There’s a lot included in the American Rescue Plan legislation that was passed in March, and many provisions have gone relatively unnoticed. Last week I wrote about the Unemployment Income Exclusion, and now I’d like to talk about another provision involving the Premium Tax Credit.
What is the Premium Tax Credit?
The Premium Tax Credit (PTC) is a refundable credit that helps individuals and families cover the premiums for their Affordable Care Act (Marketplace) health insurance policy. The monthly policy premiums are based on several factors, including what the individual expected their income to be during the year. They entered this information when they signed up for the policy, usually in November or December for coverage during the next year. Based on their income, they may receive a lower monthly premium that helps make the plan more affordable. While it’s commonly thought that this is a discount, it’s really an advance credit on their next years' tax return. Think of it like receiving the Child Tax Credit, which can give taxpayers a $2,000 tax credit per qualifying child, split into equal payments during the year instead of on your tax return.
During tax preparation, we have to reconcile what the individual actually earned versus what they thought they would make. If their income was lower than expected then they may receive an additional tax credit on their return, the PTC. Conversely, if their income was higher, they may need to pay back a portion of the credit that they received in the form of lower insurance premiums during the previous year.
American Rescue Plan and the PTC
The American Rescue Plan includes provisions that lower the cost of Marketplace policies and expands access to the credit.
Individuals and families may be eligible for a temporary increase in premium tax credits. This will allow some households that earned too much to qualify for the credit to lower their monthly premiums.
It increases premium tax credits for coverage years beginning 2021 and 2022, lowering premiums for most policyholders.
Taxpayers who receive unemployment compensation during any week beginning in 2021 may be eligible to receive premium tax credits to help pay for a 2021 Marketplace policy.
Taxpayers who received too much in advance premium tax credits in 2020 will not have to repay the excess amount.
How do I take advantage of this?
Taxes - My role in this is to perform the required reconciliation when I prepare tax
returns. For now, I’m holding off on filing 2020 tax returns that include repayment of the PTC. As of today, the IRS hasn’t issued guidance on this topic. We don’t know whether the IRS wants us to file the returns and then amend them or if they’ll correct the returns themselves and send refunds.
Health Insurance - I live and breathe taxes, not health insurance. As unsatisfying as
this answer is, the only advice I can give you is to visit your Marketplace website or call them.
The American Rescue Plan includes many provisions designed to help individuals and families affected by the pandemic. One of which affects those with an Affordable Care Act (Marketplace) healthcare policy.
This article is a brief introduction to the topic and is not meant to provide legal or tax guidance. There may be other rules that apply to your particular situation, and I encourage you to seek additional information and talk with your tax professional and health insurance policy provider.
Megan Austin, EA