Understanding the 2014 Premium Tax Credit for Insurance

What is the health care premium tax credit?

The premium tax credit is a refundable tax credit to help eligible individuals and families with the cost of buying health insurance in the Marketplace. To be eligible, household income for a taxpayer must be between the federal poverty line or four times the federal poverty line – 400 percent of the federal poverty line – based on the family’s size. Essentially, the credit reduces a person’s out-of-pocket costs incurred for health insurance premiums; hence the name health insurance premium tax credit.

The credit is based on a sliding scale, with greater credit amounts going to those with lower incomes. Again, down to the poverty line; if you are below the poverty line, you are generally not eligible. Although there are exceptions, which I’ll talk about later. Other factors that affect the credit include the cost of coverage that’s available to the person applying for the credit and the person’s household size. As you can see on the screen, there are two options for getting the credit. You can get it now, or you can get it later.


Understanding the 2014 Premium Tax Credit for Insurance

Getting it now means the advance payments of an anticipated credit are made directly to the insurer before a tax return is filed. Advance payment of the premium tax credit lowers the cost of coverage that a person has to pay every month. Eligible persons may choose the full amount of the advance payment or a lesser amount that goes to the insurance company. Getting advance payments of the anticipated credit is done through an application at the Marketplace. The IRS doesn’t administer the advance payment of the credit. This is done through the health care marketplace.


Difference between premium tax credit and advance payments of premium tax credit.

No one gets a premium tax credit ever until they file a tax return. Premium tax credit is based on the data that is entered on the tax return, and you don’t know what all that data is until the last day of the year – usually sometime after the last day of the year. So, the premium tax credit is determined on the basis of the tax return. And the advance payments that are provided through the Marketplace are merely an anticipation of what somebody’s going to be entitled to receive once they do file a tax return. The amount of the credit is based on the person’s anticipated household income for the upcoming year.

Advance credit payment

Advance credit payments are likely – I should say it is more than likely – it is almost certain will be different from the premium tax credit. In order for the advance premium tax credit to be the same as the premium tax credit, someone would have to know exactly how much they are going to make, know exactly what coverage they are going to have throughout the year, and know exactly what their tax household is going to be throughout the year. Those second two things might be fairly easy, but it’s pretty hard to pinpoint your income exactly.


Advance Payment of Health Care Premium Tax Credit

For this reason, the advance payment must be reconciled against the actual credit on the tax return for the person filing for the advance payments. This is something I’m going to say more than once today, and I hope I don’t make you nauseous by saying it too often; but if you get advance payments of a credit, you must file a return to reconcile those advance payments with your premium tax credit even if you wouldn’t otherwise be required to file a tax return. You must file to reconcile.