What a Premium Tax Credit Does

A premium tax credit is money the federal government sends directly to your health insurance company to reduce what you pay each month for coverage. You do not receive it as a refund or a check — it works like a subsidy that lowers your bill before you see it. The amount depends on your household income, family size, and the cost of insurance plans in your area.

The credit comes from the Affordable Care Act (ACA) and is available only if you buy coverage through your state's health insurance marketplace (also called an exchange). If you get insurance through an employer, a government program like Medicare, or directly from an insurer outside the marketplace, you cannot use a premium tax credit.

The credit reduces your monthly premium — the amount you pay to keep your insurance active. It does not cover deductibles, copays, or other out-of-pocket costs. Those are handled separately through cost-sharing reductions, which is a different program.

Key Takeaways

  • Premium tax credits are only available through your state's health insurance marketplace, not through employer plans or direct purchase from insurers.
  • The credit amount is based on your household income, family size, and the second-lowest silver plan cost in your area, and changes if your income changes during the year.
  • You can receive the credit as advance payments sent to your insurer each month, or claim it when you file taxes the following year.
  • If your actual income differs from what you reported when you enrolled, you may owe money back or receive a larger credit when you file taxes.

How the Credit Amount Is Calculated

The federal government calculates your credit using a formula that compares your household income to the federal poverty line for your family size. The credit is designed so that you pay a percentage of your income toward the second-lowest silver plan available in your area — the percentage increases as your income rises. For 2024, that percentage ranges from 2% of income for people near the poverty line to 8.5% for people at higher income levels, though these percentages change each year.

Your area matters because insurance costs vary by state and county. The government looks at the price of the second-lowest silver plan in your specific region and uses that as the benchmark. If you choose a cheaper bronze plan, you keep the difference. If you choose a more expensive gold or platinum plan, you pay the difference out of pocket.

The credit is reduced or eliminated if your income rises above certain thresholds. For 2024, you generally cannot receive a credit if your income exceeds 400% of the federal poverty line, though some states have extended credits beyond that point. Income limits change annually.

Advance Payments Versus Claiming the Credit at Tax Time

You have two ways to use your premium tax credit. The first is to receive it as advance payments — the government sends money to your insurance company each month, and your monthly bill is already reduced. You do not have to wait until tax time to benefit.

The second way is to claim the credit when you file your federal income tax return the following year. You would pay the full premium each month, then report the credit on your tax form (Form 8962) and receive it as part of your refund or as a reduction in taxes owed. This approach requires you to have the cash to pay the full premium upfront.

Most people choose advance payments because they lower the bill when ready. However, advance payments create a reconciliation step at tax time: the government compares what you received in advance to what you were actually may have access to to based on your final income for the year. If you received too much, you owe it back. If you received too little, you get the difference.

What Happens If Your Income Changes

Your premium tax credit is based on your estimated household income for the year you are enrolled. If your actual income turns out to be different — because you got a raise, lost a job, started a business, or had a major life change — the credit amount may need to be adjusted.

If you are receiving advance payments and your income increases, you should report the change to the marketplace as soon as possible. The marketplace will recalculate your credit, and your monthly payment will go up. If you do not report the change and you received more credit than you were may have access to to, you will owe the difference when you file taxes.

If your income decreases, reporting the change means your credit increases and your monthly payment goes down. You can update your income information on your marketplace account at any time during the year — you do not have to wait for the next open enrollment period.

Income Limits and Who Can Receive a Credit

Premium tax credits are available to people whose household income falls between 100% and 400% of the federal poverty line (some states extend credits beyond 400%). The federal poverty line changes each year and depends on family size. For 2024, the poverty line for a single person is approximately $14,600 per year; for a family of four, it is approximately $30,000 per year.

You must also be a U.S. citizen or national, or a lawfully present immigrant. You cannot be claimed as a dependent on someone else's tax return. You must enroll in a health plan through your state's marketplace — employer coverage, Medicare, Medicaid, or direct purchase from an insurer do not may have access to.

If your income is below 100% of the poverty line, you may be directed toward Medicaid instead, depending on your state. Some states have expanded Medicaid to cover more people; others have not. The marketplace will tell you which program you may be directed to based on your income.

Reconciliation at Tax Time

When you file your federal income tax return, you must report the premium tax credit you received (or were may have access to to receive) using Form 8962, Premium Tax Credit (PTC). The IRS compares the advance payments your insurer received to the credit you were actually may have access to to based on your final income, household size, and other factors.

If you received more in advance payments than you were may have access to to, you owe the difference back to the government — it reduces your refund or increases the taxes you owe. If you received less than you were may have access to to, you receive the difference as part of your refund. This is called reconciliation, and it happens automatically when you file.

To minimize surprises at tax time, report any income changes to the marketplace during the year. The more accurate your income estimate, the closer your advance payments will be to your actual credit, and the smaller any reconciliation will be.

Premium Tax Credits Versus Other Cost Reductions

Premium tax credits and cost-sharing reductions are two separate programs that work together. The credit lowers your monthly premium. Cost-sharing reductions lower your deductible, copays, and coinsurance — the amounts you pay when you actually use care.

Cost-sharing reductions are available only if you choose a silver plan and your income is below 250% of the poverty line. If you choose a bronze, gold, or platinum plan, you do not receive cost-sharing reductions, even if you are may have access to to them. This is why silver plans are often the most affordable option for people with lower incomes — they combine the premium tax credit with cost-sharing reductions.

You do not have to choose a silver plan to receive a premium tax credit. You can use the credit on any metal level plan (bronze, silver, gold, or platinum). However, if you use the credit on a non-silver plan, you lose access to cost-sharing reductions.

Frequently Asked Questions

Can I get a premium tax credit if I have employer health insurance?

No. Premium tax credits are only for people who buy coverage through a state health insurance marketplace. If your employer offers health insurance, you are generally not may be able to access for a credit, even if the employer plan is expensive or does not cover your family members. Some exceptions exist if the employer coverage is deemed unaffordable or does not meet minimum coverage standards, but you would need to discuss this with the marketplace.

What happens if I do not report a change in income?

If your income changes and you do not report it, you may receive more or less in advance payments than you are may have access to to. At tax time, the IRS will reconcile what you received against what you should have received. If you received too much, you will owe it back. If you received too little, you will get the difference. Reporting changes promptly keeps reconciliation amounts smaller.

Do I have to take the full credit amount I am may have access to to?

No. You can choose to receive less than your full credit in advance payments, or you can claim the full amount at tax time instead. Some people do this if they expect their income to increase during the year and want to avoid owing money back at tax time. You control how much of your credit you use each month on your marketplace account.

Can I use a premium tax credit on any health plan?

You can use the credit on any plan offered through your state's marketplace — bronze, silver, gold, or platinum. However, if you use the credit on a silver plan, you may also be may have access to to cost-sharing reductions that lower your deductible and copays. Non-silver plans do not include cost-sharing reductions, so silver plans are often the lowest-cost option for people with lower incomes.

What if my income is too high for a premium tax credit?

If your income exceeds 400% of the federal poverty line (or your state's extended limit), you are not may have access to to a premium tax credit. You can still buy coverage through the marketplace and pay the full premium, or you can explore coverage through an employer or other source. Some states have programs that help people with higher incomes, so check your state's marketplace for other options.