What Is the Advanced Premium Tax Credit?

The Advanced Premium Tax Credit is a federal tax credit for individuals that reduces the amount they pay for monthly health insurance premiums when they buy health insurance on the Marketplace.

Breaking Down the Advanced Premium Tax Credit

The Advanced Premium Tax Credit is a credit in the Patient Protection and Affordable Care Act (ACA, also referred to colloquially as Obamacare), signed into law on March 23, 2010, by President Barack Obama. The tax credits are not like regular tax credits that must be calculated and applied to the taxpayer's tax liability and either refunded or used to reduce liability when taxes are filed for the previous year.

In contrast, the Advanced Premium Tax Credit is calculated and sent directly from the government to the health insurance companies that insure individuals who are eligible for the credit. The individual gets a discount on monthly premium payments in the amount of the tax credit. Anyone eligible for this tax credit receives an amount determined by income. Those who make more will receive a smaller credit and a smaller monthly discount, while those with less income will receive larger credits and a larger discount on health care premiums. Because this tax credit is a direct payment, individuals who receive it do not have to pay the full amount of their monthly health insurance premium up front but can pay the discounted amount.

Taxpayers get a discount on the monthly premium payments in the amount of the tax credit.

The qualifications for the Advanced Premium Tax Credit are that the individual is ineligible for either Medicaid or the Children’s Health Insurance Program (CHIP), is ineligible for employer-sponsored health insurance and has a modified adjusted gross income (AGI) of between 100 and 400 percent of the federal poverty level.

How to Apply for the Advanced Premium Tax Credit

To claim the Advanced Premium Tax Credit, the individual must enroll in health insurance coverage through the Marketplace. The tax credit is not automatic, and the individual must apply for it when they sign up for insurance by having the Marketplace website calculate the amount of the credit based on information supplied at that time, or pay all the normal premiums and then claim the tax credit back on the tax return when filing the next year.

If an individual takes the monthly discount, they must reconcile that actual credit with the discount received on their tax return the next year. IRS Form 8962 Premium Tax Credit is the form to use to claim or reconcile this tax credit. If the discount taken monthly is less than the amount of the credit, the individual is eligible for a refund. If the discount was more than the credit amount, this becomes part of the individual's tax liability, and he or she must repay the amount when filing his or her tax return.

Individuals who buy health insurance on the Marketplace are allowed to choose how much of their Advance Premium Tax Credit they would like to apply to their health insurance premiums. They are not obligated to apply the full tax credit to their premiums. If an individual is not sure how much money he or she will earn over the course of the year, or if his or her income fluctuations during the year, he or she can adjust how much of his or her tax credit to apply to his or her premiums, and avoid a larger tax liability at the end of the year.