The U.S. tax law provides people whose self-reported incomes were in the lowest income bracket and families with a refundable tax credit to subsidize the purchase of health plans offered through the federal and state health benefit exchanges.
The American Rescue Plan Act of 2021 made the credit available to more individuals for 2021 and 2022. The Build Back Better Act, passed by the U.S. House of Representatives in November 2021 and currently pending in the Senate, would extend the ARPA changes for three more years and provide additional technical revisions.
- The premium tax credit (PTC) is a refundable tax credit designed to help eligible individuals and families pay for qualified health plans, purchased through the federal or state exchanges.
- Eligibility for the PTC for an exchange plan is determined upon enrollment and is generally based on the applicant’s tax return filed two years earlier.
- To obtain the PTC, Form 8962 must be filed with Form 1040, 1040-SR, or 1040-NR, even if the claimant is not otherwise required to file a tax return.
- Individuals eligible for employer-sponsored plans, other than individual health reimbursement arrangements (HRAs), cannot waive coverage and claim the PTC for another plan unless the employer plan is either unaffordable or covers insufficient costs.
Understanding the Premium Tax Credit (PTC)
The premium tax credit is generally paid in advance to the insurer issuing the qualified plan as an advance payment PTC, or APTC. The APTC is credited monthly against premiums for qualified plans; i.e., plans offered through the Health Insurance Marketplace—that is, state and federal health exchange plans. In some cases, eligible individuals can elect to pay their premiums out of pocket and claim the PTC in their tax return for the year, instead of benefiting from an APTC.
The amount of the monthly premium tax credit for 2021 is the lesser of (1) the monthly premium for a qualified plan in which the taxpayer, the taxpayer’s spouse, and dependents are enrolled, or (2) the excess, if any, of the premium for the second-lowest-cost silver plan for the same individuals that is available on the exchange in the taxpayer’s area, over an amount equal to 1/12th of a specified percentage of the taxpayer’s household income for the year, in accordance with the brackets of the applicable federal poverty level (FPL) in the following table:
|Percentages Applicable to PTC Calculation for Household Incomes at FPL Ranges|
|Household income percentage of federal poverty line||Initial percentage||Final percentage|
|Less than 150%||0.0||0.0|
|At least 150% but less than 200%||0.0||2.0|
|At least 200% but less than 250%||2.0||4.0|
|At least 250% but less than 300%||4.0||6.0|
|At least 300% but less than 400%||6.0||8.5|
|At least 400% and higher||8.5||8.5|
Whether you receive an APTC or claim a PTC for 2021 and later years, you must file Internal Revenue Service (IRS) Form 8962 with your Form 1040. If you benefited from an APTC in 2021, it must be reconciled with the allowable PTC when you file your return. If the APTC exceeds the allowable PTC, you generally must repay the difference. If the APTC is less than the PTC, you can claim a credit in the amount of the difference and reduce your tax liability or receive a refund.
Although the IRS suspended the repayment requirement for excess APTC for 2020, the suspension has not been renewed for 2021. However, the amount of excess APTC that must be repaid by taxpayers whose household incomes fall below specified percentages of the FPL is limited. For household incomes below 200% of the FPL, the maximum required repayment is $600; if at least 200% but less than 300% of the FPL, $1,500; and if at least 300% but less than 400% of the FPL, $2,500.
Eligibility for—and the amount of—the APTC is estimated by the U.S. Department of Health and Human Services (HHS) upon enrollment in a qualified plan, usually on the basis of your tax return for two years earlier. Individuals who are eligible for the APTC also may be eligible for reduced cost sharing—for example, reduced deductibles and co-pays.
If your circumstances change after enrollment, you must inform the exchange promptly.
Who Can Take the PTC?
Married individuals who file a joint return and single individuals who file their own returns are eligible for the PTC, provided that they and their insurance plans meet additional requirements. Individuals listed as dependents on a return and married individuals filing separately are generally not eligible for the PTC. Special exceptions apply for certain victims of domestic abuse or spousal abandonment and for some individuals who qualify as married living apart under the head of household rules.
Generally, to qualify for the PTC in 2020, your household income had to be at least 100%—but no more than 400%—of the FPL for your household’s size. The American Rescue Plan, enacted in March 2021, eliminated the 400% ceiling entirely for 2021 and 2022. The law also changed the highest credit reduction percentage used in the PTC calculation from 9.5% for 2020 to 8.5% for 2021 and 2022. The decrease in this top percentage rate and the elimination of the eligibility ceiling of 400% of the FPL make more individuals and families eligible for the PTC. If the Senate enacts the Build Back Better Act with its current PTC provisions, the changes for 2021 and 2022 generally would continue in effect through 2025.
Household income is defined for the PTC as modified adjusted gross income (MAGI). It is calculated by adding back nontaxable income, such as tax-exempt interest, the amount excluded from income by citizens or residents living abroad, and the nontaxable portion of Social Security benefits, to your adjusted gross income (AGI). HHS publishes poverty guidelines annually with separate levels for the 48 contiguous states and for the District of Columbia, Alaska, and Hawaii.
Exchange plans, and thus the PTC, are not available to individuals who are not U.S. residents or nationals, nor to undocumented individuals who are not lawfully present in the U.S.
Which Health Plans Qualify for the PTC?
In addition to meeting the personal status and income requirements, you must be covered by a qualified plan to claim the PTC. Qualified plans are plans offered on federal and state health insurance exchanges. In most cases, if you, your spouse, or your dependent(s) are eligible for coverage under a plan that offers minimum essential coverage (MEC) from a source other than an exchange, the plan is not a qualified plan, and you, your spouse, or your dependent(s), respectively, are not entitled to the PTC.
Plans treated as offering MEC include most employer-sponsored plans whether or not you enroll, as well as Medicaid, the Children’s Health Insurance Program (CHIP), and similar government-sponsored health coverage. If your employer offers an individual health reimbursement arrangement (HRA) and you accept it, you are not eligible for the PTC. However, if the HRA does not qualify as affordable under the PTC rules and you decline such HRA coverage, then you can be eligible for the PTC—provided other requirements are met. If your employer offers COBRA (Consolidated Omnibus Budget Reconciliation Act) or retiree coverage and you choose not to enroll, you still can be eligible for the PTC for other qualified plan coverage.
In some cases, an employee still might be able to claim the PTC even though the employee is eligible for employer-sponsored health coverage. If an employer-sponsored plan is determined either to be unaffordable for an employee or to provide less than minimum value—for example, it covers too small a portion of healthcare costs—then the employee can decline such coverage and still claim the PTC with respect to premiums for a qualified plan obtained through an official exchange. Generally, a plan is considered unaffordable if the employee’s annual cost for self-only coverage exceeds a statutorily set percentage of the employee’s household income. For 2021, the affordability percentage was 9.83%; for 2022, the percentage is set at 9.61%.
Health Coverage Tax Credit: Limited Eligibility
The tax law also provides a 2021 tax credit for health insurance premiums for coverage through various state, COBRA, and other sources for limited categories of eligible individuals. Eligibility is restricted to individuals who are certified as displaced workers by the U.S. Department of Labor and who are on leave from training in a federally funded trade adjustment assistance program (or receiving unemployment compensation in lieu of training), and individuals who are age 55 or older and are receiving benefits from the Pension Benefit Guaranty Program. The credit also is available for such individuals’ family members. To obtain the credit, which amounts to 72.5% of premiums, a taxpayer must file IRS Form 8885.
If I don’t owe income taxes for 2021, can I still receive the premium tax credit?
Yes, you can still receive this refundable credit if you meet the eligibility requirements. You must file both a Form 1040 and a Form 8962. You can claim the credit and receive a refund of any shortfall in the amount of advance premium tax credited against your 2021 premiums for coverage on a plan offered on the health insurance exchange.
Can I claim a tax credit for premiums paid for my employer group health plan?
No. The credit is not allowed against premiums paid for employer group health plan coverage in 2021. For future years, if your employer plan does not meet legal requirements for affordability and minimum essential coverage (MEC), you could waive employer coverage, choose a plan on the health exchange for your area, and receive the premium tax credit—provided that you meet income and other eligibility requirements. However, most employers structure their group health insurance plans to pass both the affordability and MEC tests.
Can I get other tax benefits for health premiums if I’m not eligible for the credit?
Health insurance premiums and co-pays qualify as deductible medical expenses, along with other medical costs, subject to certain limitations. Medical costs can be deducted, but only if you itemize deductions and only to the extent that such costs exceed 7.5% of your adjusted gross income.
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