The premium tax credit is the mechanism the Affordable Care Act uses to make Marketplace health insurance affordable. It is a refundable tax credit, which means it can reduce your tax bill below zero and the remainder comes back as a refund. Most people never see it as a tax form line, though, because they take it in advance, month by month, straight off their insurance bill.
Strip away the jargon and the credit is one subtraction:
Monthly credit = benchmark monthly premium − your expected monthly contribution
Your expected monthly contribution is your annual household income multiplied by an applicable percentage, divided by twelve. The applicable percentage is the share of your income the IRS says you should be able to afford, and it rises as your income rises.
1. The benchmark premium. This is the premium of the second-lowest-cost silver plan, often shortened to SLCSP, sold in your rating area. It is not the plan you buy. It is a reference price the IRS uses so that the credit reflects local insurance costs. If premiums are high where you live, your credit is larger. You will see the benchmark identified when you shop on HealthCare.gov or your state Marketplace.
2. Your household income. The Marketplace counts modified adjusted gross income, or MAGI. That is your adjusted gross income plus tax-exempt interest, excluded foreign earned income, and nontaxable Social Security benefits. It is the income for everyone in your tax household, not just the person applying.
3. The applicable percentage. Each year the IRS publishes a table that maps your income, expressed as a percentage of the federal poverty level, to the percentage of income you are expected to contribute. For 2026, set by Revenue Procedure 2025-25, the scale runs from 2.10% for incomes under 133% of the poverty level up to 9.96% for incomes between 300% and 400% of the poverty level. Inside each bracket the percentage rises in even steps, so someone at 210% of the poverty level pays a slightly higher share than someone at 205%.
Take a two-person household in Ohio with $45,000 of annual MAGI and a benchmark premium of $1,050 per month in their area.
Step one, find the poverty level. The 2026 federal poverty guideline for a household of two in the 48 contiguous states is $21,640. Divide $45,000 by $21,640 and you get 207.95%. The IRS drops the fraction, so the household sits at 207% of the poverty level.
Step two, find the applicable percentage. 207% falls in the 200% to 250% bracket, which runs from 6.60% to 8.44%. Interpolating 7 of the way through the 50-point bracket gives 6.86% after rounding to the nearest hundredth of a percent.
Step three, compute the expected contribution. $45,000 times 6.86% is $3,087 per year, or $257.25 per month.
Step four, subtract from the benchmark. $1,050 minus $257.25 is $792.75 per month, or $9,513 per year. That is the household's premium tax credit. They can use it to cut their monthly premium, even if they enroll in a bronze or gold plan instead of the benchmark silver.
You do not have to wait until tax season. The advance premium tax credit, or APTC, sends your estimated credit straight to your insurer each month so your bill is lower immediately. You choose how much of the available credit to take in advance. Take the full amount and your monthly bill is as low as possible. Take a smaller amount, or none at all, and you settle up on your tax return, where any credit you did not use in advance reduces your tax or increases your refund.
The catch is reconciliation. When you file your return, the IRS compares the advance credit you received with the credit your actual final income supports, using Form 8962 and the Form 1095-A your Marketplace sends you. If your income came in higher than you estimated, you may owe back part of the advance credit. If it came in lower, you may get more. This is why updating your Marketplace application when your income changes is one of the most valuable habits in this system.
Under current law, the credit is available to households with income between 100% and 400% of the federal poverty level who buy coverage through the Marketplace, are lawfully present in the United States, are not claimed as a dependent by someone else, and do not have access to affordable employer coverage or other minimum essential coverage. Below 100% of the poverty level, households are generally in the Medicaid range instead, with an exception for certain lawfully present immigrants subject to the Medicaid five-year waiting period. Above 400%, there is no credit under current law, because the enhanced subsidies that once extended help past that line expired at the end of 2025.
The credit also cannot exceed the premium of the plan you actually buy. If your expected contribution is already higher than the benchmark premium, the formula produces zero or a negative number, and the credit is simply zero.
Your credit equals the monthly premium of the second-lowest-cost silver plan in your area minus your expected contribution, which is your annual household income times the IRS applicable percentage, divided by twelve.
The benchmark is the second-lowest-cost silver plan sold in your rating area. You will see it labeled when you compare plans on HealthCare.gov or your state Marketplace.
No. The premium tax credit cannot exceed the premium of the plan you actually enroll in, and the calculation starts from the benchmark silver premium.
No. You can take some or all of it in advance to lower your monthly bill, take none in advance and claim the full credit on your tax return, or split it. What you take in advance is reconciled against your final income when you file.