What is premium tax credits?
The Premium tax credit, a federally-funded initiative, reduces your insurance premiums if you buy coverage via the Health Insurance Marketplace. It is available to families and individuals with incomes below the federal poverty level who meet other eligibility criteria.
How does it work exactly?
When you apply to the Marketplace for health insurance, you must estimate your family income in order for your insurer to determine the amount of premium tax credits you will receive. This credit is then transferred directly to the insurance company and lowers your monthly premium costs.
When you purchase your policy, your insurer may send you "Health Insurance Marketplace Statements" (also known as a 1095A) if you qualify for a tax credit. The form also reports the amount of your premium tax credit to the IRS for tax purposes.
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 your income fluctuates during the course of the year, as well as if your tax household size changes, you will see a change to your premium tax.
What happens when your income exceeds what you expected to earn?
If you have a higher income than expected, it is possible that you will be required to pay part or the entire amount of your tax credit. You can only pay up to 400 percent of the household income. It is sometimes referred to by the term "clawback."
How do you handle a change in your income?
Marketplace must be informed as soon you have any changes in income. This will help you avoid paying back excess premium tax credit at the end of the year.
The amount you must repay will depend on your income level and whether your income exceeds the poverty threshold. Instructions for Form 8962 are available. This form is used to submit information about claiming a credit against the cost of health insurance purchased through the Health Insurance Marketplace.
What is Form 8962?
When you file your tax return, you'll need to report the amount of your advance premium tax credit that you received during 2021. The amount that you will have to reimburse depends on the results from the reconciliation of your 2021 advance premium tax credit with the premium credit for the year.
The Form 8962 is used to reconcile the credit for advance premiums you received in 2021. This form may be found at your state website or on the IRS website.
IRS also requires you to submit the results of the reconciliation for the advance premium credit received during 2021. The line 29 will appear on your federal 2021 tax return.
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. However, these exceptions only apply to income that was reported on your taxes for 2021.