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Determining The Credit

Overview

The credit is actually the difference between what the government thinks a family should pay towards their own health insurance premiums, based upon their poverty level, and the cost of the insurance. A simplistic view without the details is:

The family’s cost of insurance purchased through a Marketplace: $ XXXX
What government thinks a family should pay towards own insurance: < XXXX>
Premium Tax Credit: $ XXXX

The cost of the insurance used for the determination is the second lowest cost of a Silver plan of insurance (SLCSP). It is also referred to as the benchmark premium. This cost is determined by the Marketplace and reported on Form 1095-A, a copy of which goes to the IRS and the insured.

What the government thinks the family should pay towards their insurance is a percentage of the family’s household income based upon their poverty level. This percentage, referred to as the “applicable percentage” is determined from a table provided by the government based upon the family’s poverty percentage.

Family’s Responsibility Towards Their Insurance Premiums

Below is a table showing the “applicable percentage” (termed “applicable figure” on line 7 of Form 8962) for various poverty levels. For example, the “applicable %” value of 0315 is actually 3.15%. This table is included in the Form 8962 instructions. Note: The table shown below is for 2021 through 2025.

ARPA, and as extended by the Inflation Reduction Act of 2022, made temporary changes for 2021 through 2025 by substituting a special premium percentage table for the one normally used, which substantially increases the PTC for those years.

Example: Assume the family’s poverty percentage is 167 and the family’s income is $34,000. From the table above the percentage of their income that they should pay towards their own insurance is .0068 (0.68%). Thus, the amount the government expects them to pay towards their own insurance is $231(.0068 x $34,000)
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Determining the Premium Tax Credit

Depending upon whether the Marketplace reporting using Form 8962 is on an annual basis or a monthly basis, the credit will have to be computed in the same manner. For purposes of explaining how the computation works, the following explanation is based upon an annual computation.

Taxpayer’s family size – (line 1 Form 8962); defined earlier in this chapter.
Taxpayer’s household income (line 3 Form 8962); defined earlier in this chapter.
From the table determine the income that is equal to 100% of the federal poverty level based on the taxpayer’s family size (line 4 Form 8962).
Family’s poverty level - Divide the amount from line 2 by the amount determined at line 3, rounded to the nearest whole percentage (line 5 Form 8962), keeping in mind the special rounding rules noted above.
From the applicable percentage table determine the percentage of family income the taxpayer is expected to pay towards purchasing their own health insurance (line 7 Form 8962).
Multiply line 5 times line 2. This is the amount of health insurance premium the taxpayer is expected to pay towards their own health insurance (line 8a Form 8962).
Enter the annual premium for the second lowest cost Silver plan (SLCSP). The Marketplace provides this number on Form 1095-A (line 33A for annual computations).
Subtract Line 6 from line 7. This amount, not exceeding the cost of the insurance, is the premium tax credit.

Example: Married couple with one child who live in the continental U.S. Couple has an AGI of $32,370. Child, a teenager, has a part time job and has an AGI of $7,000. Their 2024 premium tax credit is determined as follows:

Taxpayer’s family size: 3
Taxpayer’s household income: $39,370 ($32,370 + $7,000)
From the table of 2023 poverty levels used for 2024 returns, determine the income that is equal to 100% of the federal poverty level for the taxpayer (line 4 Form 8962): $24,860 (100% of poverty level for family of 3 = $14,580 plus $5,140 x 2)
Family’s poverty level - Divide the amount from line 2 by the amount determined at line 3, rounded to the nearest whole percentage: 159% (($39,370/$24,860) x 100)
From the applicable percentage table determine the percentage of family income the taxpayer is expected to pay towards their own health insurance: .0036 taken from the IRS table shown above based on the poverty level.
Multiply line 5 times line 2. This is the amount of health insurance premium the taxpayer is expected to pay towards their own health insurance: $1,417 (.0036 x $39,370)
Enter the annual premium for the second lowest cost Silver plan (SLCSP). The Marketplace provides this number on Form 1095-A: $6,332: (Estimated by the author in order to provide this example).
Subtract Line 6 from line 7. This amount, not exceeding the actual cost of the insurance, is the premium tax credit: $4,915 ($6,332 - $1,417).

Form 8962 – Premium Tax Credit (PTC)

Is used to determine the premium assistance credit that the taxpayer is entitled to and to reconcile that credit with the advance credit paid through the insurance Marketplaces.