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How the IRS reconciles your premium tax credit

How the IRS reconciles your premium tax credit

The premium tax credit is a tax credit that offsets your annual health insurance premiums. It’s a way for the government to pay for some or all of your private health insurance costs. 

One unique feature of the premium tax credit is that it’s advanceable. Advanceable means you can receive an estimated tax credit before you file your tax return. 

When you receive the tax credit in advance, it’s an estimate based on an annual income estimate you provide to the Marketplace as part of your application. The IRS then reconciles your estimated premium tax credit based on your actual income when you file your tax return the following year. 

You don’t have to receive your premium tax credit in advance, but most people choose to. If you elect not to accept it upfront, you’ll receive whatever amount you qualify for in the form of a refund when you file your tax return the following year.

The premium tax credit reconciliation

Each year, the Marketplace generates a “Health Insurance Marketplace Statement” called a 1095-A for you to use when you file your tax return. The Marketplace also sends a copy to the IRS. Think of the 1095-A as a special kind of W-2 or 1099. It’s a way for the Marketplace to report information about your health insurance plan and any premium tax credits you receive to the IRS for tax purposes.

Note: If you’re a LegUp Health client, you’ll be able to download your Form 1095-A online each year. You’ll also receive a copy via mail or email.

Your 1095-A will include personal identification information for you and everyone covered on your health insurance plan. It also lists the information the IRS needs to reconcile your premium tax credit, including the:

  • Monthly premiums for the health insurance plan you enrolled in
  • Monthly premiums for the second-lowest-cost silver plan (i.e., the “benchmark plan”).
  • Monthly premium tax credits you received in advance

When you file your tax return, you’ll use your 1095-A to complete Form 8962. Form 8962 calculates your actual premium tax credit and reconciles it with any advance payments you received. Don’t worry. Your accountant and most online tax filing services like TurboTax will walk you through this.

Suppose you end up with less income than you estimated and received too little premium tax credit in advance. In that case, you’ll receive more premium tax credit in the form of a refund.

Note: You’re only eligible for premium tax credits if you purchase coverage through the Marketplace. At LegUp Health, we encourage all clients to purchase coverage through the Marketplace even if they’re not expecting to qualify for a premium tax credit. That way, if they do end up qualifying, they’ll be sure to receive the tax credit as a refund.

If you end up with more income than you estimated and you received too much premium tax credit in advance, you’ll have to pay some of it back in the form of a tax. The IRS caps the amount you have to pay back if your income is below 400 percent of your household’s federal poverty level. But if your income is above 400 percent of the poverty level, you will have to repay all excess credits you received in advance. Policy advocates refer to this as the premium tax credit “clawback”.

Note: If you elect to receive an estimated premium tax credit in advance, be sure to track whether your actual income is tracking higher than your estimated income. If your income ends up being higher, you’ll owe more taxes at the end of the year. Don’t allow yourself to be surprised by the premium tax credit clawback.

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