How does an advance premium tax credit lower health insurance costs?

What is an advance premium tax credit?

A premium tax credit is a federal credit that you can claim to help decrease your monthly costs for health insurance. It’s designed to help eligible individuals and families with lower income afford a health care plan purchased through the health insurance marketplace (at Healthcare.gov).

"If an individual or family qualifies for this credit, the amount of the credit can be used to reduce your marketplace plan premium," says Matthew Brust, an associate attorney with Henderson Franklin Starnes & Holt.

You can use premium tax credits to pay premium costs upfront. This is when a premium tax credit is referred to as an "advance premium tax credit."

Enhanced premium tax credits expired in 2026

The American Rescue Plan Act of 2021 expanded premium tax credits and increased credit amounts for two years (through the 2022 marketplace plan year). The Inflation Reduction Act extended these enhanced subsidies through 2025, but they expired at the end of that year.

For 2026, the enhanced federal subsidies are no longer in effect. Federal premium tax credit eligibility returns to the 100%–400% federal poverty level income range, subject to exceptions and other eligibility requirements.

How does an advance premium tax credit work?

An advance premium tax credit lowers your monthly insurance bill by sending the estimated credit directly to your insurer. You pay the difference between your plan's full premium and the amount of credit applied.

If you qualify for the credit through the health insurance marketplace, you can pay the credit in advance directly to the insurance company to lower your monthly premium payments. 

When applying for coverage at the marketplace, you will estimate your expected income for the year. If you’re eligible for a premium tax credit based on your estimate, you can use any amount of the credit in advance to lower your premium.

"If by the end of the year, the amount you've used as an advance premium tax credit is more than what you should have taken based on your final annual income based on your final income, you will be required to pay back the excess when you are filing your annual tax return. If the amount used is lower than what you qualify for, you will be paid back the difference in the form of a tax refund," explains Greg Rozdeba, president of Dundas Life.

Change in the requirement to repay excess payments

The 2020 exception to repaying excess advance premium tax credit payments applied only to the tax year 2020. For 2026, taxpayers who receive advance payments must reconcile them with the credit they qualify for on their federal tax return and repay any excess without a repayment cap.

The American Rescue Plan Act of 2021 suspended the requirement to repay excess advance premium tax credit payments for the tax year 2020. Taxpayers with excess payments did not need to file Form 8962 solely to reconcile those payments. However, taxpayers claiming an additional premium tax credit for 2020 still had to file the form.

If you choose to use the premium tax credit this year, note that you will have to file tax form 8962 with your next federal income tax return. IRS Form 8962, premium tax credit, is what you use to claim or reconcile the tax credit.

How to apply for the advance premium tax credit

Apply for an ACA marketplace plan through HealthCare.gov or your state's marketplace and provide your expected annual household income and family information. The marketplace uses these details to determine your estimated eligibility and credit amount.

Follow these steps:

1. Visit HealthCare.gov or your state's official health insurance marketplace.
2. Enter your household information, including the number of people in your tax household.
3. Estimate your total household income for the coverage year.
4. Review the plans available in your area and the estimated premium tax credit.
5. Select a qualifying plan and choose how much of your credit to apply to your monthly premium.

"If initially, the marketplace determines that you are not eligible to receive the credit, you can file tax form 8962 to indicate that circumstances have changed and that you now qualify for the credit," Brust adds.

How to calculate the advance premium tax credit

The amount of the credit is typically equal to the premium for the second-lowest-cost silver plan available through the health insurance marketplace minus a certain percentage of your household income.

"It's the difference between the second-lowest silver plan and the highest amount that [the IRS] has reasoned to be affordable as a monthly health insurance premium," notes Adam Garcia, a personal finance and investing expert and founder of TheStorkDork.com. "This is also known as the premium cap."

Here's an example:

• Let's say a person makes $25,000 a year.
• He expects to pay 10% of his income (or $2,500) to health insurance premiums.
• His benchmark plan is $5,000.
• In this case, the person would be eligible for a $2,500 credit, which you get by subtracting the percentage of income expected to be paid on health insurance premiums from the benchmark plan cost.

Be aware that the advance premium tax credit can’t be more than the cost of the premium for the marketplace plan.