forum discussion on ACA premium subsidy and filing taxes

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go_mets
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forum discussion on ACA premium subsidy and filing taxes

Post by go_mets » Fri Sep 07, 2018 9:58 am

I think I filed my taxes incorrectly for 2015 with regards to figuring out the deduction for health insurance cost for the self-employed.


I have read in forum discussion on BH that it is an iterative process.
I cannot find the thread that discusses how to figure the deduction when filing taxes.
Can someone point me to it?
I don't use tax software.

Thanks in advance.


go_mets
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Re: forum discussion on ACA premium subsidy and filing taxes

Post by go_mets » Fri Sep 07, 2018 11:27 am

Thank you.

These two Financebuff articles ( https://thefinancebuff.com/irs-guidance ... ction.html ) + ( https://thefinancebuff.com/circular-ref ... bsidy.html ) discuss it but since I am not using a tax software, I am still confused by which lines on the tax forms I would be iterating.

I am especially confused by

Code: Select all

First you take the whole unsubsidized premium as a deduction. 
It gives you a tax credit, leaving the rest as your deduction. 
Taking the smaller deduction gives you a smaller tax credit. 
The alternative method just stops there.
Huh?



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J295
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Re: forum discussion on ACA premium subsidy and filing taxes

Post by J295 » Fri Sep 07, 2018 5:39 pm

Sorry I cannot help answer your question directly. We use tax software. You may find it a valuable and worthwhile expense. Since you are self-employed, you will need to familiarize yourself with the IRS guidance on reconciling the premium tax credit and the self-employed health insurance deduction. It is a circular calculation, and the service has issued guidance on this. The tax software accounts for it but if you are not going to use tax software you will need to understand the guidance and factor it in.

go_mets
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Re: forum discussion on ACA premium subsidy and filing taxes

Post by go_mets » Fri Sep 07, 2018 6:15 pm

J295 wrote:
Fri Sep 07, 2018 5:39 pm
Sorry I cannot help answer your question directly. We use tax software. You may find it a valuable and worthwhile expense. Since you are self-employed, you will need to familiarize yourself with the IRS guidance on reconciling the premium tax credit and the self-employed health insurance deduction. It is a circular calculation, and the service has issued guidance on this. The tax software accounts for it but if you are not going to use tax software you will need to understand the guidance and factor it in.
I found https://obamacareguide.wordpress.com/20 ... lculation/
and it seems to explain it a little bit better.

I wish there are tax forms where I can change a value on a line on Form 1040 and have everything be re-calculated! :happy
Tax software hides the process too much for me, but entering values in PDF and having to actually do the addition/subtraction is a pain.

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munemaker
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Re: forum discussion on ACA premium subsidy and filing taxes

Post by munemaker » Fri Sep 07, 2018 6:26 pm

go_mets wrote:
Fri Sep 07, 2018 6:15 pm

I wish there are tax forms where I can change a value on a line on Form 1040 and have everything be re-calculated!
Well why didn't you say so!

This will work for you:
https://sites.google.com/site/excel1040/

go_mets
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Re: forum discussion on ACA premium subsidy and filing taxes

Post by go_mets » Fri Sep 07, 2018 6:28 pm

munemaker wrote:
Fri Sep 07, 2018 6:26 pm
go_mets wrote:
Fri Sep 07, 2018 6:15 pm

I wish there are tax forms where I can change a value on a line on Form 1040 and have everything be re-calculated!
Well why didn't you say so!

This will work for you:
https://sites.google.com/site/excel1040/
wow!

thanks!

This should make the iterations a bit less painful.

J295
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Re: forum discussion on ACA premium subsidy and filing taxes

Post by J295 » Fri Sep 07, 2018 8:19 pm

See Rev Procs 2014-37 and 2014-41

And, curious on why you want to do this without a tax return program?

Were you not self-employed or not qualifying for the premium tax credits in 2016 and 2017?

go_mets
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Re: forum discussion on ACA premium subsidy and filing taxes

Post by go_mets » Fri Sep 07, 2018 8:32 pm

J295 wrote:
Fri Sep 07, 2018 8:19 pm
See Rev Procs 2014-37 and 2014-41

And, curious on why you want to do this without a tax return program?

Were you not self-employed or not qualifying for the premium tax credits in 2016 and 2017?
I printed out 2014-1
I like to learn the how versus just having the software do the work.


I misspoke. It was 2016 that I probably did not do it right.
I had minimal self-employment income in 2017. Mostly W-2.



.

J295
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Re: forum discussion on ACA premium subsidy and filing taxes

Post by J295 » Fri Sep 07, 2018 9:35 pm

Impressive. Best regards.

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tfb
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Re: forum discussion on ACA premium subsidy and filing taxes

Post by tfb » Sat Sep 08, 2018 11:09 am

go_mets wrote:
Fri Sep 07, 2018 11:27 am
These two Financebuff articles ( https://thefinancebuff.com/irs-guidance ... ction.html ) + ( https://thefinancebuff.com/circular-ref ... bsidy.html ) discuss it but since I am not using a tax software, I am still confused by which lines on the tax forms I would be iterating.

I am especially confused by

Code: Select all

First you take the whole unsubsidized premium as a deduction. 
It gives you a tax credit, leaving the rest as your deduction. 
Taking the smaller deduction gives you a smaller tax credit. 
The alternative method just stops there.
Huh?
Because I wrote those, may I ask how I can make it clearer to you, and perhaps others as well, besides pinpointing the exact tax form and the line numbers for the deduction and the premium tax credit?
Harry Sit, taking a break from the forums.

go_mets
Posts: 228
Joined: Wed Oct 21, 2015 11:49 am

Re: forum discussion on ACA premium subsidy and filing taxes

Post by go_mets » Sat Sep 08, 2018 3:38 pm

tfb wrote:
Sat Sep 08, 2018 11:09 am
go_mets wrote:
Fri Sep 07, 2018 11:27 am
These two Financebuff articles ( https://thefinancebuff.com/irs-guidance ... ction.html ) + ( https://thefinancebuff.com/circular-ref ... bsidy.html ) discuss it but since I am not using a tax software, I am still confused by which lines on the tax forms I would be iterating.

I am especially confused by

Code: Select all

First you take the whole unsubsidized premium as a deduction. 
It gives you a tax credit, leaving the rest as your deduction. 
Taking the smaller deduction gives you a smaller tax credit. 
The alternative method just stops there.
Huh?
Because I wrote those, may I ask how I can make it clearer to you, and perhaps others as well, besides pinpointing the exact tax form and the line numbers for the deduction and the premium tax credit?

..
Which tax form and which line numbers? I guess I am going blind!

text from the first link:

Code: Select all

Some of you may remember this post I wrote last year: Circular Reference In Self-Employed Health Insurance 
Deduction Under Obamacare Premium Subsidy. It pointed out a circular reference math problem between 
the premium subsidy under Obamacare and the health care premium deduction for the self-employed.

If you are self-employed, the health care premium is deductible, which lowers your MAGI, which 
potentially qualifies you for a premium subsidy, which lowers the amount you can deduct 
because you can’t double dip, which raises your MAGI and reduces your premium subsidy, which 
increases the amount you can deduct, and on and on.

The IRS issued guidance on this issue recently in Rev Proc 2014-41. First it acknowledged the circular reference problem:

Thus, the amount of the § 162(l) deduction is based on the amount of the § 36B premium tax credit, 
and the amount of the credit is based on the amount of the deduction – a circular relationship.

It confirmed iterations are the right way to solve it:

    … … If the change in either the § 162(l) deduction or the premium tax credit from 
    Steps 2 and 3 to Steps 4 and 5 is not less than $1, repeat Steps 4 and 5 (using amounts 
    determined in the immediately preceding iteration) until changes in both the § 162(l) deduction 
    and the premium tax credit between iterations are less than $1.
    
    For those who don’t want to do the math over and over, the IRS also gave an alternative method, 
    which basically stops after two iterations. Unfortunately, the alternative method gives you a lower 
    subsidy and a lower deduction. If you want the full credit, don’t be lazy — do the math!

Graphically speaking, the alternative method and the iterative method work like this, using 
one of the examples given by the IRS:


First you take the whole unsubsidized premium as a deduction. It gives you a tax credit,
 leaving the rest as your deduction. Taking the smaller deduction gives you a smaller tax credit. 
 The alternative method just stops there.

More iterations will drive up both your deduction and your tax credit. Eventually they converge. 
In the example given by the IRS, if you don’t do the extra iterations you will leave on the table 
$381 in tax credit plus $527 in tax deduction.

Iterations are easy to do for a computer. I expect the tax prep programs such as TurboTax, HR Block, 
and TaxACT will incorporate this when they come out later this year. It will be an interesting test
to see who’s on the ball, because not doing it the right way can mean a difference of $500 in how much tax you pay.

[Update:] Now we know which software programs took on the challenge and which dropped the ball. 
See Tax Software Bake-Off: Self-Employed Health Insurance and ACA Premium Tax Credit.

Reference: Rev Proc 2014-41, Internal Revenue Service



text from the second link:

Code: Select all

When you are self-employed, your health insurance premium is tax deductible above the line. 
If you are getting a premium subsidy tax credit when you buy insurance from the exchange under Obamacare, 
you can’t double-dip. You can only deduct the net, unsubsidized premium.

The subsidy of course depends on your MAGI, which depends on your above-the-line deductions. 
We have this nice circle going.

So how do you figure out how much you are allowed to deduct?

I don’t know whether the law or the regulations already spelled this out. Mathematically you can solve it by iteration.

You start out with the full health insurance premium as the tentative deduction (D0). 
It lowers your MAGI, which gives you a subsidy, which lowers your unsubsidized premium allowed as a deduction (D1).

Then you start reducing the tentative deduction D0, which increases your MAGI, which lowers your subsidy, 
which raises your allowed deduction D1. This narrows the gap between D0 and D1.

You do this over and over again until the two numbers D0 and D1 converge to the same value.

Here’s a math exercise for the numerically inclined:

Suppose your modified adjusted gross income before any self-employed health insurance deduction 
is $60k and it falls between 300% and 400% FPL for a family of two. Suppose the second least 
expensive Silver plan for you costs $9,600 a year and that’s also the plan you choose. How much
 of the $9,600 can you deduct? Remember the formula for the subsidy:

    Subsidy = Cost of 2nd least expensive Silver – MAGI * X%

This simple example can be solved algebraically. When that X% number depends on a lookup table, 
it gets more complicated.

Income 	Affordable Premium
up to 133% FPL 	2.0% of MAGI
133-150% FPL 	3.0 – 4.0% of MAGI
150-200% FPL 	4.0 – 6.3% of MAGI
200-250% FPL 	6.3 – 8.05% of MAGI
250-300% FPL 	8.05 – 9.5% of MAGI
300-400% FPL 	9.5% of MAGI
above 400% FPL 	full cost

It would still be very easy for a computer to get the answer by trial and error. I’m sure tax software 
will be able to do the iterations under one second. I don’t know how the IRS will come up with instructions for people to do it with pencil and paper though.

[Updates:] The IRS issued guidance on how to calculate the subsidy tax credit and the deduction. 
Read more in IRS Guidance On Circular Reference in Obamacare Premium Subsidy and Deduction. 
Some tax software programs incorporated the iterative calculations. 
See Tax Software Bake-Off: Self-Employed Health Insurance and ACA Premium Tax Credit.


Please point them out to me in either of the two links.



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tfb
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Re: forum discussion on ACA premium subsidy and filing taxes

Post by tfb » Sat Sep 08, 2018 5:30 pm

go_mets wrote:
Sat Sep 08, 2018 3:38 pm
Which tax form and which line numbers? I guess I am going blind!
I'm sorry I confused you again. My question wasn't rhetorical. From your earlier post in this thread, I already knew you were looking for the exact form and line numbers, which I didn't provide. I suspected there must be something else besides the form and line numbers that weren't clear. I was asking for your feedback.
Harry Sit, taking a break from the forums.

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