What is Premium Tax Credit?
The premium tax credit program is funded by the federal government and reduces the costs of insurance when you purchase your coverage through Health Insurance Marketplace. It is available to families and individuals with incomes below the federal poverty level who meet other eligibility criteria.
How does it work?
When you apply to the Marketplace for health insurance, you must estimate your family income in order for your insurer to determine the amount of premium tax credits you will receive. This credit is then transferred directly to the insurance company and lowers your monthly premium costs.
When you purchase your policy, your insurer may send you "Health Insurance Marketplace Statements" (also known as a 1095A) if you qualify for a tax credit. The form also provides the IRS with the amount of premium tax credits you have received.
Your premium tax credit will be based upon your estimated household earnings and the size and number of dependents in your tax family. This includes you, your spouse (if you're filing a joint tax return), and your children. If your income changes during the year, or if your tax family size changes, then your premium tax credit will change.
What happens when your income exceeds what you expected to earn?
If your income goes up during the year, you may have to pay back part or all of your premium tax credit. You can only pay up to 400 percent of the household income. This is also known as "the clawback."
How do you handle a change in your income?
You should report any changes in your income to the Marketplace as soon as possible. You will avoid having to pay back any excess premium tax credits at the end.
Your income will determine the amount you are required to pay. The instructions for Form 8962, which is used by individuals to report health insurance costs through the Health Insurance Marketplace, outline the rules.
What is Form 8962?
When you file an income tax return you will need to declare the amount that you received for your premium tax advance during 2021. You will have to pay the amount due based on the results of a reconciliation of your advance premium tax credits received during 2021, with the actual premium credits for that year.
This form is used to reconcile any advance premium credit that you may have received between 2021 and now. This form can be located on the IRS' website or your state's.
IRS: You will need to provide the IRS with the results of a reconciliation of the credit for advance premiums you received in 2020. This will appear in your 2021 federal return on Part III, Line 29.
There are a few exceptions. Your household income must be above 138% poverty level in a non-ACA state or you may have received unemployment compensation in whichever week of 2021. However, these exceptions only apply to income that was reported on your taxes for 2021.