What Is a Premium Tax Credit?

How Premium Tax Credits Work

The premium tax credit was created to provide affordable health insurance to eligible families and individuals with low to moderate incomes. It’s available only for health insurance purchased through the Health Insurance Marketplace (also known as the "exchange").

When you enroll in a marketplace plan, you can choose to receive your premium tax credit either in advance to lower your monthly premium or when you file your tax return for that tax year. If you accept it in advance, the marketplace calculates your estimated credit amount based on the application information. If you use less than your allotted tax credit, you’ll get a refundable credit on your tax liability when you file.

If you use more tax credits than you qualify for based on your final yearly income and household size, you must repay the difference when you file your income tax return. There are repayment caps based on your income and filing status, but if your income is 400% or more above the federal poverty line, you’ll owe the full amount.

How To Calculate Your Premium Tax Credit

The maximum health insurance premium you’d pay for a marketplace insurance plan is typically equal to what you'd pay for the second lowest cost Silver plan (SLCSP) available to you on the marketplace, minus a specific percentage of your household income. Your premium tax credit is then the difference between your maximum premium contribution and the plan’s premium.

Here’s how much of the SLCSP premium you’re responsible for, based on the tax-filing year and your income compared to the poverty line. Remember that the premium tax credit works on a sliding scale, so the percentage of SLCSP premiums you pay directly correlates to your income level. Here's an example of what that sliding scale looks like for tax year 2022:

Example of the Premium Tax Credit

Suppose you live in one of the 48 contiguous United States (Alaska and Hawaii have slightly different criteria) and want to calculate your premium tax credit for your family of three.

Federal guidelines show that the poverty line for a family of three is $23,030. You estimate your household income will be $46,100, which puts you at around 200% of the poverty line. That means you’re responsible for paying between 2% and 4% of the SLCSP.

Now suppose the benchmark plan available to you costs $10,000 for the year. If your maximum premium contribution is 4%, you’d only pay $400 per year and your premium tax credit would be $9,600 ($10,000 – $400).

Your premium tax credit remains the same regardless of which type of marketplace plan you choose (Bronze, Silver, Gold, or Platinum) and how much that health plan costs. But if you purchase one that’s more expensive than the SLCSP, the tax credit won't cover as much of your premium.

Who Qualifies for a Premium Tax Credit

You may be eligible for a premium tax credit if you meet the following criteria:

• You or a family member have a qualified health plan through the marketplace.
• You or members of your household aren’t eligible for employer- or government-sponsored health insurance coverage.
• Your household income is 100% to 400% of the federal poverty line, based on your family size (though you may still qualify if your household income is below 100% if you meet all the requirements outlined by the IRS).
• Nobody claims you as a dependent on their tax return.
• If you’re married, you’ll file a joint tax return unless you qualify for an exception.
• You paid all your health insurance premiums.

Frequently Asked Questions (FAQs)