What is a premium tax credit (PTC)?
The premium tax credit is a federally funded program that reduces the cost of insurance premiums when you purchase coverage through the Health Insurance Marketplace. Families and individuals who earn less than the federal poverty threshold can apply for this credit.
How does it function?
If you are applying for health coverage through the Marketplace you need to estimate your family's annual income. This will allow your insurer to calculate the amount of tax credit that you'll get. This credit is then transferred directly to the insurance company and lowers your monthly premium costs.
When your insurer issues your policy, if you are eligible for the premium tax credit you will receive a "Health Insurance Marketplace Statement", also known as a Form 1095-A. The form will also report the amount of the premium tax credit you are entitled to.
Your premium credit is based off your estimated household revenue and the size your tax family. (You, your spouse or dependents if you filed jointly with your spouse) If you change your income during the year or if the size of your family changes, your premium credit will also change.
What happens when your income exceeds what you expected to earn?
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. You are limited to a maximum of 400 percent. The "clawback" is what this is commonly called.
How does it work when your income changes?
Marketplace must be informed as soon you have any changes in income. This will prevent you from having to repay any excess tax credit.
The amount you must repay will depend on your income level and whether your income exceeds the poverty threshold. The rules can be found in the instructions to Form 8962. This is the form used to report the information related to claiming a cost offset for purchasing health insurance via the Health Insurance Marketplace.
What is Form 892?
When you file a tax return, it's important to include the amount you received as an advance premium tax credits in 2021. The amount of money you'll have to repay will be determined by the result of the reconciliation between the advance premium credit you received in 2021 and your actual premium credit.
You can reconcile your advance premium tax credits received for 2021 using Form 8962. This form can be found on the website of your state or the IRS.
You'll also need to report the results of the reconciliation of the advance premium credit you received during 2021 to the IRS. You will find this information on line 29 of Part III on your federal tax return for 2021.
This rule is not applicable if, for example, your household income exceeds 138% of poverty in a state that hasn't implemented Medicaid expansion under the ACA or if you have received unemployment benefits in any given week starting in 2021. The exceptions are only applicable to income reported in your tax return for 2021.