Everything You Need to Know About The Health Care Tax Credit

Need to get health insurance through an Affordable Care Act exchange? You may be eligible for help.

Photo of a stethescope on top of an insurance form
(Image credit: Getty Images)

 Health insurance can be expensive. But thanks to Obamacare, people who otherwise can’t get affordable coverage through their employers can purchase insurance through an exchange and qualify for the premium tax credit (PTC) to reduce premiums. The PTC is about to celebrate its 10th birthday, and it has grown from when it began. The recently passed Inflation Reduction Act preserved a 2021 and 2022 expansion of the PTC for three more years, through 2025, just in time for open enrollment, which begins Nov. 1. Not only will more people continue to qualify for the PTC, but bigger credits remain in place for many.

Who is Eligible for a Health Care Credit? 

 Before 2021, the PTC was available to people with household incomes from 100% to 400% of the poverty level who bought health coverage through an exchange. If you’re enrolling for 2023, those income levels range from $13,950 to $55,800 for singles and $27,750 to $111,000 for a family of four (the figures are higher for residents of Alaska and Hawaii). For 2021 through 2025, people with incomes over 400% of the poverty line who enroll in coverage through an exchange also get PTCs to the extent their cost exceeds 8.5% of income.

Individuals who are eligible for Medicare, Medicaid, Tricare or other federal, state or local government insurance do not qualify for the PTC. Nor do individuals who are offered affordable  health insurance through their employer. Employer coverage is treated as affordable if the employee’s share of annual premiums for self-only coverage doesn’t exceed 9.12% of household income (9.61% for 2022).  For years, this same self-only test also applied in determining affordability for the employee's spouse and children, but President Biden's administration changed that rule. It recently issued final regulations that determines affordability for family members based on the employee's share of the cost of family coverage  under the employer's plan. This change will be in place for open open enrollment for 2023.

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How Does the Premium Tax Credit Work? 

 The credit is estimated when you go on the exchange to buy insurance. The estimated PTC for 2023 is based on your expected 2023 income. Begin with your 2021 modified adjusted gross income, which is AGI plus tax-free interest, nontaxable Social Security benefits and any tax-exempt foreign earned income. Then add or subtract any income changes that you expect to have for 2023.

The size of the PTC will be tied to the premium of the second-lowest-cost silver plan available to you, minus your expected contribution amount, which is based on your household’s modified AGI. The lower your modified AGI, the bigger the PTC. You can choose to have the PTC paid in advance directly to the health insurance company to lower your monthly premiums.

If you receive coverage through an exchange and opt for the PTC to be paid to the insurer, you must file a federal income tax return for that year and report the PTC, even though your income may be below the filing threshold or you expect a refund. You will have to attach Form 8962 to your Form 1040 to compute the actual PTC, list any advance payments made to the insurer and reconcile the two figures. If the PTC exceeds the advance payments, you can claim the excess as a refundable credit on the 1040. If the PTC is less than the advances, most people will need to repay all or part of the excess. Before filing your return, make sure you accurately report all information and double check that you qualify for the PTC. The IRS is on the prowl for people who get PTC advance payments and either don’t file returns or file but erroneously report the PTC.

If you elect advance payments of the PTC, let the exchange know of any changes that could affect the amount of the PTC, such as a change in income, employment, marital status or dependents. When you enroll in an insurance plan through an exchange, your estimated income is used to determine your PTC. If you later realize that your income for the year will be higher or lower than what you originally estimated, inform the exchange as soon as you can. It will then either lower or increase the PTC advances for the rest of the year. That will help avoid an unpleasant surprise when you file your tax return next year.

Joy Taylor
Editor, The Kiplinger Tax Letter

Joy is an experienced CPA and tax attorney with an L.L.M. in Taxation from New York University School of Law. After many years working for big law and accounting firms, Joy saw the light and now puts her education, legal experience and in-depth knowledge of federal tax law to use writing for Kiplinger. She writes and edits The Kiplinger Tax Letter and contributes federal tax and retirement stories to kiplinger.com and Kiplinger’s Retirement Report. Her articles have been picked up by the Washington Post and other media outlets. Joy has also appeared as a tax expert in newspapers, on television and on radio discussing federal tax developments.