ACA Premium Tax Credits: How They Work and What to Know Before You Enroll

3 min read

A premium tax credit is financial help that can lower the monthly cost of a Marketplace health plan. It is one of the main reasons many households pay less than the full price of coverage. Because it depends on an income estimate and is settled on your tax return, it helps to understand how it works before you enroll.

What Is a Premium Tax Credit?

The premium tax credit is a federal tax credit for people who buy coverage through the Health Insurance Marketplace and meet certain requirements. You can generally have it applied directly to your monthly premium (an advance payment) or claim it all at once when you file your taxes.

How the Amount Is Decided

The credit is based on several factors:

  • Your household size.
  • Your estimated household income for the year, measured as modified adjusted gross income.
  • The cost of a benchmark plan in your area, which is the second-lowest-cost Silver plan.

In general, the credit is meant to limit how much of your income goes toward a benchmark plan. You can apply the credit to any Marketplace plan, not only the benchmark. Eligibility rules and income thresholds are set by federal law and have changed in recent years, so confirm the current rules on HealthCare.gov rather than relying on older figures.

Why Your Income Estimate Matters

When you apply, you estimate your income for the coming year. That estimate determines the advance credit you receive each month. If your income ends up higher or lower than you estimated, the credit is adjusted when you file.

  • If your actual income is lower than estimated, you may receive additional credit.
  • If it is higher, you may owe some or all of the extra credit back, subject to any repayment limits that apply in that year.

This is why updating your Marketplace application when your income changes, such as a new job or a raise, is important.

Reconciling on Your Tax Return

Everyone who receives advance payments of the premium tax credit must file a federal tax return and reconcile the credit using IRS Form 8962. Skipping this step can affect your eligibility for financial help in future years.

Cost-Sharing Reductions Are Separate

Premium tax credits lower your monthly premium. Cost-sharing reductions are a different form of help that lowers your deductible, copays, and out-of-pocket maximum, available only on Silver plans for households within certain income limits. See our guide on how ACA costs work for how these pieces fit together.

Tips for Using Credits Wisely

  1. Estimate income carefully, including self-employment and other sources.
  2. Report changes in income or household size to the Marketplace promptly.
  3. Keep records of your Marketplace forms for tax time.
  4. Consider talking with a tax professional if your income varies a lot.

Sources and Further Reading

Frequently Asked Questions

Do I have to take the premium tax credit in advance?

No. You can choose to receive it in advance or claim it when you file your taxes.

What happens if my income changes during the year?

Update your Marketplace application. Differences between your estimate and actual income are reconciled on your tax return.

Do I need to file a tax return to get the credit?

Yes. You must file and reconcile using Form 8962 if you received advance payments.

Can I use the credit on any plan?

Generally yes, you can apply it to any Marketplace plan, not only the benchmark Silver plan.