Understanding the Premium Tax Credit (PTC) for Health Insurance

The premium tax credit (PTC) serves as a vital federal tax expenditure aimed at reducing the cost of health insurance for those purchasing through federal and state Marketplaces. Established by the Patient Protection and Affordable Care Act and initiated in 2014, the PTC aids millions of Americans. By February 2025, over 21 million of the 23.4 million Marketplace enrollees benefited from these credits.

The Joint Committee on Taxation estimates that the federal government will allocate $105 billion towards PTC-related expenses in 2026. This reduction from previous allocations is linked to the end of enhanced subsidies and expanded eligibility that were put in place during the COVID-19 pandemic. Eligibility for the PTC involves meeting specific income thresholds in relation to the federal poverty level (FPL) among other requirements.

The PTC amount is computed as the difference between the cost of the "benchmark plan"—the second-lowest Silver plan—and the expected contribution based on income. When the benchmark premium exceeds this contribution, enrollees receive the difference as a tax credit. During COVID-19, enhancements lifted the income cap and increased subsidies; however, these measures will revert to pre-pandemic guidelines by 2026.

Enrollees may choose to have the PTC as advance payments sent directly to insurers, reducing monthly premiums, or claim it during tax filing to adjust tax liability. Most PTC benefits are through advance payments. In 2022, households earning below $50,000 received 75% of PTC distributions, with an average credit of $6,943.

Eligibility is limited to those with Marketplace health plans. Between 2015 and 2021, enrollment figures ranged from 11.4 to 12.7 million. After the income limit was removed, enrollment surged to 24.3 million by 2025. However, with the 2026 reinstatement of the prior income cap, these numbers are expected to decline.

Since its start, the PTC has become the fourth largest tax expenditure, significantly growing in fiscal impact. PTC expenditure rose sharply from $22 billion in 2015 to $54 billion in 2022, spurred by expanded eligibility and increasing healthcare costs. An upward trend in benchmark-plan premiums used in calculating tax credits has further driven up federal expenditures.

While PTC expenses have grown, they remain moderate compared to major health programs like Medicare and Medicaid, and smaller than costs for other tax exclusions such as employer-sponsored health insurance. Rising healthcare costs continue to concern federal budget planning and contribute to national debt growth. As policymakers consider future healthcare reforms, balancing these expenditures with economic implications remains essential.