What is the premium tax credit?
The premium tax credit program is funded by the federal government and reduces the costs of insurance when you purchase your coverage through Health Insurance Marketplace. Families and individuals who earn less than the federal poverty threshold can apply for this credit.
How does it work?
When you apply for health insurance through the Marketplace, you estimate your family's income so that your insurer can determine the amount of the premium tax credit you'll receive. This credit will be sent directly to your insurer, which will lower your monthly premiums.
If you are eligible for a premium tax credit, your insurer will send you a "Health Insurance Marketplace Statement" called a 1095-A when it issues your policy. The form will also report the amount of the premium tax credit you are entitled to.
Your premium tax credit will be based upon your estimated household earnings and the size and number of dependents in your tax family. This includes you, your spouse (if you're filing a joint tax return), and your children. Your premium tax credits will change if either your income or the size of your tax family changes.
What happens if you end up with more income than you expected?
You may be required to repay part or even all of the premium tax credit if your income increases during the course of the year. The maximum amount that you can pay back is capped at 400 percent of your household's income. This is also known as "the clawback."
How does it work if your income changes
Marketplace should be notified of any change in your income as quickly as possible. You will avoid having to pay back any excess premium tax credits at the end.
Your income will determine the amount you are required to pay. These rules are explained in the instructions of Form 8962 which is used for reporting information about the offsets to be claimed to the cost to purchase health insurance on the Health Insurance Marketplace.
What is Form 8962?
When you file an income tax return you will need to declare the amount that you received for your premium tax advance during 2021. The amount you have to pay back will depend on the results of the reconciliation of the advance premium tax credit that you received during 2021 with your actual premium credit for that year.
On Form 8962, you reconcile the advance tax credit received in 2021. This form is available on the IRS or state websites.
You'll also need to report the results of the reconciliation of the advance premium credit you received during 2021 to the IRS. This will appear in your 2021 federal return on Part III, Line 29.
There are some exceptions to this rule, such as if your household income is above 138% of the poverty level in states that have not implemented the ACA's Medicaid expansion or if you received unemployment compensation for any week beginning in 2021. However, these exceptions only apply to income that was reported on your taxes for 2021.