Premium Tax Credit (PTC)

The premium tax credit is the refundable credit under Internal Revenue Code section 36B that subsidizes health insurance premiums for a household that buys a qualified health plan through an Affordable Care Act Exchange. For each month the household is enrolled and eligible, the credit is the lesser of two amounts: the premiums actually paid for the plans covering the household, or the premium for the applicable second-lowest-cost silver plan reduced by one-twelfth of a set percentage of annual household income. The credit can be paid in advance directly to the insurer each month, which is how most households receive it, and it is then reconciled against the household's actual income when the return is filed. The statute's own heading calls it a "refundable credit for coverage under a qualified health plan"; the credit and the phrase "ACA subsidy" refer to the same thing, and the separate subsidy that lowers deductibles and copayments is the cost-sharing reduction rather than this credit.

The formula, and the cap most descriptions leave out. Section 36B(b)(2) sets the monthly amount as the lesser of the premiums paid for the plans that actually cover the household, or the excess of the adjusted monthly premium for the applicable second-lowest-cost silver plan over one-twelfth of the applicable percentage times household income. The second limb is the one people know. The first limb is why a household that buys a bronze plan cheaper than its computed credit does not receive the difference: the plan simply costs nothing and the surplus is not paid out. The benchmark silver plan is a reference price, not a plan anyone has to buy, and it varies by county, household composition and year, so no number for it belongs on a reference page.

Who is eligible, in one sentence, because for 2026 it is a top-line fact again rather than a detail. Section 36B(c)(1)(A) defines an applicable taxpayer as one "whose household income for the taxable year equals or exceeds 100 percent but does not exceed 400 percent" of the poverty line for a family of that size. Between 2021 and 2025 the upper half of that sentence was switched off by subparagraph (E), which reached only tax years beginning before January 1, 2026 and then expired on its own terms. So the band is back: below 100 percent there is no credit, above 400 percent there is no credit, and the poverty line figures themselves are published annually.

The applicable percentage went back to the original scale for 2026, and that is the change with the widest reach. Section 36B(b)(3)(A)(i) contains a six-tier table of initial and final premium percentages, rising from 2.0 percent at the bottom of the income range to 9.5 percent in the 300 to 400 percent tier, with the percentage moving on a straight line across each tier so that a household's exact figure depends on where inside its tier it sits. Clause (ii) re-indexes those percentages annually by the excess of premium growth over income growth, with a further consumer-price adjustment that switches on only if total credits and cost-sharing reductions exceeded 0.504 percent of gross domestic product in the preceding year. Clause (iii) substituted a far more generous table, starting at 0 percent, for tax years beginning after 2020 and before 2026. It expired by its own terms. So the contribution a household is expected to make from its own income rose for 2026 across the whole range, independently of the return of the 400 percent ceiling.

Coverage months are the unit, and eligibility is tested monthly. Section 36B(c)(2) defines a coverage month as one where, on the first day, the taxpayer, spouse or a dependent is covered by a qualified health plan bought through an Exchange, and the premium for that month is paid either by the household or by an advance payment. A month in which anyone is eligible for other minimum essential coverage is not a coverage month for that person. This is why a mid-year change, a new job with a health plan, a birthday that brings Medicare eligibility, changes the credit from that month forward rather than for the year.

The employer-coverage test has a precise shape and a trap in its last clause. Under section 36B(c)(2)(C), an offer of an employer plan does not disqualify the month unless the plan is affordable, meaning the employee's required contribution for self-only coverage is no more than 9.5 percent of household income as annually adjusted, and provides minimum value, meaning the plan pays at least 60 percent of total allowed costs. Clause (iii) then switches both tests off if the employee or family member is actually covered under the employer plan. So enrolling forfeits the credit however unaffordable the employer plan is; only declining an unaffordable or low-value offer preserves it.

Two further 2026 changes and one scheduled for 2027. Section 36B(c)(1)(B), which treated a lawfully present non-citizen below 100 percent of the poverty line who was ineligible for Medicaid as if their income were at 100 percent, was repealed outright by Public Law 119-21 section 71302(a) for tax years beginning after 2025. Section 36B(f)(2)(B), the cap on how much excess advance credit a household below 400 percent of the poverty line had to repay, was struck by section 71305 on the same schedule, so repayment is now uncapped. And for tax years beginning after 2026, section 71301 narrows the credit among lawfully present immigrants to lawful permanent residents, Cuban and Haitian entrants, and residents under a Compact of Free Association. Anyone in that position should confirm the rule as it stands when they enroll.

The credit runs on an estimate during the year and is settled on the return.

1. At enrollment, the Marketplace projects household income for the coverage year and computes an advance premium tax credit, which is paid directly to the insurer each month so the household pays only the net premium.
2. During the year, a change in income, household size, or access to other coverage is reported to the Marketplace, which recomputes the advance amount from that month forward.
3. In January, the Exchange sends Form 1095-A reporting the premiums, the benchmark premium, and the advance payments for each month.
4. At filing, Form 8962 recomputes the credit on actual income and compares it with what was advanced. A shortfall is added to the refund; an excess advance increases the tax owed, with no cap.

A hypothetical example. Nadia is single with no dependents and household income of $39,000. Assume her applicable percentage works out to 8 percent; the real figure comes from the six-tier statutory table and is re-indexed annually, so treat 8 percent as a stand-in rather than a rate to rely on. Her expected contribution is 8 percent of $39,000, which is $3,120 a year, or $260 a month. The second-lowest-cost silver plan available to her costs $600 a month. Her monthly credit is $600 minus $260, or $340, which is $4,080 across twelve coverage months.

Now the cap. If Nadia buys a bronze plan costing $310 a month rather than the silver benchmark, her credit is the lesser of the $340 the formula produces and the $310 she actually pays. She pays nothing for the plan and the remaining $30 a month is not paid out to her. If instead she chooses a gold plan at $760 a month, her credit stays at $340 and she pays the $420 difference herself, because the benchmark is fixed by the silver plan regardless of what she buys.

Pros

• Refundable, so it helps a household with little or no income tax liability, which is most of the population it is aimed at.
• Available in advance, so the help arrives as a lower monthly premium rather than a refund a year later.
• Indexed to local premiums through the benchmark plan, so it is larger where coverage is more expensive.
• Buying a plan cheaper than the benchmark keeps the saving, up to the point where the premium reaches zero.

Cons

• Runs on an income projection made up to a year in advance, and the correction arrives as a tax bill.
• Repayment of excess advance credit is no longer capped for tax years after 2025, so an underestimate is repaid in full.
• Ends at a cliff rather than tapering, so income just above the ceiling costs the entire year's credit.
• Enrolling in an employer plan forfeits the credit even when that plan is unaffordable.
• A married person who does not file jointly cannot claim it at all, which catches separated couples who have not yet divorced.