What is the premium tax credit? How it works?
US tax law makes available to qualified individuals and families a refund tax credit to sponsor the purchase of qualified health plans. They include plans provided through the federal and state health benefits exchange.
The premium tax credit is generally paid in advance to the insurer issuing the qualifying plan in the form of a PTC Advance Payment, or APTC.
In this article, we will define the premium tax credit and also explain in detail how it works.
CONTENTS
What is the premium tax credit?
Understanding the Premium Tax Credit (PTC)
Is the premium tax credit available to everyone?
IRS Form 8962: Premium Tax Credit
Who is eligible to file IRS Form 8962 Premium Tax Credit?
How does the premium tax credit work?
Advanced premium credits and reconciliation
Frequently Asked Questions
Conclusion
References
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What is the premium tax credit?
Also known as PTC, the premium tax credit is a refundable credit that allows eligible individuals and families to cover the premiums for their health insurance that they purchased through the Health Insurance Marketplace. You can prepay it directly to the health insurance company to offset the cost of monthly health insurance premiums.
Additionally, the tax credit was introduced in the United States in 2014 by the Internal Revenue Service (IRS) and the goal is to cover health insurance for 18 million low- and middle-income US households. To qualify for the premium tax credit, you must meet certain conditions and file a tax return.
Understanding the Premium Tax Credit (PTC)
Generally, the premium tax credit is paid upfront to the insurer issuing the qualifying plan as a PTC prepayment or simply APTC. The insurer receives the APTC each month against the premiums of the plans offered in the health insurance market.
For whatever reason, some eligible individuals may choose to pay their premiums with their money and claim the PTC at the end of the tax year. It is an alternative to the benefit of an APTC.
Whether it was an APTC that was paid to you or you applied for a PTC at the end of the year, you must complete IRS Form 8962.
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Is the premium tax credit available to everyone?
The premium tax credit can be claimed by anyone. However, married people who file a joint return, as well as single people who file their returns, are eligible for the premium tax credit. This is only possible as long as they and their insurance plans meet additional requirements.
On the other hand, people who are listed as dependents on a return and married people filing separately are not eligible for the premium tax credit. Yet, there are special exceptions available to victims of domestic violence or those abandoned by their spouse as well as those who fall into the married category but live separately under the rules of the head of household.
Overall, for you to be eligible for the PTC, your household income must reach 100% of the federal poverty level for your household size. However, it should not exceed 400%.
In addition, household income is defined as Modified Adjusted Gross Income (MAGI). The calculation is done by adding non-taxable income (such as tax-exempt interest), the exempt amount of income by citizens living abroad, and the non-taxable portion of Social Security benefits, to your adjustable gross income. (AGI).
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IRS Form 8962: Premium Tax Credit
This form is used in calculating the amount of premium tax credit you are eligible for if you paid a premium for health insurance purchased through the Health Insurance Marketplace. When you claim your PTC, it could result in a reduction in your tax liability for the year.
Additionally, completing Form 8962 will tell you how much credit you qualify for or if you owe the IRS money because you receive too much in APTC.
Who is eligible to file IRS Form 8962 Premium Tax Credit?
If you purchased health insurance through the Affordable Care Act Health Insurance Marketplace, all you need to do is complete IRS Form 8962. However, if you have valid health insurance coverage at work or you purchased health insurance directly from an insurance company outside of the exchange, you do not need the form to complete your tax return.
Equally important, if you received a Form 1095-B from your insurance company or a Form 1095-C from your employer, you do not need to file Form 8962.
How does the premium tax credit work?
For some, the premium tax credit minimizes your premium for most policies in the health insurance market. How much you might receive on your tax credit can, in large part, depend on the health insurance plans in your area.
Similarly, the Marketplace will define the expected contribution you will have to pay regarding the premium of a midrange (Silver) benchmark plan. In addition, the expected contribution will increase downward, depending on your income for the coming year.
For example, if your income is between the poverty line and 150% of the poverty line, the expected contribution you must pay regarding the reference plan is $0. Additionally, if your income reaches 400% of the poverty line, what you are expected to pay relative to the benchmark is 8.5% of your income.
Thus, the difference between the benchmark plan premium and your expected contribution corresponds to the amount of your tax credit. You don't have to pay more than the actual premium for the tax. The marketplace will tell you the dollar amount. The amount can be used to pay for a Bronze, Silver, Gold or Platinum plan offered by the Marketplace. Also, the credit cannot be used to pay for a disaster plan.
It is at the end of the year that you will have to claim your tax credits on the premiums. Similarly, you can claim an advance premium tax credit, depending on your estimated income for the following year. If you choose to receive an advanced premium credit, each month the government will send 1/12 of the credit directly to your insurance company. However, you will be the one to insure the rest of the premium.
It is equally important to note that once you have claimed the premium tax credit for the open enrollment period, you certainly cannot know what your earnings will be for the covered year. This therefore means that you will apply according to the projection you have made. Well in advance, when you file your tax return, the Internal Revenue Service will make a comparison between your actual income and the amount of premium tax credit you originally claimed.
If for some reason you have miscalculated your income and claimed the over-premium tax credit, this may mean that you will have to repay some or all of the differences. Similarly, if you did not receive all of the premium tax credit to which you are entitled during the year, you are entitled to claim the difference when filing your income tax return. Therefore, you must report any changes in your income during the year to the Marketplace. This will make it easier to adjust your credit and you can avoid any large repayments at the end of the year.
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Advanced premium credits and reconciliation
As noted above, premium tax credits are based on a household's income in the tax year the premium is paid. But all of the credits are calculated the following year as the household files its tax return. Additionally, the Treasury is known to send the prepayment of premium credits to the insurance company. As a result, the household pays only a minimized premium. Prepayment of credits depends on estimated income and usually comes from the previous tax declaration filed before joining health insurance.
In addition, if the actual income in the year of registration is not up to the projected income, families are offered an additional credit when filing their return. On the other hand, if the actual income exceeds the projected income, families that outnumber the income , the family is expected to repay some or all of the credit advanced.
For most low-income filers, reconciliation payments will reduce tax funds instead of requiring an additional payment. Reconciliation of the tax credit will most likely present difficulties for some families who receive an advanced premium credit even though they have no tax payments due. This is because many low-income households now depend on tax refunds to meet their basic needs.
Frequently Asked Questions
Can I use the premium tax credit to minimize the cost of a Marketplace health plan?
You can apply the premium tax credit to any Bronze, Silver, Gold or Platinum plan that the Marketplace has made an offer for. However, you cannot apply premium tax credits to disaster plans or stand-alone dental plans.
What is the health insurance market?
Also known as the Marketplace, the Health Insurance Marketplace is where information about private health insurance plans is shared. You'll also buy health insurance and get help with premiums and out-of-pocket expenses if you qualify.
Who is entitled to the premium tax credit?
You benefit from the premium tax credit if you: Have household income within a certain range, Do not file a Married Filing tax return separately, unless you fall within the group of victims of domestic violence or spousal abandonment, Cannot claim him as a dependent.
What are the income limits?
Your income will be at least 100% but must not exceed 400% of the federal poverty level for your family.
Who is a family member for the premium tax credit?
Your family consists of yourself, your spouse and any other people you declare to be dependents. That is, your family size is the number of individuals in your family.
Conclusion
The premium tax credit helps you and your family cover the premiums for your health insurance that you purchased through the Health Insurance Marketplace. We believe that through this article you will know what to do to fulfill the requirements.
References
Premium tax credit
What are premium tax credits?
How do premium tax credits work?
Questions and answers about premium tax credits
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