What Is the $5400 Tax Subsidy and How Do You Claim It?

The “$5400 tax subsidy” refers to the Premium Tax Credit (PTC), a federal benefit from the Affordable Care Act (ACA) designed to make health insurance more affordable. The $5400 figure is an example, not a guaranteed amount. The actual credit amount varies based on income, family size, and the cost of health insurance in your area. The PTC works by lowering the monthly premiums for health plans purchased through the Health Insurance Marketplace.

This credit can be received in two ways. You can have it paid directly to your insurance company throughout the year to reduce your monthly payments, which is known as the advance premium tax credit (APTC). Alternatively, you can claim the full credit when you file your annual federal income tax return. The purpose of the PTC is to ensure that eligible households do not have to pay more than a specified percentage of their income for health coverage.

Eligibility Requirements for the Premium Tax Credit

To qualify for the Premium Tax Credit, an individual or family must meet several conditions. A primary factor is household income, which is your Modified Adjusted Gross Income (MAGI). Eligibility is based on the Federal Poverty Level (FPL).

For tax years through 2025, the 400% upper income limit has been removed. This allows households with higher incomes to qualify if their health insurance costs exceed 8.5% of their income. This expansion is set to expire at the end of 2025, and for the 2026 tax year, eligibility is scheduled to revert to the 100% to 400% FPL income threshold.

Another requirement is the source of your health insurance. You must be enrolled in a qualified health plan through the official Health Insurance Marketplace. Coverage obtained from other sources, including most employer plans, does not qualify for this credit.

You also cannot be eligible for other forms of qualifying health coverage, like most forms of Medicaid or Medicare. Similarly, if you have access to an affordable health plan through an employer that meets minimum value standards, you are not eligible for the PTC.

Finally, your tax filing status is considered. To claim the credit, you cannot file your taxes using the “Married Filing Separately” status, though limited exceptions exist for situations like domestic abuse. You also cannot be claimed as a dependent on someone else’s tax return.

Calculating the Subsidy Amount

The calculation of the Premium Tax Credit does not depend on the health plan you select, but on a specific benchmark. The first component is the premium for the “benchmark plan.” This is the second-lowest cost Silver plan available to your household through the Marketplace. The Marketplace uses this plan as a uniform standard to determine the amount of assistance for everyone.

The second component is your “expected contribution,” the amount the government determines your household can afford to pay for health insurance. This contribution is a percentage of your household income, calculated on a sliding scale. Through 2025, the required contribution ranges from 0% for those at the lowest income levels up to a cap of 8.5% of household income.

The final subsidy amount is the difference between these two figures. The formula is the premium of the benchmark plan minus your expected contribution. For instance, if the benchmark plan in your area costs $15,000 per year and your expected contribution is $3,120, your Premium Tax Credit would be $11,880 for the year. This is the amount of assistance you can apply to the plan of your choice.

Required Information and Forms

To claim the Premium Tax Credit, you must have Form 1095-A, Health Insurance Marketplace Statement. This form is sent by the Marketplace by January 31st of the year following coverage. You should not file your taxes until you have received this document, as it provides a month-by-month breakdown of figures needed for your calculation.

Part III of Form 1095-A contains the information needed for your return. It details the total monthly premium for your plan, the premium for the applicable benchmark plan, and the amount of any advance premium tax credit paid to your insurer during the year.

This information is used to complete Form 8962, Premium Tax Credit, which must be filed with your tax return. You will transfer the monthly amounts from Form 1095-A to Form 8962 to calculate your total credit for the year. You will also need your household income (MAGI) and family size to complete the form.

Claiming the Credit on Your Tax Return

Once you have completed Form 8962, you must attach it to your Form 1040, U.S. Individual Income Tax Return, when you submit it to the IRS. This step is how you formally claim the credit or reconcile any advance payments.

On Form 8962, you will perform a reconciliation. This is where you compare the advance credit payments you received during the year with the actual Premium Tax Credit you qualify for based on your final, end-of-year income. This comparison determines the financial outcome on your tax return.

If the PTC you calculated is more than the advance payments you received, the difference will increase your tax refund or lower the amount of tax you owe. If the PTC is less than the advance payments, you will have to repay the excess amount. This repayment will decrease your refund or increase your tax liability.