If you lost your job due to foreign trade or are receiving a pension from the Pension Benefit Guaranty Corporation (PBGC), you might qualify for a valuable tax credit that covers 72.5% of your health insurance premiums. Form 8885 is how you claim this benefit. Here's everything you need to know about this specialized tax form.

What the Form Is For

Form 8885 allows eligible individuals to claim the Health Coverage Tax Credit (HCTC), a federal tax credit that pays 72.5% of qualified health insurance premiums. This means if you're eligible and pay $1,000 for health insurance, the government credits you $725.

The HCTC targets two specific groups: workers displaced by foreign trade and early retirees whose pension plans failed. Specifically, you might qualify if you're receiving Trade Adjustment Assistance (TAA), Alternative TAA (ATAA), or Reemployment TAA (RTAA) benefits, or if you're between ages 55-65 receiving pension payments from the PBGC because your employer's pension plan was taken over by the government.

The credit is remarkably generous—covering nearly three-quarters of premium costs—but it comes with strict eligibility requirements and detailed documentation rules. You can claim it for yourself and qualifying family members (spouse and dependents) who meet all the requirements. IRS Form 8885 Instructions

When You'd Use It (Late/Amended Returns)

You file Form 8885 with your regular tax return for the year you paid health insurance premiums. For 2018, this means attaching it to your 2018 Form 1040, 1040-NR, 1040-SS, or 1040-PR. The original deadline would have been April 15, 2019 (or October 15, 2019 with an extension).

Important: Even if you're filing years later, you must make your HCTC election by the tax return deadline (including extensions). The election cannot be made on an amended return filed after this deadline. If you participated in the advance monthly payment program (where the IRS paid 72.5% of your premiums directly to your insurer each month), you must file Form 8885 even if you can't claim additional credit. Failing to file means those advance payments become taxable income you must repay.

If you're filing an amended return using Form 1040-X to correct other issues on your 2018 return, you can only include Form 8885 if you're within the original filing deadline period (including extensions). Once that window closes, you cannot elect the HCTC for the first time on an amended return, though you can correct calculation errors on a previously filed Form 8885.

Key Rules for 2018

Several critical rules governed the HCTC in 2018:

Eligibility Requirements

As of the first day of each month you're claiming, you must have been an eligible TAA/ATAA/RTAA recipient or PBGC payee (or qualifying family member of someone who died or divorced you). You cannot be claimed as someone else's dependent, and you must meet all conditions listed on the form.

Employer Coverage Restriction

You cannot claim the credit for any month when you (or your spouse) were covered under employer-sponsored health insurance where the employer paid 50% or more of the premium. ATAA and RTAA recipients face even stricter rules—they're ineligible if the employer contributed anything at all or if they were merely eligible for employer coverage paying 50%+ of costs.

Medicare/Medicaid Exclusions

You cannot be enrolled in Medicare Part A, B, or C, Medicaid, CHIP, Federal Employee Health Benefits, or TRICARE for months you're claiming the credit. However, if you're enrolled in Medicare, you may still claim the credit for eligible family members for up to 24 months after your Medicare enrollment.

Qualified Coverage

Your health insurance must be "qualified" coverage, which includes COBRA continuation coverage, spouse's employer plan, non-group individual policies (not from Marketplaces), state-based coverage, or coverage through a VEBA established in bankruptcy. Marketplace plans don't qualify for HCTC in 2018, though you might claim the Premium Tax Credit for those separately.

The 72.5% Formula

The credit equals 72.5% of premiums you paid for qualified coverage. If you paid $10,000 in eligible premiums, your credit would be $7,250.

Step-by-Step (High Level)

Step 1: Determine Eligibility

Check whether you were an eligible TAA/ATAA/RTAA recipient or PBGC payee for each month. You'll need official documentation: a letter from the Department of Labor/state workforce agency (for trade-certified individuals) or Form 1099-R from PBGC (for pension recipients).

Step 2: Complete Part I – Make Your Election

Check the box for the first month you're electing to take the credit. All eligibility conditions must be true as of the first day of that month. Then check boxes for every subsequent eligible month. This election is binding—once you elect for a month, the election automatically applies to all later eligible months in 2018.

Step 3: Calculate Line 2 – Total Premiums Paid

Add up all premiums you paid directly to your health plan for eligible months. Don't include premiums paid to "US Treasury-HCTC" (the advance payment program), any amounts shown on Form 1099-H (advance monthly payments), or premiums you were reimbursed for via Form 14095.

Step 4: Subtract HSA/MSA Distributions (Line 3)

If you used Archer MSA or Health Savings Account money to pay premiums, enter that amount on line 3 and subtract from line 2 to get line 4.

Step 5: Calculate the Credit (Line 5)

Multiply line 4 by 72.5% (0.725). However, if you received advance payments for ineligible months (months not checked on line 1), you must use the Excess Advance HCTC Repayment Worksheet to calculate any repayment owed, which reduces your credit.

Step 6: Gather Required Documentation

Attach proof of eligibility (official letters), copies of health insurance bills showing your name, plan name, premium amounts, coverage dates, and plan ID numbers, plus proof of payment (cancelled checks, bank statements, credit card statements) for every month claimed on line 2.

Step 7: Transfer to Main Return

Enter the line 5 amount on Schedule 5 (Form 1040), line 74 (checking box c), or the appropriate line on Form 1040-NR, 1040-SS, or 1040-PR.

Common Mistakes and How to Avoid Them

Mistake #1: Claiming Months with Employer Coverage

Many taxpayers incorrectly claim months when they (or their spouse) had employer-sponsored insurance covering 50%+ of costs. Always check coverage status as of the first day of each month. Pre-tax contributions count as employer-paid amounts, so if you and your employer together contributed through payroll deduction, the entire amount is considered employer-paid.

Mistake #2: Missing Required Documentation

The IRS will disallow your entire credit if you don't attach complete documentation. Use the checklist: eligibility letter, insurance bills for each month, and proof of payment. If your insurer doesn't issue monthly bills, get an official letter from them with all required information (your name, plan name, monthly premium, coverage dates, plan ID).

Mistake #3: Including Advance Payments on Line 2

If you participated in the advance monthly payment program, don't include those months' premiums on line 2—you already got the benefit. Only include amounts you paid directly to your health plan out-of-pocket. Check Form 1099-H to see which months had advance payments.

Mistake #4: Forgetting to File When Using Advance Payments

Even if you owe no additional tax and can't claim more credit, you must file Form 8885 if you received advance payments. Not filing means those advances become taxable and you'll owe additional tax.

Mistake #5: Claiming Marketplace Coverage

Qualified health plans from Healthcare.gov or state Marketplaces don't qualify for HCTC. You might be able to claim the Premium Tax Credit for Marketplace coverage, but not HCTC. If you had both types of coverage in different months (or for different family members), you can claim both credits appropriately, but follow the special coordination instructions in the Form 8962 guidance.

Mistake #6: Including Ineligible Premiums

Separate dental or vision insurance doesn't count. Only include comprehensive health coverage premiums. If your bill bundles dental/vision into one comprehensive package and it's not substantially all excepted benefits, the whole package may qualify.

What Happens After You File

Processing Timeline

The IRS processes Form 8885 along with your main tax return. Expect normal refund timing if you're owed money—typically 21 days for e-filed returns with direct deposit, longer for paper returns.

Credit Application

The HCTC reduces your tax liability dollar-for-dollar. If your credit exceeds your tax owed, you typically receive the difference as a refund (it's a refundable credit). The credit appears on Schedule 5 of your Form 1040 and flows through to reduce your total tax.

Verification and Audits

Because documentation requirements are strict, the IRS may request additional verification. Keep all supporting documents (letters, bills, payment records) for at least three years after filing. Common verification requests include proof that employer coverage didn't exceed the 50% threshold or clarification about coverage periods.

Advance Payment Reconciliation

If you received advance payments via Form 1099-H, the IRS reconciles what you received against what you were entitled to. Excess advance payments (for ineligible months) must be repaid as additional tax, calculated using the Excess Advance HCTC Repayment Worksheet. The repaid amount shows as additional tax on your return.

Future Year Planning

If you remain eligible in subsequent years, you can continue claiming HCTC (the credit was extended through 2020 for 2018 filers). The advance payment program allows future-year participants to have the IRS pay 72.5% of premiums directly to insurers monthly, with only end-of-year reconciliation needed.

FAQs

Q1: Can I claim HCTC for my family members even if they have separate insurance?

Yes. You and your qualifying family members don't need to be on the same policy. As long as each family member meets all eligibility requirements (not on Medicare, Medicaid, CHIP, FEHBP, or TRICARE, and you paid for qualified coverage), you can include their premiums on line 2.

Q2: What happens if I got divorced or my spouse died during 2018?

If you were a qualifying family member of an eligible TAA/ATAA/RTAA recipient or PBGC payee who died or divorced you, you become the recipient and can claim HCTC in your own name for up to 24 months after the death/divorce. You must have been a qualifying family member immediately before the event. File Form 8885 under your own name and Social Security number.

Q3: Can I claim both HCTC and the Premium Tax Credit?

Not for the same coverage in the same month. However, you can claim HCTC for yourself (say, for COBRA coverage) and Premium Tax Credit for family members' Marketplace coverage in the same month. You can also claim HCTC some months and PTC other months for the same person if coverage types changed. Follow the special coordination instructions when completing Form 8962.

Q4: I paid my premiums, but my employer reimbursed me later. Can I still claim HCTC?

It depends on timing. If you paid the premium and claimed HCTC, then got reimbursed in a later year, you may need to repay the HCTC by reducing your credit in the reimbursement year. If the employer reimbursement happened before you filed your return, don't include that reimbursed amount on line 2.

Q5: What if I started Medicare Part A in the middle of 2018?

You cannot claim HCTC for any month you were enrolled in Medicare Part A, B, or C. However, you can still claim credit for eligible family members for up to 24 months after your Medicare enrollment, as long as they meet all other requirements.

Q6: Do I need to claim HCTC for every eligible month?

No. You elect when to start the credit by checking the first month on line 1. Once you elect, the election automatically applies to all subsequent eligible months, but you don't have to start in January—you can choose to begin in any eligible month. This might matter if you want to time your credit for maximum tax benefit.

Q7: What counts as "paying 50% or more of the cost" for employer coverage?

This includes the employer's direct premium contributions plus any pre-tax payroll deductions you make. For example, if monthly premiums are $800, you contribute $300 pre-tax through payroll deduction, and your employer pays $500, the employer is considered to have paid 100% (not 62.5%) because your pre-tax contribution counts as employer-paid. This rule disqualifies you from HCTC for that month.

Additional Resources

• Form 8885 (2018)
• Instructions for Form 8885 (2018)

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