Premium Tax Credit: your top questions answered
Health insurance is a significant expense for many individuals and families. However, the Premium Tax Credit (PTC) may make your health insurance more affordable. But it’s not the most straightforward tax credit to understand. In this article, we’ll answer some of the most frequently asked questions about the PTC so you can determine whether you’re eligible for the credit and how to make the most of it.
What is the PTC?
The PTC is a refundable tax credit designed to help eligible individuals and families afford health insurance purchased through the Health Insurance Marketplace. Since the PTC is refundable, it can be used to reduce your tax liability to zero or even result in a refund if the credit amount exceeds the taxes you owe.
Who is eligible for the PTC?
To qualify for the PTC, you must meet several specific criteria:
Income requirements
Generally, your household income must be at least 100% but not more than 400% of the federal poverty line (FPL) for your family size. For tax years 2021 through 2025, the eligibility criteria have been temporarily expanded. Even if your household income exceeds 400% of the FPL, you may still qualify for the PTC, provided you meet the other requirements.
Filing status
You cannot file as Married Filing Separately unless you qualify for certain exceptions, such as being a victim of domestic abuse or spousal abandonment.
Dependency
You cannot be claimed as a dependent on someone else’s tax return.
Marketplace enrollment
You, your spouse, or a dependent must be enrolled in a health plan through the Health Insurance Marketplace.
Ineligibility for other coverage
You are not eligible for the PTC if you can get other qualifying health coverage, such as Medicare, Medicaid, or an employer-sponsored plan that provides minimum value.
Employer-sponsored coverage
If your employer offers you health insurance, it may affect your eligibility for the PTC. To determine whether you qualify for the PTC when purchasing insurance through the Marketplace, you need to evaluate two aspects of your employer-sponsored plan: affordability and minimum value.
For the 2024 plan year, an employer-sponsored health plan is considered affordable if your share of the annual premium for self-only coverage does not exceed 8.39% of your household income.
The calculation is based solely on the cost of insuring yourself, even if you intend to cover family members. If your employer offers multiple health coverage options, the affordability test applies to the lowest-cost self-only plan available that also meets the minimum value requirement.
A health plan meets the minimum value standard if it covers at least 60% of the total allowed costs of medical services. The plan must also provide substantial coverage for inpatient hospital services and physician services. You can determine whether your employer’s plan meets this standard by reviewing the Summary of Benefits and Coverage document. Your employer is required to provide this document, and it will specify whether the plan meets the minimum value criteria.
Please note that your employer-sponsored coverage must meet both requirements to make you ineligible for the PTC. If the plan is unaffordable or doesn’t meet minimum value, you may be eligible for the PTC when purchasing insurance through the Marketplace.
Premium payments
You must pay your share of the premiums that are not covered by advance credit payments.
How is the PTC calculated?
The PTC is calculated on a sliding scale based on your household income, family size, and the cost of health insurance plans available to you through the Marketplace. Generally, the lower your income, the larger the credit you receive.
The Marketplace offers a PTC calculator that will help you determine your out-of-pocket costs for premiums as well as your PTC. You’ll need to know your modified adjusted gross income (MAGI) and also be prepared to enter your zip code, state, and age of your household members.
What are Advance PTC payments?
Once you determine the amount of PTC you may be eligible for, you can opt to get the estimated PTC paid in advance directly to your insurance company, reducing your monthly premiums, or pay the entire monthly premium during the year and claim the PTC when you file your federal income tax return. Either way, you must file Form 8962 with your tax return.
If you receive advance PTC payments, please note that changes in your circumstances during the year could affect the amount of the credit you’re eligible for. If your actual income is higher than estimated, you might have to repay some or all of the advance payments when you file your taxes. If your income decreases, you might qualify for a larger credit and receive an additional refund.
To minimize the chances of owing money at tax time, it’s crucial to report any changes in your income or family situation to the Marketplace as soon as they happen. This allows your estimated credit and any advanced payments to be adjusted accordingly, helping you avoid unexpected tax bills.
How can I reduce my MAGI and potential repayment amount?
As we’ve discussed, the amount of PTC you’re eligible for is based on your MAGI. The higher your MAGI, the less credit you receive. If your MAGI increases during the year, you might have to repay some or all of the advance PTC you’ve received.
Fortunately, there are strategies to reduce your MAGI, which can increase your eligibility for the credit or lower the amount you might need to repay.
Contribute to retirement accounts
Making deductible contributions to an employer-sponsored retirement plan or an IRA can reduce your MAGI and increase your retirement savings.
Use HSAs
If you’re enrolled in a high-deductible health plan (HDHP), you can contribute to an HSA. Contributions to an HSA are tax-deductible and lower your MAGI. For 2024, the contribution limits are $4,150 for individual coverage and $8,300 for family coverage, with an additional $1,000 catch-up contribution if you’re 55 or older.
Make contributions to FSAs
If your employer offers a healthcare FSA, you can set aside pre-tax dollars for qualified medical expenses, reducing your MAGI. Contributions to a dependent care FSA for childcare expenses also lower your taxable income.
Adjust the timing of income and deductions
If possible, consider delaying income to the next tax year. This might involve postponing a year-end bonus or waiting to invoice clients until after the new year begins.
Review eligibility for certain tax deductions and credits
Above-the-line deductions that can be claimed without itemizing can directly reduce your MAGI. For instance, if you pay student loan interest, you may be eligible to deduct up to $2,500. Eligible educators can deduct up to $300 of unreimbursed classroom expenses. If you’re self-employed, ensure you’re claiming all eligible business deductions, such as home office expenses, equipment, and mileage.
Need assistance?
The PTC can make health insurance more affordable, but it comes with complexities that require careful navigation. By understanding how the PTC works, staying informed about changes, and proactively managing your income and reporting, you can maximize your benefits and avoid unexpected costs.
To ensure you’re properly claiming all available credits and deductions, please contact our office.
