The premium tax credit is the main subsidy that makes ACA marketplace insurance affordable. It is run by the IRS, but you usually claim it through HealthCare.gov or your state marketplace, and you take it monthly to lower your premium.
I get asked about this credit more than any other ACA topic, mostly because the rules around income changed during the pandemic and stayed changed in some years but not others. Always check the IRS page above for the current year before you commit to a number.
Who can claim the credit
The credit is for people who buy a marketplace plan and meet a short list of conditions.
You buy through HealthCare.gov or a state marketplace, not directly from an insurer.
You are not eligible for Medicare, Medicaid, CHIP, or other government coverage that the marketplace recognizes as minimum essential coverage.
You are not offered affordable employer coverage that meets minimum value. The IRS defines "affordable" each year as a percentage of household income, and that percentage moves. Check the current threshold on the IRS page before you assume an employer offer is affordable.
You file a federal return and, if married, you file jointly. There are limited exceptions, mostly for domestic abuse and abandonment.
You are a US citizen, US national, or lawfully present.
You are not claimed as a dependent on someone else return.
How the credit is calculated
The credit is the difference between two numbers.
The first number is the cost of the second-lowest-cost Silver plan in your area for your family size. That plan is called the benchmark.
The second number is the amount the IRS expects you to pay for that benchmark plan based on your income. This is called your expected contribution and is a percentage of household income that scales with how far above the federal poverty level you are.
The credit equals benchmark cost minus expected contribution. You apply the credit to any metal level you want, not just to the benchmark Silver plan.
A worked example helps. Say a benchmark Silver plan in your county costs $700 a month for your household. Say the IRS thinks you should pay $250 a month based on your income. Your premium tax credit is $450 a month. If you pick a Bronze plan that costs $500 a month, you pay $50 a month after the credit. If you pick a Gold plan that costs $800, you pay $350.
What changes year to year is the percentage of income the IRS expects you to pay, and the income cliffs where the credit phases out. The expanded credits under the American Rescue Plan and Inflation Reduction Act made the credit available to more people and reduced the expected contribution. Whether those expansions are still in effect for the current plan year matters a lot. Check HealthCare.gov before you do the math.
What counts as income
For marketplace purposes, income means household MAGI. This is adjusted gross income from your federal return plus three add-backs:
- Non-taxable Social Security benefits
- Tax-exempt interest
- Excluded foreign income
It is not your gross paycheck, and it is not the MAGI rules used for Roth IRAs or other tax topics. The marketplace MAGI definition is specific to the ACA.
Household includes you, your spouse if you file jointly, and your tax dependents. If a tax dependent has their own income that requires them to file (for example a teenager with a summer job above the filing threshold), their income counts toward household MAGI.
If your income varies a lot, estimate carefully. The marketplace lets you update the estimate during the year if income changes. Updating mid-year prevents a surprise at tax time.
Reconciling at tax time: Form 8962
If you took the advance credit during the year, you reconcile it on Form 8962 when you file. The form compares the advance credit you actually received to the credit you were entitled to based on your actual income.
Three things can happen.
You estimated correctly. The amounts match and there is nothing to settle.
You under-estimated your income. The IRS gives you a smaller credit than you took. You repay the difference. There is a repayment limit for filers under a certain income, but above that limit, repayment is uncapped. The exact dollar caps move each year. The current numbers are in the Form 8962 instructions.
You over-estimated your income. The IRS gives you a larger credit than you took. The difference comes back as a refund or reduces tax owed.
If anyone in your tax household received any advance credit, you must file Form 8962, even if your income is below the filing threshold. Skipping the form can make you ineligible for advance credits next year until you reconcile.
Special situations that catch people
Marriage during the year. You usually split the credit between the two spouses' marketplace coverage using the IRS allocation method on Form 8962. Read the instructions carefully or talk to a tax professional.
Divorce during the year. Whoever was covered for which months affects how the credit is split.
A baby. A new dependent changes household size and can change your credit. Update the marketplace right away. You can also claim the change at reconciliation.
Death of a household member. Reduce the household size on the marketplace for the rest of the plan year.
Self-employment income. Self-employed health insurance is deductible, and that deduction interacts with the credit calculation. The IRS publishes a worksheet for this circular calculation. Many tax professionals use software to handle it, but be sure your software supports it.
Year-end bonus or windfall. A one-time income spike can push you above the cliff. If you can, time the income carefully, defer to next year, or accept that you may pay some credit back.
How this fits with cost-sharing reductions
Cost-sharing reductions (CSRs) are a separate help from the premium tax credit. CSRs lower your deductible, copays, coinsurance, and out-of-pocket maximum, but only if you buy a Silver plan. CSRs are not paid out as money to you. They are baked into the benefits of special Silver-CSR plan variants the marketplace shows you when you qualify.
A common pattern: someone qualifies for both a sizable premium tax credit and a meaningful CSR. They look at a Bronze plan because it has the lowest post-credit premium, and they pick it. They miss the fact that the Silver-CSR version of their plan would have had a much lower deductible. For people who qualify for CSRs, the Silver tier is usually the better total-cost choice.
What to do next
Use the savings estimator on HealthCare.gov or your state marketplace before you finalize a plan. Run it with a realistic income, not your best-case income.
If your income is hard to predict, lean toward over-estimating. It is much less painful to get a refund than to repay credits.
If you have a complex situation — small business, multi-state household, recent divorce, mixed citizenship status in the household — work with a certified marketplace assister or a tax pro who handles ACA returns regularly.
For background, see our ACA marketplace explainer and how to compare health insurance plans.
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Frequently asked questions
Is the premium tax credit refundable?
Yes. It is a refundable credit, so you can benefit from it even if you owe no federal income tax.
What is MAGI for marketplace purposes?
Marketplace MAGI is your adjusted gross income plus non-taxable Social Security benefits, tax-exempt interest, and excluded foreign income. It is not the same as the MAGI used for IRA contributions.
What happens if my income ends up higher than I estimated?
You may have to pay some or all of the advance credit back at tax time. The IRS publishes a repayment limit each year that caps how much lower-income filers owe back.
Do I get the credit monthly or at tax time?
You can take the advance premium tax credit (APTC) monthly so your premium is lower throughout the year, or take it as a single refundable credit when you file. You can also do a mix.
Do I have to file a return if I got APTC?
Yes. If anyone in your household received APTC, you must file Form 8962 to reconcile. Skipping it can disqualify you from credits the next year.
