A premium tax credit reduces what you pay each month for health insurance

A premium tax credit is money the federal government sends directly to your health insurance company to lower your monthly premium. You do not receive the money yourself — it goes straight to the insurer, and your bill shrinks by that amount. The credit exists because the Affordable Care Act requires people without employer coverage to have health insurance, and the credit makes that insurance affordable for people earning between roughly 100% and 400% of the federal poverty line.

The size of your credit depends on your household income, the number of people in your household, and the cost of the second-cheapest Silver plan available in your area. If your income drops during the year, your credit can increase mid-year. If your income rises, your credit shrinks. You report the actual credit you received when you file your tax return, and if you received too much, you repay the difference.

Key Takeaways

  • Premium tax credits pay your health insurance company directly each month, not you, so your out-of-pocket premium bill is lower.
  • The credit amount depends on your household income, household size, and the cost of the second-cheapest Silver plan in your county.
  • You must report the credit you received on your tax return, and if you received more than you were may have access to to, you repay the excess when you file.
  • You can update your income and household size during the year if your situation changes, which can increase or decrease your credit.
  • The credit is only available through the Health Insurance Marketplace; employer plans and individual plans bought outside the Marketplace do not may have access to.

How the credit amount is calculated

The IRS calculates your credit using a formula that compares your expected household income to the cost of the second-cheapest Silver plan in your county. The government assumes you should pay a certain percentage of your income toward insurance — that percentage rises as your income rises. The credit covers the difference between what you are expected to pay and the actual cost of that Silver plan.

For example, if the second-cheapest Silver plan costs $400 per month and the government determines you should pay $150 per month based on your income, your credit would be $250. That $250 goes to the insurer, and you pay $150. If you choose a cheaper Bronze plan instead, you still receive the $250 credit, so your out-of-pocket cost drops further. If you choose a more expensive Gold or Platinum plan, the credit stays the same, so you pay the difference out of pocket.

The income thresholds and percentages change each year. The IRS publishes the current percentages in the Federal Register, and the Marketplace uses them to calculate credits when you enroll.

Where to receive the credit and when it starts

You receive a premium tax credit only if you enroll in a plan through the Health Insurance Marketplace — the federal site at HealthCare.gov or your state's Marketplace if your state runs its own. Plans sold directly by insurance companies, plans through your employer, and plans sold by brokers outside the Marketplace do not may have access to for the credit.

When you enroll during the annual open enrollment period (usually November 1 through January 15) or during a special enrollment period (triggered by life events like losing employer coverage or moving), you estimate your household income for the coming year. The Marketplace calculates your credit based on that estimate and tells you the amount before you enroll. You can choose to receive the full credit in advance each month, receive part of it in advance and repay the rest at tax time, or receive none in advance and claim the full credit when you file your return.

Most people choose to receive the credit in advance because it lowers their monthly bill when ready. The credit starts the month your coverage begins.

What happens if your income changes during the year

If your household income changes — you lose a job, get a raise, get married, have a child, or experience another change — you can report the new income to the Marketplace at any time. The Marketplace will recalculate your credit and adjust the amount you receive each month going forward.

If your income drops, your credit increases, and you pay less each month. If your income rises, your credit decreases, and you pay more each month. You do not have to wait until tax time to make these changes. Reporting changes promptly prevents you from receiving too much or too little credit, which reduces the amount you owe or are owed when you file your return.

Life events that trigger the right to update your income include losing or gaining employer coverage, marriage or divorce, birth or adoption of a child, change in household size, significant income change, and change of address to a different county.

Reconciling the credit on your tax return

When you file your federal income tax return, you report the total premium tax credit you received during the year on Form 8962, Premium Tax Credit (PTC). You also report your actual household income for that year. The IRS recalculates what your credit should have been based on your actual income, not your estimate.

If you received more credit than you were may have access to to — because your actual income was higher than you estimated — you repay the excess when you file. The repayment is subtracted from your refund or added to the tax you owe. If you received less credit than you were may have access to to — because your actual income was lower than you estimated — the IRS sends you the difference as part of your refund.

This is why it is important to report income changes to the Marketplace during the year. The closer your estimate is to your actual income, the smaller the adjustment when you file.

Income limits and household size rules

Premium tax credits are available to people whose household income falls between 100% and 400% of the federal poverty line. The poverty line changes each year and varies by household size. For 2024, the poverty line for a single person is roughly $14,600, so the credit range is approximately $14,600 to $58,400. For a family of four, the poverty line is roughly $30,000, so the range is approximately $30,000 to $120,000. These figures change annually.

Your household size includes you, your spouse if you are married and file jointly, and any dependents you claim on your tax return. If you are claimed as a dependent on someone else's return, you cannot receive a credit — the person claiming you may be able to receive it instead. If you are married, you generally must file jointly to receive the credit, though exceptions exist for certain situations.

If your income is below 100% of the poverty line, you may be covered by Medicaid in your state instead. If your income exceeds 400% of the poverty line, you do not may have access to for the credit, though you can still enroll in a Marketplace plan and pay the full premium.

The difference between premium tax credits and cost-sharing reductions

Premium tax credits and cost-sharing reductions are separate programs that work together. The premium tax credit lowers your monthly premium. Cost-sharing reductions lower your deductible, copayments, and coinsurance — the money you pay when you actually use care. You receive cost-sharing reductions only if you enroll in a Silver plan and your income falls below 250% of the poverty line.

Both are calculated based on your income and household size, and both must be reported on your tax return. You can receive a premium tax credit without cost-sharing reductions, but you cannot receive cost-sharing reductions without also receiving a premium tax credit.

Frequently Asked Questions

Can I receive a premium tax credit if I have employer coverage?

No. If your employer offers health insurance and you are may be able to access for it, you generally cannot receive a premium tax credit for a Marketplace plan. The IRS considers employer coverage "affordable" if the employee's share of the premium is less than a certain percentage of household income (currently 8.39% for 2024). If your employer's plan meets that test, you are not may have access to to a credit, even if the plan is expensive or has a high deductible.

What if I did not report a change in income to the Marketplace?

When you file your tax return, the IRS will recalculate your credit based on your actual income. If you received more credit than you were may have access to to, you will owe the difference. There is no penalty for receiving too much credit, but you must repay it. Reporting changes promptly to the Marketplace prevents this surprise at tax time.

Can I claim the premium tax credit if I am claimed as a dependent?

No. If another person claims you as a dependent on their tax return, you cannot receive a premium tax credit. The person claiming you may be able to receive the credit for your coverage instead, depending on their income and household size.

Do I have to receive the credit in advance, or can I claim it all at tax time?

You can choose either option. If you receive the credit in advance, your monthly premium is lower. If you claim it all at tax time, you pay the full premium each month and receive the credit as part of your refund when you file. Claiming it at tax time makes sense if your income is unpredictable or if you expect to owe money when you file.

What happens to my credit if I move to a different state?

If you move to a different state, you can report the change to the Marketplace, and your credit will be recalculated based on the cost of plans in your new state. You may need to enroll in a new plan in your new state's Marketplace. Report the move as soon as possible to avoid receiving an incorrect credit amount.