurance companies by the Department of the Treasury on a monthly basis. No payments are made directly to consumers.
- Refundable: The premium tax credit is refundable so taxpayers who have little or no income tax liability can still benefit.
- Reconciliation: Taxpayers receiving the premium tax credit must file an income tax return. Because the premium tax credit is based on the previous year’s income, there is a reconciliation process when taxpayers file their tax returns for the actual year in which they received the tax credit. If a taxpayer was “under-credited,” an additional credit will be returned to the taxpayer. If there was an excess credit, the taxpayer is liable for the overpayment, subject to caps ranging from $600 for married taxpayers ($300 if single) with household income from 300% to 400% of FPL. Taxpayers who end the year with household income below 100% of FPL will not be required to prepay any overpayment of the advance credit.
Estimating the Premium Tax Credit
We have a website set up to help people calculate their subsidy. This calculator can be used to give an estimate of the amount of any premium tax credit subsidy that someone might be entitled. You can use that calculator by clicking here.