Source: https://obamacareguide.wordpress.com/2014/07/
Timestamp: 2018-07-22 06:38:13
Document Index: 189684946

Matched Legal Cases: ['§ 162', '§1', '§ 1', '§ 162', '§162', '§ 36', '§ 1', '§ 162', '§ 36', '§ 1', '§36', '§ 1']

July | 2014 | An Ad Hoc Guide to the Affordable Care Act
Self Employed Health Insurance Deduction – Alternative Calculation
This post is my continuing effort to translate an IRS regulation from legalese into English. The source document is here: 26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement;
This post won’t make any sense at all unless you read my previous explanation of the Iterative Calculation.
If you have read that post, you know that the problem, mathematically, is that calculation of the correct insurance premium tax credit together with the self-employed health insurance deduction creates a circular reference. As the CREDIT increases, the amount that might be claimed as a DEDUCTION for payment of premiums is reduced, but when the DEDUCTION is diminished, the MAGI is increased, which in turn reduces the amount of available CREDIT.
If a taxpayer has accepted and advance premium subsidy in excess of the amount of the actual CREDIT to which he is entitled, then the impact of clawback limitations may effectively prevent the need for repeat calculations.
But in the case of a taxpayer who has not taken the advance premium credits — or one who has accepted less money in advance payments than the amount allowed based on family income– an exact calculation when done by hand will require multiple repetitions until an exact figure is reached. The IRS “Iterative Calculation” requires that the taxpayer repeat the calculation until the difference between the new calculation and the previous result is less than $1. As IRS practice always allows for rounding of figures to the nearest dollars, this procedure will result in the taxpayer receiving the maximum possible credit mathematically.
However, IRS also sets forth an “Alternative Calculation”. I am not going to go through a step-by-step analysis of the Alternative, because the instructions are the essentially the same as what is printed on a shampoo bottle: “lather once, rinse, repeat.”
Self-Employed Health Insurance Deduction — the Iterative Calculation
The IRS has figured out that the interplay between the ACA premium tax CREDIT and the self-employed health insurance DEDUCTION is “circular” –the amount of each is influenced by changes in the amount of the other. IRS says that taxpayers can use any approach they choose to figure this out, but IRS suggests two possible approaches. The first is called the “Iterative Calculation”
Specified premiums are premiums for a specified qualified health plan or plans for which the taxpayer may otherwise claim a deduction under § 162(l). A specified qualified health plan is a qualified health plan, as defined in §1.36B-1(c), covering the taxpayer, the taxpayer’s spouse, or a dependent of the taxpayer (enrolled family member) for a month that is a coverage month within the meaning of § 1.36B-3(c) for the enrolled family member
The SPECIFIED PREMIUM amount is the actual total premiums charged for health insurance coverage from a qualified health plan. For our purposes we will assume a single taxpayer, buying insurance via an exchange, and that if the taxpayer paid the full cost of the premium, it would cost $8000 for a year of coverage.
Household Income and the Self-Employed Health Care Deduction
This post is my effort to translate an IRS regulation from legalese into English. It’s going to take a while. The source document is here: 26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement;
1. Some taxpayers are eligible to claim both a self-employed health insurance deduction and an insurance premium tax credit:
.03 Some taxpayers enrolled in a qualified health plan and eligible for the premium tax credit may also be allowed a deduction under § 162(l). Section 1.162(l)-1T of the Temporary Income Tax Regulations provides rules for taxpayers who claim a §162(l) deduction and also may be eligible for a § 36B credit for the same qualified health plan or plans. Under § 1.162(l)-1T(a)(1), a taxpayer is allowed a § 162(l) deduction for specified premiums not to exceed an amount equal to the lesser of (1) the specified premiums less the premium tax credit attributable to the specified premiums, and (2) the sum of the specified remiums not paid through advance credit payments and the additional tax imposed under § 36B(f)(2)(A) and § 1.36B-4(a)(1) with respect to the specified premiums after the application of the limitation on additional tax in §36B(f)(2)(B) and § 1.36B-4(a)(3)
If a self-employed taxpayer is eligible for an insurance premium tax CREDIT, then the amount of the DEDUCTION is calculated by subtracting the amount of the tax CREDIT from the maximum allowable DEDUCTION. Example: Taxpayer earns $40,000 and pays $8,000 for health insurance purchased from an exchange. If the calculation shows that the taxpayer is eligible for a $3000 premium tax credit, then the maximum allowable insurance deduction would $5,000.
If a self-employed taxpayer who bought insurance from an exchange has already received an ADVANCE CREDIT, and if that credit is more than the taxpayer is entitled to, then the maximum allowable DEDUCTION is equal to the sum actually paid out-of-pocket for the reduced premium, plus the sum of the total amount of any clawback tax owed because of the excess ADVANCE CREDIT payments. Example: Taxpayer claimed a credit based on an anticipated $40,000 income, but taxpayer in fact earned $70,000 in 2014. Taxpayer received $4500 in advance credits, and paid $3500 directly to the insurance company. Because of taxpayer’s higher income, no tax credit is allowed, and taxpayer owes an additional $4500 in taxes. However, that amount may be added to the out-of-pocket expenses to calculate the deduction — taxpayer then deducts the full $8000 deduction ($3500 paid in premiums plus $4500 of tax owed).
advanced tax credit, qualifying for subsidy, self-employment	Leave a comment