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How can I save on my monthly insurance bill with a Premium Tax Credit?

Americans at all income levels can have their monthly health insurance bill reduced with an advance payment of the Premium Tax Credit. Here’s how it works…

FILE - In this Oct. 6, 2015, file photo, the HealthCare.gov website, where people can buy health insurance, is displayed on a laptop screen in Washington. President Barack Obama told insurers his health care overhaul has some growing pains. But with premiums rising and marquee insurers bailing ahead of the fourth sign-up season, could the real diagnosis be “failure to thrive?” (AP Photo/Andrew Harnik, File)
Andrew HarnikAP

Starting in 2014, under the Affordable Care Act (ACA) millions of Americans became eligible for the Premium Tax Credit that helps them pay for health insurance coverage. Those with incomes between 100 and 400 percent of the Federal Poverty Level (FPL) who purchased coverage on the health insurance Marketplace in their state were eligible.

The size of the credit and the number of people that could qualify for it was increased in 2021 with the passage of the American Rescue Plan Act (ARPA). Those with incomes over 400 percent of the FPL could now be eligible and those below 150 percent saw their contribution level lowered to zero percent of the premium. Those temporary enhancements were extended through the end of the 2025 coverage year in the Inflation Reduction Act.

You may be interested in: The list of refundable and non-refundable tax credits: the maximum the IRS can return to you

How can I save on my monthly insurance bill with a Premium Tax Credit?

Those eligible for the Premium Tax Credit can choose to wait to claim it as a lump sum on their IRS tax return when they file for the year the coverage was purchased or take an advance on it. In the latter case, people will have to file a tax return for the corresponding year to reconcile the payments received with what they were eligible for before the April filing date. When purchasing your plan on the Marketplace you must estimate what your income will be for the following year.

In the event the taxpayer paid more in premiums than they had to, they will be reimbursed for that surplus portion on their tax refund. However, if they received more than they should’ve they will have to pay back the difference when they file their taxes. That’s why it’s important to keep track of your earnings and report any changes in order to avoid a surprise bill at the end of the year.

How do the Premium Tax Credit advance payments work?

The insurance company receives a direct payment for the portion of the Premium Tax Credit the beneficiary is entitled to based on estimated earnings for the year that coverage will be received, and the policyholder would then have to pay the remainder of the health insurance premium.

The share of household income that must be paid toward the cost of coverage by an individual or a family is based on a sliding scale. The lower the household earnings the smaller the share will be.

For example, under the current rules an individual who expects to earn $30,000, roughly 205 percent of the poverty line, would have to contribute 2 percent of his or her income toward the premium of the health insurance they purchased in the Marketplace. That would be $50 per month, the rest would be covered by the Premium Tax Credit.

A family of four with a $90,000 annual income, 300 percent of the FPL, would have to contribute 6 percent of that toward the premium, or $5,400 per year. If the benchmark plan for the family is $10,000, they would receive a Premium Tax Credit of $4,600. That’s $10,000 minus the family’s contribution of $5,400 ($450 per month) to equal $4,600, or $383 per month.

The exact amounts for each applicant’s case is given when you apply through the Marketplace. The Center on Budget and Policy Priorities provides some answers to commonly asked questions.