The premium tax credit is a refundable federal credit for health coverage bought through an Exchange, computed month by month and reduced by anything already paid in advance toward the same premiums. In the case of an applicable taxpayer, there shall be allowed as a credit against the tax imposed by this subtitle for any taxable year an amount equal to the premium assistance credit amount of the taxpayer for the taxable year (26 U.S.C. 36B(a)).
Two features make it unlike other credits on the return. It can be paid before the year is over, straight to the insurer, and whatever was paid that way has to be squared against the real answer when the return is filed. That reconciliation is where the credit turns into a balance due for a client whose income moved.
What the Credit Equals
The total is built up from months, not from a year. The term premium assistance credit amount means, with respect to any taxable year, the sum of the premium assistance amounts determined under paragraph (2) with respect to all coverage months of the taxpayer occurring during the taxable year (26 U.S.C. 36B(b)(1)).
Each month’s figure is the lesser of two amounts, and both limbs matter. The premium assistance amount determined under this subsection with respect to any coverage month is the amount equal to the lesser of the monthly premiums for such month for one or more qualified health plans offered in the individual market within a State which cover the taxpayer, the taxpayer’s spouse, or any dependent, as defined in section 152, of the taxpayer and which were enrolled in through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act, or the excess, if any, of the adjusted monthly premium for such month for the applicable second lowest cost silver plan with respect to the taxpayer over an amount equal to 1/12 of the product of the applicable percentage and the taxpayer’s household income for the taxable year (26 U.S.C. 36B(b)(2)).
The first limb caps the credit at what the client actually pays. The second limb is the benchmark rule everyone means when they say the subsidy is tied to the silver plan: the reference premium is the second lowest cost silver plan, whether or not the client bought it, and the taxpayer’s own contribution is subtracted from that reference rather than from their real plan.
The applicable percentage is not a single number. Except as provided in clause (ii), the applicable percentage for any taxable year shall be the percentage such that the applicable percentage for any taxpayer whose household income is within an income tier specified in the statutory table shall increase, on a sliding scale in a linear manner, from the initial premium percentage to the final premium percentage specified in that table for that income tier (26 U.S.C. 36B(b)(3)(A)(i)). Two clients in the same tier can therefore carry different percentages, because the scale moves continuously inside each band rather than in steps.
The income figure the whole computation runs on is household income, which is built from modified adjusted gross income on the definition set out in modified adjusted gross income.
Who Is an Applicable Taxpayer
The base rule is a band with a floor and a ceiling. The term applicable taxpayer means, with respect to any taxable year, a taxpayer whose household income for the taxable year equals or exceeds 100 percent but does not exceed 400 percent of an amount equal to the poverty line for a family of the size involved (26 U.S.C. 36B(c)(1)(A)).
Three further rules sit alongside it, and each one decides real cases.
Below the floor there is a route in for one group. If a taxpayer has a household income which is not greater than 100 percent of an amount equal to the poverty line for a family of the size involved, and the taxpayer is an alien lawfully present in the United States but is not eligible for the medicaid program under title XIX of the Social Security Act by reason of that alien status, the taxpayer shall, for purposes of the credit under this section, be treated as an applicable taxpayer with a household income which is equal to 100 percent of the poverty line for a family of the size involved (26 U.S.C. 36B(c)(1)(B)). Note both conditions. Low income alone does not do it.
Filing status is a condition, not a preference. If the taxpayer is married within the meaning of section 7703 at the close of the taxable year, the taxpayer shall be treated as an applicable taxpayer only if the taxpayer and the taxpayer’s spouse file a joint return for the taxable year (26 U.S.C. 36B(c)(1)(C)). Where the statuses come from is set out in filing status.
And a dependent cannot claim it. No credit shall be allowed under this section to any individual with respect to whom a deduction under section 151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which that individual’s taxable year begins (26 U.S.C. 36B(c)(1)(D)).
The Ceiling Is Suspended, With Dates
This is the provision behind every conversation about enhanced subsidies, and its date qualifiers are the whole of it. In the case of a taxable year beginning after December 31, 2020, and before January 1, 2026, subparagraph (A) shall be applied without regard to the words but does not exceed 400 percent (26 U.S.C. 36B(c)(1)(E)).
Read what that does and does not do. It removes the ceiling and leaves the floor, so the band becomes open ended at the top for those years. It is written as a temporary rule with an end date on its face, so anything said about years after the window has to be checked against the law in force for the year being prepared.
The same window moves the percentages as well as the ceiling, so naming only the ceiling understates it. In the case of a taxable year beginning after December 31, 2020, and before January 1, 2026, clause (ii) shall not apply for purposes of adjusting premium percentages under that subparagraph, and a substitute table shall be applied in lieu of the table contained in clause (i) (26 U.S.C. 36B(b)(3)(A)(iii)). So for those years both the eligibility ceiling and the contribution scale are different provisions from the ones that otherwise apply.
What Kills a Coverage Month
A month only counts if two things are true. For purposes of that subsection, the term coverage month means, with respect to an applicable taxpayer, any month if, as of the first day of that month, the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer is covered by a qualified health plan described in subsection (b)(2)(A) that was enrolled in through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act, and the premium for coverage under that plan for that month is paid by the taxpayer, or through advance payment of the credit under section 1412 of that Act (26 U.S.C. 36B(c)(2)(A)).
Then an exception removes months where other coverage was available. The term coverage month shall not include any month with respect to an individual if for that month the individual is eligible for minimum essential coverage other than eligibility for coverage described in section 5000A(f)(1)(C), relating to coverage in the individual market (26 U.S.C. 36B(c)(2)(B)(i)). The trigger is eligibility, not enrolment, which is why a client who turned down an employer plan can still lose the month.
Employer coverage is where that exception gets its own carve-outs, and there are three of them. Except as provided in clause (iii), an employee shall not be treated as eligible for minimum essential coverage if that coverage consists of an eligible employer-sponsored plan and the employee’s required contribution with respect to the plan exceeds 9.5 percent of the applicable taxpayer’s household income, and that clause also applies to an individual who is eligible to enroll in the plan by reason of a relationship the individual bears to the employee (26 U.S.C. 36B(c)(2)(C)(i)). Except as provided in the same clause (iii), an employee shall not be treated as eligible for minimum essential coverage if the coverage consists of an eligible employer-sponsored plan and the plan’s share of the total allowed costs of benefits provided under the plan is less than 60 percent of those costs (26 U.S.C. 36B(c)(2)(C)(ii)).
Clause (iii) is the one that reverses both. Clauses (i) and (ii) shall not apply if the employee, or any individual described in the last sentence of clause (i), is covered under the eligible employer-sponsored plan or the grandfathered health plan (26 U.S.C. 36B(c)(2)(C)(iii)). So the affordability and minimum-value escapes are available to someone who declined the employer plan, and closed to someone who took it.
That 9.5 percent figure is not fixed either. In the case of plan years beginning in any calendar year after 2014, the Secretary shall adjust the 9.5 percent under clause (i)(II) in the same manner as the percentages are adjusted under subsection (b)(3)(A)(ii) (26 U.S.C. 36B(c)(2)(C)(iv)). Quoting the statutory number without the indexing clause is how a stale affordability percentage ends up in a file.
Reconciliation, and the Cap on the Clawback
The credit and the advance payments meet on the return. The amount of the credit allowed under this section for any taxable year shall be reduced, but not below zero, by the amount of any advance payment of that credit under section 1412 of the Patient Protection and Affordable Care Act (26 U.S.C. 36B(f)(1)).
Where too much was paid in advance, the excess comes back as tax rather than as a reduced credit. If the advance payments to a taxpayer under section 1412 of that Act for a taxable year exceed the credit allowed by this section, determined without regard to paragraph (1), the tax imposed by this chapter for the taxable year shall be increased by the amount of that excess (26 U.S.C. 36B(f)(2)(A)).
That increase is capped for some taxpayers and not for others, and the condition is the part that gets dropped. In the case of a taxpayer whose household income is less than 400 percent of the poverty line for the size of the family involved for the taxable year, the amount of the increase shall in no event exceed the applicable dollar amount determined in accordance with the statutory table, and one-half of that amount in the case of a taxpayer whose tax is determined under section 1(c) for the taxable year (26 U.S.C. 36B(f)(2)(B)(i)). A taxpayer at or above that line is not capped at all, which is the single fact that decides whether a reconciliation is a nuisance or a disaster.
The table is written in three bands. The applicable dollar amount is $600 where household income is less than 200 percent of the poverty line, $1,500 where it is at least 200 percent but less than 300 percent, and $2,500 where it is at least 300 percent but less than 400 percent (26 U.S.C. 36B(f)(2)(B)(i)).
Those are base amounts and not the figures for a current year. In the case of any calendar year beginning after 2014, each of the dollar amounts in that table shall be increased by that dollar amount multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year, and if the amount of any increase is not a multiple of $50 the increase shall be rounded to the next lowest multiple of $50 (26 U.S.C. 36B(f)(2)(B)(ii)). Take the indexed figures for the year being prepared from the revenue procedure that sets them, never from the printed table.
The Exchange feeds the return rather than the client. Each Exchange shall provide to the Secretary and to the taxpayer the level of coverage and the period it was in effect, the total premium without regard to the credit or cost-sharing reductions, the aggregate amount of any advance payment of the credit or reductions, the name, address and TIN of the primary insured and the name and TIN of each other individual obtaining coverage under the policy, any information provided to the Exchange including any change of circumstances necessary to determine eligibility for and the amount of the credit, and information necessary to determine whether a taxpayer has received excess advance payments (26 U.S.C. 36B(f)(3)).
Common Questions
They are the same credit at two points in time. The advance payment is made during the year under section 1412 of the Patient Protection and Affordable Care Act, and the credit allowed on the return is then reduced, but not below zero, by whatever was advanced (26 U.S.C. 36B(f)(1)). Nothing in the statute treats them as two credits.
Not under the general rule. Where the taxpayer is married within the meaning of section 7703 at the close of the taxable year, applicable taxpayer status requires that the taxpayer and the spouse file a joint return for the taxable year (26 U.S.C. 36B(c)(1)(C)). Whether a person is married for that purpose is decided on one date, a mechanic set out in filing status.
No. Eligibility for minimum essential coverage removes the month, but an employee is not treated as eligible where the employer plan’s required contribution exceeds the indexed affordability percentage, or where the plan’s share of total allowed costs is less than 60 percent (26 U.S.C. 36B(c)(2)(C)). Both escapes close if the employee actually enrolled in that plan or in a grandfathered plan (26 U.S.C. 36B(c)(2)(C)(iii)).
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