The Premium Tax Credit, also called the Health Coverage Tax Credit, goes into effect when a taxpayer signs up for health insurance offered through the Affordable Care Act. The Premium Tax Credit is meant to subsidize the cost of monthly health insurance premiums.
The amount of Premium Tax Credit you receive is based on how your income stacks up against the federal poverty rate. The credit is designed to cover the difference between the actual cost of the health insurance plan and how much you are required to pay. For example, if your income is up to 133 percent of the federal poverty level, you will be asked to contribute no more than 2 percent of your income toward monthly premiums. This means that if you earn $28,850, which is 133 percent of the federal poverty level, your maximum monthly contribution will be $40.
There is one important distinction between the Premium Tax Credit and other tax credits. The Premium Tax Credit is paid to the insurer directly and is not deducted from a taxpayer's end-of-year tax bill. The tax credit will automatically begin when a taxpayer signs up for coverage under the Affordable Care Act. However, you'll still need to report the Premium Tax Credit on your tax return and if you end up earning more than you expected, you may need to repay a portion of the tax credit [source: National Women's Law Center].