What Changed About Excess Premium Tax Credits?

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The IRS announced that taxpayers with excess advanced premium tax credits didn’t have to report the excess for 2020

Key takeaways:

  • Premium tax credits are available to some eligible taxpayers who get health insurance coverage through the Marketplace
  • Usually, taxpayers must report any excess advance tax credits on their tax returns, and it may increase their tax liability
  • For 2020, the IRS announced that taxpayers did not have to file Form 8962, Premium Tax Credit, or report excess credits on their individual returns—but 2021 is back to normal

The American Rescue Plan Act of 2021 introduced several changes to give taxpayers additional relief during the COVID-19 pandemic. Eligible Americans received another round of stimulus checks, supplemental unemployment benefits were extended, and the Child Tax Credit and earned income tax credits were expanded for 2021, among other changes.

Another change in the law that the IRS announced in April was the suspension of the increase in tax liability for any excess advance premium tax credit payments for the 2020 tax year. What is this excess tax credit, and what changed?

What are excess premium tax credits?

Eligible taxpayers can claim a premium tax credit (PTC) for their health insurance plan using Form 8962, Premium Tax Credit. This credit lowers the monthly insurance premium they pay. The amount is based on a taxpayer’s income estimate for the year and other household information outlined on an application for Marketplace health insurance coverage.

Typically, those with a PTC must pay the difference between their advance PTC (APTC) payments and what they qualify for based on annual income. This discrepancy is usually repaid on a yearly tax return, and filers use Form 8962 to calculate the amount of their PTC compared to the APTC. 

The form tells taxpayers whether they have to pay more in taxes that year or whether they can claim a net PTC. Conversely, if taxpayers used less PTC than they qualified for that year, they get the difference as a refundable credit. Put simply: the excess APTC is the amount that a taxpayer used in advance payments that exceeds their PTC.

Who is eligible for premium tax credits?

Not all taxpayers who get Marketplace health coverage are eligible for a premium tax credit. The IRS outlines the following eligibility requirements:

  • If a taxpayer or their family member were enrolled in Marketplace health insurance coverage for at least a month in a year when they were not eligible for affordable coverage through an employer or for Medicare, Medicaid, TRICARE, or another government plan
  • If a taxpayer’s premiums for at least one of those months is paid by the due date of their tax return
  • They are within certain income limits:
    • Household income must be at least 100% but no more than 400% of the federal poverty line for the applicable family size
  • They don’t file a married, filing separately return
  • They aren’t claimed by someone else as a dependent 

Taxpayers with healthcare insurance coverage purchased outside of the Marketplace are not eligible for the PTC. Eligibility factors vary based on where taxpayers live, their family size, and the cost of available insurance coverage.

Changes that applied to the 2020 tax year

In April 2021, the IRS announced that taxpayers with excess premium tax credits did not have to file Form 8962 as they usually would to report those excess credits. Taxpayers also did not need to report the excess on their regular Form 1040 when filing their individual tax returns

The American Rescue Plan Act of 2021 suspended the requirement to pay taxes of all or part of their excess APTC for 2020. However, there is no change in the process for taxpayers claiming a net PTC for 2020, so they still had to file Form 8962 with their individual tax return if applicable. 

If a taxpayer already filed their 2020 tax return with an excess APTC before this announcement was made, they didn’t need to file an amended return or contact the IRS. The IRS automatically reduced the excess APTC to zero, so no further action was required, and the agency reimbursed taxpayers who paid the excess APTC.

Form 1095-A, Health Insurance Marketplace Statement, is the document taxpayers should check with their tax preparer to find the amount of allowable PTC versus the APTC.

At the moment, this change only applies to 2020 taxes. The process was the same for prior tax years, and 2021 taxes will generally return to normal. But the APTC did extend to this year “eligibility to taxpayers with household income above 400 percent of the federal poverty line by lowering the upper premium contribution limit to 8.5 percent of household income.” 

And if you paid the excess and qualified for an automatic refund but did not receive it, be sure to contact the IRS or speak with a tax professional.

Getting help on your taxes

To stay abreast of changes and opportunities, contact a tax professional who understands temporary tax law adjustments and can advise accordingly. 

The team at Provident CPA and Business Advisors are experts who understand how evolving rules may impact you or your business. We also ensure that you pay the least tax legally possible while helping you plan for a successful future.

Contact our team today to learn more about our tax and business advisory services.