When comprehending health insurance and tax planning, you may come across different terms like ‘premium tax credit’ or PTC. L&Y Tax Advisors offers the most reliable and updated information on what is premium tax credit so you can see how it works in different sectors and judge if PTC is good for you.
What is Premium Tax Credit Mean?
The premium tax credit (PTC) is a refundable tax credit. It is designed to help eligible individuals and families with low or moderate income afford health insurance purchased through a ‘Marketplace.’
The amount you receive is based on a sliding-scale calculation that considers your household’s estimated
- Income
- Size
- Cost of Marketplace plans in your area
In practice, you can use this credit in advance to reduce your monthly premiums. You can also claim it when you file your tax return.
What is a Marketplace?
A Marketplace is the official online platform. It is established under the Affordable Care Act (ACA) where individuals and families can compare, purchase, and enroll in health insurance plans. It also determines eligibility for financial assistance, such as the Premium Tax Credit. The Marketplace makes healthcare coverage more affordable for everyone.
Read: What is a VAT number in the US?
What is Premium Tax Credit Repayment?
Repayment comes into play when you have received advance payments of the premium tax credit (APTC). But, your actual income for the year turns out higher than estimated.
If you received more credit in advance than you were eligible for, you may need to reconcile the difference on your tax return using Form 8962.
In contrast, if you took less credit than you qualified for, you will receive the additional amount when you file. You must report changes in income or household size during the year to avoid unexpected repayment.
What is Premium Tax Credit for Health Insurance?
In the context of health insurance, the PTC applies to plans purchased through the health insurance Marketplace.
When you enroll in a Marketplace plan and qualify for the credit, you can apply it directly to your monthly insurance premium. Doing so lowers the amount you pay on a monthly basis.
The credit calculation uses the benchmark ‘second-lowest cost silver plan’ as a reference. It subtracts your expected contribution based on income to arrive at your credit amount.
Read: What is tax yield?
Is Premium Tax Credit Good or Bad?
Generally, the PTC is very good for you. It makes health insurance more affordable by either:
- Reducing monthly premiums, or
- Providing a refund
But, PTC also comes with responsibilities. Estimating your income too low may lead to higher repayment when you file your taxes.
On the other hand, if your actual income is lower than you estimated, you will benefit from additional credit.
Stay updated on income changes. Report them to your Marketplace. Doing so avoids repayment surprises.
Besides, eligibility and subsidy levels are subject to change (including potential legislative shifts beyond 2025). Therefore, keep searching for recent updates in this regard.
The Bottom Line
Comprehending ‘What is premium tax credit (PTC)?’ makes health insurance more affordable for eligible households. You must learn how the credit works. Study the ways in which repayment may apply. Also, learn how PTC ties directly to your health plan premiums. Make wise decisions to avoid unexpected tax burdens.
