Premium tax credit

The premium tax credit is the main reason a Marketplace health plan can cost far less each month than its listed price. When you take it in advance, the Marketplace sends the money straight to your insurer and your bill shows only what is left, according to HealthCare.gov (opens in a new tab). Because that advance amount is an estimate built on the income and household you projected, the IRS (opens in a new tab) settles the real figure when you file your federal tax return, and the difference can raise your tax balance or your refund.

How the advance credit lowers a monthly bill

The credit comes from Internal Revenue Code § 36B (opens in a new tab), which allows an eligible taxpayer a refundable credit for each month of qualified coverage. For a sense of scale, people who received advance credits during the 2017 HealthCare.gov open enrollment got an average of $383 per person per month, leaving an average net premium of $106, according to the Centers for Medicare & Medicaid Services (opens in a new tab). The credit covered about 78% of the gross premium.

The arithmetic is $489 minus $383, which leaves $106 a month, or $1,272 over 12 months. These are 2017 national averages, not a quote; your own amount depends on household income, family size, where you live, the benchmark second-lowest-cost silver plan in your area and the price of the plan you pick.

Choices that change your credit and your bill

You decide how much of the estimated credit to take each month, and the choice moves risk between your monthly bill and your tax return, according to HealthCare.gov (opens in a new tab):

• Take all of it in advance. Your monthly premium drops by the full estimate, and you reconcile the advance payments on Form 8962.
• Take part of it. You pay more each month, which can shrink any repayment if your final income comes in higher than you projected.
• Take none in advance. You pay the full premium and claim the credit you qualify for when you file.

Plan choice matters too. Because the credit is tied to the benchmark silver plan, a cheaper plan can leave you a lower net premium, while a plan priced above the benchmark leaves you paying the difference. The credit can apply to bronze, silver, gold and platinum plans, but catastrophic plans generally do not qualify, according to IRS Publication 974 (opens in a new tab). In Connecticut, the state's Covered Connecticut program (opens in a new tab) requires 2026 participants to use 100% of their available advance credits and cost-sharing reductions and enroll in a silver plan through Access Health CT.

Premium tax credit, cost-sharing reductions and "subsidy"

"Subsidy" is the everyday word for any help with health costs, and the premium tax credit is one specific kind that lowers only the premium. Cost-sharing reductions are a separate subsidy that lower your deductible, copays, coinsurance and out-of-pocket maximum, generally only on a silver plan, according to CMS (opens in a new tab). Medicaid, CHIP, New York's Essential Plan and state premium help are other forms of assistance, not the federal credit.

Where you see the term

The premium tax credit belongs to individual and family health insurance bought through a federal or state Marketplace. In Connecticut that is Access Health CT, and in New York it is NY State of Health. It does not apply to auto, homeowners, renters, life, pet or business insurance.

You meet it on the Marketplace application and eligibility notice, on plan comparisons that show the gross premium, the advance credit and the net premium, and on your enrollment confirmation and monthly bill. At tax time it appears on Form 1095-A, the Health Insurance Marketplace Statement, and on Form 8962, which you file to reconcile the credit, according to the IRS (opens in a new tab). Renewal notices and any IRS letter about repayment use the term as well.

Questions to ask an agent or the Marketplace

1. What is the full premium before the credit, the monthly advance credit and my net premium? The gross premium still matters at renewal and when you reconcile.
2. Is this plan qualified Marketplace coverage that is eligible for the credit? The federal credit generally requires qualified coverage bought through a Marketplace.
3. What happens if my income, family size, address, marital status or job-based coverage changes? Each change can alter the credit and the amount settled on your tax return.
4. Am I taking all, part or none of the advance credit? Taking less each month can reduce what you might owe back if your income rises.
5. Do I also qualify for cost-sharing reductions? The premium tax credit cuts the premium only, while cost-sharing reductions address deductibles and out-of-pocket costs.

Frequently asked questions

These come up most often at enrollment, after a life change and at tax time.

Do I have to pay back a premium tax credit?

You may have to repay some or all of the excess if your final allowable credit is lower than what was paid in advance. The reconciliation happens on Form 8962, according to the IRS (opens in a new tab). If your final credit is higher, the difference works in your favor.

What happens if I do not file Form 8962?

Anyone who received advance payments must file Form 8962 to reconcile them, according to the IRS (opens in a new tab). Skipping it can affect your eligibility for advance help in a later year.

Can I get the credit if my job offers health insurance?

Generally, no, if you are eligible for job-based coverage that is affordable and provides minimum value, according to the IRS (opens in a new tab). Federal exceptions apply, so confirm with the Marketplace before turning down the employer plan.

Why did my monthly credit change?

The Marketplace recalculates the estimate when you report new income, a marriage or divorce, a household change, a move or new coverage. Reporting changes as they happen can reduce the chance of a large balance at tax time, according to HealthCare.gov (opens in a new tab).