What is Advance Premium Tax Credit – Overview
The Advance Premium Tax Credit (APTC) is a form of federal tax credit that you can use to lower your monthly bill for health insurance. This is effective when you buy Obamacare insurance plans from the health insurance marketplace.
The APTC helps to decrease the average monthly health insurance bill on insurance plans you signed up for through the insurance marketplace. It does this by paying part of your premium tax credit directly to the insurance company monthly. This is an optional way to receive your premium tax credit.
Otherwise, you end up paying the entire premium from your pocket each month and claim the credit in a lump sum based on your tax return.
You must buy health insurance through the insurance marketplace and meet specific requirements to be eligible for APTC. If your advance premium tax credit amount is more than the premium tax credit amount, then you qualify based on your income and other qualifications but need to pay back the excess amount.
How Does Advance Premium Tax Credit work?
The APTC is mainly a type of premium tax credit. The premium tax credit is sufficient to cover the cost of health insurance premiums, but only if the health insurance policy is bought from the insurance marketplace.
Generally, your income should be between 100% and 400% of the federal poverty level for your family size to qualify for the premium tax credit. For fiscal years 2021-2022, the 400% limit was temporarily eliminated. However, larger credits are generally allotted to people with lower income limits.
If you qualify for this program, the health insurance marketplace will calculate your estimated premium tax credit amount for the current year. Then, you can choose to have a part of the estimated credit paid directly to your choice of insurance provider every month. This helps to claim the credit in advance, which is why this program is called an “advanced” premium tax credit.
Remember, the advance premium tax credit for a fiscal year is the premium tax credit you select to have the marketplace pay directly to your insurance provider in a specific calendar year. Your APTC is calculated based on an “estimated” premium tax credit amount which is determined by the marketplace.
However, several factors are variable and likely to change during a calendar year. For instance, you may get a raise at work, which will cause your credit to become smaller. Due to this, the actual amount of your premium tax credit, based on your actual AGI (adjusted gross income), can differ from your advance premium tax credit.
The difference between the two is stated in IRS Form 8962. You will need to include this form with your tax return to reconcile the amounts that have been paid directly to your insurance provider, with the actual amount of your eligible premium tax credit.
Once you reconcile the amounts on your tax return and the advance premium tax credit turns out to be more than your actual premium tax credit amount, then you will need to pay back the excess amount.
On the other hand, if your advance premium tax credit amount is lower than your actual premium tax credit amount, then the difference is credited against your tax liability for the current year. This results in a significantly larger refund or lower balance due.
What Are Some Examples of Advance Premium Tax Credits?
Imagine you buy health insurance through the insurance marketplace. In this scenario, the program calculates an estimate that you qualify for a USD 1,000 premium tax credit. Your advanced APTC amount will be less than USD 1,000. If you select this entire amount to the paid back to your health insurance provider, the APTC will reduce your monthly premium payments by around USD 83 (USD 1,000 / 12 months).
You can also decide to have the health insurance marketplace pay nothing to your insurance provider every month. In such cases, you would have no APTC, and you can claim the entire USD 1,000 APTC amount on your tax return for the current year.
How Much is Advance Premium Tax Credit?
Every individual policyholder’s APTC amount is calculated according to the cost of the second-lowest silver plan offered to you, minus a percentage of your family earnings. Your maximum APTC amount is calculated on the health insurance marketplace’s estimate of this calculation. You can select the portion of this amount to take in advance.
The premium tax credit, which also includes the advance premium tax credit, does not have a particular statutory amount. It differs from other tax credits whose amount may be eliminated based on your earnings.
How to Get Advance Premium Tax Credit?
You will need to qualify for the premium tax credit first before being eligible for the advance premium tax credit. You must buy a health insurance policy from the insurance marketplace to do this.
Below are the criteria that you need to fulfill to be eligible for receiving an advance premium tax credit for your health insurance plans:
- Enrolled in a marketplace plan for a minimum 1 month
- You and your family members enrolled in a health insurance plan are not eligible for coverage through an employer-sponsored or government-sponsored health insurance plan, such as Medicaid or Medicare
- Having an income that is at least 100% and no more than 400% of the designated federal poverty level, based on the size of your family
- Tax filing status is not married filing separately
- Not claimed as another taxpayer’s dependent
If you are eligible, you will receive the advance premium tax credit by letting the insurance marketplace pay some, or all, of your estimated premium tax credit amount to your insurance company.
There is no fixed amount of dollars as the maximum limit for the premium tax credit as the amount is calculated on overall health insurance costs and the expected contribution from the taxpayer. You will also need to remember that a raise during the calendar year may result in lowered APTC for you.