By Laila Dillsi, CPA | July 19, 2019

The Affordable Care Act (ACA) – nicknamed Obamacare – was disappointing for some, but a godsend for others. If today it is your solution for healthcare coverage, you will want to take maximum advantage of one aspect of it called the ‘Premium Tax Credit,’ assuming you qualify.

The Premium Tax Credit (PTC) is a tax credit ‘advance’ that qualifying taxpayers can receive to help pay the cost of the private health insurance they are purchasing through a Health Insurance Marketplace.

It is considered an ‘advance’ because you can choose to benefit from it every month as a reduction in the cost of your monthly health insurance premium. Whatever sum is determined for you by the HHS formula will be paid directly to the insurance company to lessen how much you have to pay out of your pocket for premiums.

You can also choose not to apply the credit to your insurance premiums. Instead, you can wait to receive it when you file your tax return. In that case, if the amount of the annual credit is higher than your tax liability, the difference will come back to you as a tax refund. And if you owe no taxes, the full amount of the year’s credit will be refunded to you.

Who Can the Premium Tax Credit Benefit?

This tax credit may be available to those paying for their own health insurance. For example:

  • Those whose employers do not offer to pay for health insurance;
  • The self-employed; or
  • People retiring before the age of 65 (when Medicare kicks in), whether they are giving up employer-paid health insurance or not.

However, their household income cannot exceed 400% of the ‘Federal Poverty Line,’ or FPL. The FPL is affected by:

  • Where you live (Alaska and Hawaii’s ‘lines’ differ from the rest of the country);
  • Your family size, which is the number of people you will include on your tax return for the year; and
  • Your income which, for PTC purposes, equals your AGI plus tax-exempt interest.

For example, if you and your spouse live in one of the 48 contiguous states or Washington, D.C., in 2019 the FPL is $16,910. So, if just the two of you file a joint tax return and your AGI + tax-exempt interest income is $67,640 (400% of $16,910) or less, you may qualify.

Understanding AGI

AGI is not only the total of those incomes that are taxed at ordinary income tax rates. If income from any source is taxed at all, it is included in your AGI. Also, AGI is your income before the standard deduction.

Your AGI includes:

  • both qualified and ordinary dividends;
  • the net of both short-term and long-term capital gains;
  • business income or losses;
  • rental income or losses; and
  • deductible contributions to your Health Savings Account.

Your AGI never includes:

  • The portion of your Social Security that is not taxable; or
  • Qualified distributions from a retirement account, like direct rollovers to a new plan or Roth distributions.

However, don’t forget that you must ‘add back’ any tax-free interest received during the year.

When Might You Benefit from the PTC?

The people most likely to benefit from the PTC are those younger than 65 who:

  • are keeping their AGI low by primarily living off Roth distributions and Social Security; or
  • are self-employed and can control when their business losses occur.

To qualify for the PTC, you or a family member also must:

  • Have health insurance purchased through the Health Insurance Marketplace;
  • Pay the balance of the premium (after applying the advance credit payments);
  • Not be eligible for affordable insurance through an employer; and
  • Not be eligible for a government program like Medicaid, Medicare, and others.

These four qualifications must be met for a period of at least one month and must all be occurring during the same month. Some additional requirements include:

  • Having income between 100% and 400% of the FPL for your family size;
  • Not filing taxes as Married Filing Separately (with a few exceptions); and
  • Not being claimed by someone else as a dependent.

If you have any questions about whether you are getting the maximum out of the Premium Tax Credit, call us at 1-844-4-Ask-Jim (1-844-427-5546) and let our Tax Planning Department review it for you.