How Does the Advanced Premium Tax Credit Work?

The Advanced Premium Tax Credit (APTC) is a federal subsidy that lowers the monthly cost of health insurance for individuals and families with low to moderate incomes. This financial assistance is for plans purchased through the Health Insurance Marketplace. The credit is paid directly to your insurance company, reducing the amount you have to pay each month.

This system allows you to receive the benefit of the tax credit throughout the year, rather than waiting to claim it when you file your annual tax return. This provides immediate financial relief and makes maintaining health coverage more manageable. The amount of the credit is based on an estimate of your household’s income for the upcoming year and is a component of the Affordable Care Act’s strategy to expand health coverage.

Determining Your Eligibility

To qualify for the APTC, your household income must fall within a specific range of the Federal Poverty Level (FPL). This range is between 100% and 400% of the FPL, though eligibility may extend to households with incomes above 400% if their benchmark plan premium exceeds 8.5% of their income. The income figure used is your Modified Adjusted Gross Income (MAGI), which includes your adjusted gross income plus certain non-taxable items like foreign earned income and tax-exempt interest.

You must purchase your health insurance through the Health Insurance Marketplace, which can be the federal platform or a state-run exchange. The credit cannot be applied to plans bought directly from an insurance company, as this ensures the plans meet certain standards and the subsidy can be administered correctly.

You are ineligible for the APTC if you have access to other forms of minimum essential coverage, such as:

• Affordable, employer-sponsored health insurance
• Medicare
• Medicaid
• The Children’s Health Insurance Program (CHIP)

For 2025, an employer-sponsored plan is considered affordable if the employee’s premium for the lowest-cost, self-only plan is not more than 9.02% of their household income. The plan must also provide minimum value by covering at least 60% of total allowed medical costs.

Your tax filing status also affects eligibility. If you are married, you must file a joint tax return with your spouse to qualify for the APTC, as filing separately will disqualify you.

Calculating the Credit Amount

The calculation of your APTC is tied to the cost of a specific health plan in your area known as the benchmark plan. This benchmark is the second-lowest-cost Silver plan (SLCSP) available to your household through the Marketplace. The credit amount is based on this specific plan’s premium, regardless of which plan you ultimately choose.

Your credit amount is determined by a formula considering the benchmark plan’s cost and your expected contribution. The government establishes a maximum percentage of your household income that you are expected to contribute. This expected contribution is based on a sliding scale, meaning the percentage increases with your income.

The calculation is the premium for the benchmark plan minus your expected contribution. For instance, if the SLCSP in your area costs $500 per month and your expected contribution is $150, your tax credit would be $350 per month. You can apply this $350 credit to reduce the premium of any Marketplace plan.

Receiving the Advanced Credit Payments

After your eligibility is confirmed and your credit is estimated during your Marketplace application, you can choose how to receive it. Most people elect to get the credit in advance to lower their monthly payments, which authorizes the U.S. Treasury to pay the credit directly to your insurer each month.

During enrollment, you can apply all, some, or none of your estimated credit to your premiums. If you apply the full amount, the insurer receives the payment, and you are billed for the remaining balance. For example, if your total premium is $600 and your advance credit is $450, you would pay $150 out-of-pocket each month.

This direct payment system provides immediate financial assistance. Taking less than the full credit in advance can create a buffer against income changes during the year. Any portion of the credit you are eligible for but do not take in advance can be claimed on your federal tax return.

Reconciling the Credit on Your Tax Return

At the end of the year, you must reconcile the advance credit payments you received with the actual premium tax credit you qualify for based on your final income. This is a required step when filing your federal income tax return if you received any APTC. The first step involves receiving Form 1095-A, Health Insurance Marketplace Statement, from the Marketplace, which details the total monthly premiums for your plan, the premium for the benchmark plan, and the amount of APTC paid on your behalf.

Using the information from Form 1095-A, you will complete and file Form 8962, Premium Tax Credit, with your tax return. On this form, you will input your actual household income for the year, allowing the IRS to calculate the exact premium tax credit you were eligible for. This final credit amount is then compared to the total APTC you received.

This comparison leads to one of two outcomes. If the APTC you received was more than the credit you qualified for, perhaps because your income was higher than estimated, you will have to repay the excess amount. Conversely, if you received less APTC than you were eligible for, the difference will be issued as a refundable tax credit, which can lower your tax liability or result in a larger refund.

For tax year 2025, repayment of excess APTC is capped for taxpayers with household incomes below 400% of the FPL. For single filers, these limits are $375 for incomes under 200% FPL, $975 for incomes between 200-300%, and $1,625 for incomes between 300-400%. For other filers, the limits are $750, $1,950, and $3,250 for the same income brackets. Taxpayers with incomes at or above 400% of the FPL must repay the full amount of any excess credit.

Reporting Life and Income Changes

Maintaining the accuracy of your APTC throughout the year depends on keeping the Marketplace informed of any significant life events. Reporting these changes is important because it allows the Marketplace to adjust your advance credit amount in near real-time. This helps prevent a situation where you owe a large amount back at tax time or receive a much smaller refund than anticipated.

You are required to report changes to the Marketplace, usually within 30 days of the event. Reportable changes include:

• Increases or decreases in household income
• Getting married or divorced
• The birth or adoption of a child
• Gaining or losing eligibility for other health coverage

To report these updates, log in to your Health Insurance Marketplace account or contact the Marketplace call center. When you report a change, the system re-evaluates your eligibility and recalculates your credit amount for the rest of the year. This ensures your monthly payments are as accurate as possible.