What Is the Advance Premium Tax Credit?
Learn how your estimated income connects to your health plan's cost and what this means for your finances when you file your annual tax return.
The Advance Premium Tax Credit is a refundable credit that helps eligible individuals and families afford health insurance purchased through the Health Insurance Marketplace. When you enroll in a plan, you can choose to have this credit paid directly to your insurance company in advance, which lowers your monthly premium payments.
The credit is based on your estimated income for the upcoming year. You have the flexibility to take all, some, or none of your estimated credit in advance. If you choose not to receive advance payments, you can claim the full credit when you file your federal income tax return for the year.
Determining Your Eligibility
To qualify for the Advance Premium Tax Credit, you must meet several requirements. Your household income must fall between 100% and 400% of the Federal Poverty Level (FPL) for your family size, though recent legislation has temporarily expanded eligibility for those with incomes above 400% of the FPL through 2025. The FPL is a measure of income issued annually by the Department of Health and Human Services.
You must purchase your health coverage through the Health Insurance Marketplace, as plans bought directly from an insurance company are not eligible. You also cannot be eligible for other forms of minimum essential coverage. This includes affordable health insurance from an employer or coverage through government programs like Medicare or Medicaid.
Your tax filing status is another consideration. You must file a federal income tax return for the year of coverage. Individuals who use the “Married Filing Separately” status are not eligible for the credit, though limited exceptions exist for certain victims of domestic abuse or spousal abandonment.
Estimating Your Household Income and Credit Amount
To apply for the credit, you must project your household’s Modified Adjusted Gross Income (MAGI) for the coverage year. MAGI is calculated by starting with your Adjusted Gross Income (AGI) and adding back certain deductions, such as non-taxable Social Security benefits, tax-exempt interest, and foreign earned income. It includes income from wages, tips, self-employment, and unemployment compensation.
Your tax household includes the person filing the tax return, their spouse if filing jointly, and all individuals they will claim as dependents. The combined projected MAGI for everyone in your tax household is what you report to the Marketplace. This projection is an estimate for the upcoming year, not your income from the previous year.
The Marketplace uses your household size and projected MAGI to estimate the amount of the premium tax credit you are eligible for. This estimate determines the value of the advance payments sent to your insurer each month.
Reconciling the Credit on Your Tax Return
After the coverage year ends, you must reconcile the advance credit payments you received with the actual premium tax credit you qualify for. This process happens when you file your federal income tax return. The reconciliation compares the advance payments based on your estimated income to the final credit amount calculated using your actual income.
This reconciliation is completed using IRS Form 8962, Premium Tax Credit (PTC), which is filed with your tax return. The Marketplace will send you Form 1095-A, Health Insurance Marketplace Statement, by early February. This form provides the necessary information to complete Form 8962, including your plan’s total premiums and the amount of advance credit payments made.
If the advance payments you received were less than the credit you are eligible for, you will claim the difference on your tax return. This can increase your refund or lower your tax liability. If the advance payments were more than your actual credit, you will have to repay the excess amount, though the repayment may be limited based on your final household income.
Reporting Life and Income Changes
You must report certain life events to the Health Insurance Marketplace throughout the year. Promptly reporting changes ensures your advance credit payments are adjusted accordingly, which can help you avoid owing money when you file your taxes. If your income decreases or your family size increases, you might be eligible for a larger credit, reducing your monthly premiums.
Changes that must be reported include fluctuations in household income, such as starting or losing a job. You must also report changes in household composition, like getting married, divorced, or having a child. Gaining or losing eligibility for other health coverage, such as from a new job, must also be reported.
To report these updates, log in to your Health Insurance Marketplace account or contact the call center. Updating your application as soon as a change occurs allows the Marketplace to recalculate your eligibility and adjust your advance payments for the remainder of the year. This helps you manage your health coverage costs effectively.