How does the premium tax credit work?
Taxpayers are often stunned when they have a tax liability as a result of the reconciling of Form 1095-A, which reports health insurance marketplace figures.
First, it’s important to understand basic information about the premium tax credit.
The premium tax credit is a refundable credit which assists those with low to moderate income with affording health insurance purchased through the health insurance marketplace.
Upon enrolling in marketplace insurance, enrollees can elect to receive credits upfront by having the marketplace calculate the estimated credit (and paying directly to the insurance company to lower what is paid for monthly premiums). Or, enrollees can elect to receive the premium tax credit benefit when their tax return is filed.
If advanced payments of the premium tax credit are made on your behalf, the credit paid will be reconciled with the filing of your tax return. Namely, you’ll figure your credit and compare it to the amount of advanced premium credits shown on Form 8962. This will determine if there was excess premium tax credits advanced, or if additional credits are due. If the actual credit on the tax return is less than the advanced credits, the difference is subtracted from your refund, or added to your balance due. If the actual credit on the tax return is more than the advanced credits, the difference is added to your refund or subtracted from your balance due.
For example, you may decide to have the marketplace estimate your premium tax credit. Your estimated income at calculation time may result in, say, an estimated credit of $2,400 for the year, which is paid directly to the insurance company to subsidize your insurance premiums.
The filing of your tax return and Form 8962 will then do the final calculation based on actual figures in order to reconcile the payment of this premium tax credit. If the tax return shows you should’ve received a credit of $1,600, you will owe the $800 excess with the filing of your tax return. This $800 will then be subtracted from your refund, or added to your balance due.
**Notice the difference between the advanced premium credit calculations, and the tax return calculations. One is based on estimates; the other is based on actual data as it occurred during the tax year.
Therefore, estimates may provide misleading credit amounts, resulting in taxpayers owing a repayment of any excess credits received in advance, or receiving additional credits with the filing of their tax return (if the initial estimates were lower than the actual credits due).
We recommend a conservative approach for those choosing to receive the credits in advance, namely estimating income on the low side so the tax return filing will not result in excess premiums having to be repaid.