Who qualifies for premium tax credit?
Q: I understand that the federal government recently expanded the premium tax credit for those who buy health insurance through a state health care exchange. Who qualifies for the credit now?
A: Prior to 2021, the credit was available for people with household incomes ranging from 100% to 400% of the federal poverty level, who met other criteria. For 2021 and 2022, some people with incomes over 400% of the poverty level can also get credits, depending on the cost of the policy.
The credit amount is also higher for 2021 and 2022, thus reducing the monthly premiums even more. According to a government agency, monthly premiums after these new savings will decrease on average by $85 per policy.
Individuals eligible for Medicare or other federal insurance don’t qualify. Nor do people who can get affordable health coverage through their employer.
Q: How is the credit amount calculated?
A: It’s estimated when you go on an exchange to buy insurance. The estimated premium subsidy for 2022 is based on your expected 2022 income. Begin with your 2020 modified adjusted gross income — AGI plus tax-free interest, nontaxable Social Security benefits and tax-exempt foreign earned income. Then add or subtract expected income changes. The lower your modified AGI, the bigger the credit.
People who qualify for the credit can choose to have it paid in advance directly to the health insurance company in order to lower their monthly premiums.
Let the exchange know of any changes that could affect the credit amount, including a change in income. For example, if you lost your job and report lower income, the exchange will increase the subsidy for future months, thus putting more money into your pocket. The exchange will decrease the subsidy if you report higher income. Notifying the exchange now can mitigate surprises when you file your 1040 next year.
Q: What do I need to do now if I’m getting subsidies for buying insurance through an exchange?
A: You must file a 2021 return and properly report the health premium credit, even though your income may be below the filing threshold or you expect a refund. You will have to attach Form 8962 to your Form 1040 to compute the actual credit, list any advance payments made to the insurer, and reconcile the two figures. The exchange will send you Form 1095-A to help with the 8962 calculations. If your credit exceeds the premium advances, you can claim the excess on the 1040. If the credit is less than the advances, most will need to repay all or part of the excess.
But take note: The IRS is on the prowl for people who get subsidies for buying insurance on an exchange and either don’t file returns or file but erroneously report the credit. Its computers flag returns showing modified AGIs above the limit to take the break.