The Patient Protection and Affordable Care Act (ACA) makes available to certain middle and lower-income individuals a refundable tax credit, the Premium Tax Credit (PTC), designed to help them pay the premiums on their qualified health care plans. To achieve Congress’s goal of making health insurance affordable, the PTC is most often provided directly to an individual’s insurance provider each month in advance of actually claiming the PTC on the individual’s year-end annual tax return. Of the almost twelve million individuals who have enrolled in health insurance through the federal and state health exchanges in 2015, 85% of these individuals receive the advanced PTC (APTC). In the federal health exchange, the APTC averaged $268, covering 72% of the $374 average monthly premium, resulting in $105 net monthly payments per individual or $1,260 annually.
The amount of the APTC is based upon an estimate of an individual’s household income to be earned for that tax year in which she is entitled to claim the credit. However, the allowable PTC that any individual may receive is based upon the individual’s actual “household income” for that tax year. An individual’s household income is in turn dependent upon her “modified adjusted gross income” from the tax return upon which she is claiming the credit. Therefore, the amount of the PTC an individual is entitled to for any given year cannot be determined until the individual has completed her federal income tax return for that year. For example, the amount of an individual’s PTC for 2014, the first year the credit was available, is determined by the income as shown on an individual’s 2014 federal income tax return, which is not prepared until early 2015.
In most cases, the estimated APTC used to subsidize health insurance premiums during the tax year will differ from the actual PTC as finally determined when the individual files her annual income tax return. Through the end of October 2015, taxpayers filed 143 million 2014 income tax returns, including 3.5 million 2014 income tax returns of the 4.8 million expected tax returns with 2014 PTC. These tax returns reported $11.3 billion of the $15.5 billion 2014 APTC. If the actual PTC is less than the APTC, taxpayers will have to pay the difference when they file their tax return, which would increase the amount of tax owed or decrease the amount to be refunded. Approximately 51% of the 2014 returns, or 1.8 million returns filed, reported APTC in excess of the actual PTC by an average of $860 for the year. About 61% of these taxpayers still reported a refund. If the actual PTC is greater than the APTC, the difference will be refunded or applied against other taxes that the taxpayer might owe. Approximately, 40% of the 2014 returns filed, or 1.3 million returns, reported PTC in excess of any APTC by an average amount of $600.
While the PTC is a fully refundable tax credit and can be paid directly to insurance providers in advance, it can also be applied like more traditional income tax credits. Most tax credits are claimed on an individual’s year-end income tax return, serving as a reimbursement of expenses paid by the taxpayer months, or even more than a year, before the credit is received. Similarly, qualifying individuals have the option of paying their monthly health insurance premiums in full without any subsidy and waiting until they file their federal income tax return to claim any PTC. This approach is consistent with most other refundable and nonrefundable federal income tax credits including the child tax credit, dependent-care credit, adoption expense credit, lifetime learning credit, HOPE scholarship and American Opportunity tax credits, and earned income tax credit. If the taxpayer owes no other taxes, the government will refund the PTC in full. If the taxpayer owes other taxes, the PTC will offset any tax liability due, and the taxpayer will receive a refund of any balance in excess of the tax liability.
This Article will explain the details of the PTC focusing on the unusual and complicated reconciliation process for individuals receiving the APTC. Given the recent implementation of the PTC and the first reconciliation experience for taxpayers in 2015, there is a dearth of scholarship on this topic. Despite the enactment of the ACA in 2010, academics have neither presented nor analyzed the detailed complexity of this unusual prepaid refundable tax credit for middle and lower-income taxpayers. This Article will fill this void by describing the many details of PTC using a variety of examples to expose the significant complexities inherent in this critical health care subsidy. This deconstruction of the PTC and its requisite reconciliation will serve as a platform for subsequent scholarship that will serve to enhance the PTC to better achieve Congress’s goal of providing access to affordable health care for all Americans.