Determining SE health insurance deduction with subsidy

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Topic Author
Sylvie
Posts: 49
Joined: Mon Aug 22, 2016 10:04 am

Determining SE health insurance deduction with subsidy

Post by Sylvie »

I'll have self-employment earnings this year. On my taxes, I'll want to deduct the health insurance premiums for my spouse and me -- i.e., I'll take the SE health insurance deduction.

I'll put the rest of my self-employment earnings into my SE 401(k). Doing so ensures that our income will be low enough for the subsidized marketplace health plan we're on in Massachusetts. It has an advance premium tax credit. My self-employment income is very unpredictable, and the subsidy is based on our predicted income for the year. If we guess too low, we have to correct it, and our premiums would increase. If we guess too high, we can correct it, but if we don't, then there's a reconciliation when we file our taxes, and we get back the premiums we overpaid. (This is the first year we're on the subsidized plan, so I haven't seen how that works in real life.)

If we do get back premiums we overpaid, what happens with the SE health insurance deduction I'd have already taken by then? E.g., let's say...
- I make $20K. We pay $3K in (subsidized) health insurance premiums, and take that as a $3k deduction. I put the other $17K into my SE 401(k).
- $20K is less income than we predicted, so our health insurance premiums should have totaled $1K instead. After we file our taxes, we get $2k back.
What happens with the extra $2k deduction I took?

I don't want to take less of a deduction than we should, but I don't want the paperwork hassle of getting some premiums back, and so having to amend our taxes to decrease our SE health insurance deduction. At that point, it would also be too late to shunt the self-employment earnings that we "used" to pay for health insurance premiums into the SE 401(k) instead -- the amount of those employee-side contributions need to be documented by the end of the year.

I'm thinking that maybe I should take a much lower SE health insurance deduction instead of what we actually paid, based on a low-ball guess of the premiums we'll end up having paid after any overpayment is refunded. I'd make a higher SE 401(k) contribution with the difference. Is that my best move, or is there a better way to deal with this?
vtMaps
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Location: central Vermont

Re: Determining SE health insurance deduction with subsidy

Post by vtMaps »

Your healthcare premiums that are deductible are not what you paid during the year... You won't know what SE healthcare premium deduction you can take until you know what you paid (after subsidies) for your healthcare insurance. You won't know that until you do your taxes. It's a complicated RECURSIVE formula.

So, do you taxes without taking the deduction. Then see what your premiums actually cost you after subsidies. Then you can take the SE healthcare premium deduction. That will lower your AGI which will increase your subsidy, which will lower your actual cost of the premiums. When your premiums are reduced, your SE healthcare premium deduction is reduced which raises your AGI.

Raising your AGI reduces your subsidies, which means you paid more for your healthcare premiums, which increases the SE healthcare premium deduction, which lowers the AGI.

Lowering your AGI will increase your subsidy, which will lower your actual cost of the premiums. When your premiums are reduced, your SE healthcare premium deduction is reduced which raises your AGI.

Raising your AGI reduces your subsidies, which means you paid more for your healthcare premiums, which increases the SE healthcare premium deduction, which lowers the AGI.

etc. What fun!

--vtMaps
Historical Fact: Justin Smith Morrill represented Vermont in congress, had a dog named 'Trump', and wrote legislation establishing the Land Grant Colleges.
Topic Author
Sylvie
Posts: 49
Joined: Mon Aug 22, 2016 10:04 am

Re: Determining SE health insurance deduction with subsidy

Post by Sylvie »

vtMaps wrote: Fri Nov 20, 2020 1:45 pm Your healthcare premiums that are deductible are not what you paid during the year... You won't know what SE healthcare premium deduction you can take until you know what you paid (after subsidies) for your healthcare insurance. You won't know that until you do your taxes. It's a complicated RECURSIVE formula.

So, do you taxes without taking the deduction. Then see what your premiums actually cost you after subsidies. Then you can take the SE healthcare premium deduction. That will lower your AGI which will increase your subsidy, which will lower your actual cost of the premiums. When your premiums are reduced, your SE healthcare premium deduction is reduced which raises your AGI.

Raising your AGI reduces your subsidies, which means you paid more for your healthcare premiums, which increases the SE healthcare premium deduction, which lowers the AGI.

Lowering your AGI will increase your subsidy, which will lower your actual cost of the premiums. When your premiums are reduced, your SE healthcare premium deduction is reduced which raises your AGI.

Raising your AGI reduces your subsidies, which means you paid more for your healthcare premiums, which increases the SE healthcare premium deduction, which lowers the AGI.

etc. What fun!

--vtMaps
Oh no, that's even worse than I thought! It makes sense, in an awful kind of way... The subsidy depends on what income is, and income depends on what the deduction is, and the deduction depends on what the subsidy is, in a vicious cycle. But then what do people in this situation actually DO? Am I allowed to make up a low-ball number for my health insurance premiums and deduct that instead of a higher amount I actually paid? Or can I count the subsidy overpayment I'm credited back in the year I receive it, instead of for the prior year?
J295
Posts: 2726
Joined: Sun Jan 01, 2012 11:40 pm

Re: Determining SE health insurance deduction with subsidy

Post by J295 »

IRS has guidance on this, and last year TurboTax did the calculation as part of its program. There was a post recently here that apparently the current TurboTax for 2020 still has some bugs in it it is not performing the calculation correctly.

viewtopic.php?f=2&t=330027
Topic Author
Sylvie
Posts: 49
Joined: Mon Aug 22, 2016 10:04 am

Re: Determining SE health insurance deduction with subsidy

Post by Sylvie »

J295 wrote: Fri Nov 20, 2020 4:23 pm IRS has guidance on this, and last year TurboTax did the calculation as part of its program. There was a post recently here that apparently the current TurboTax for 2020 still has some bugs in it it is not performing the calculation correctly.

viewtopic.php?f=2&t=330027
I see, thanks! I searched for the IRS guidance, and found this article and the IRS guidance itself. Looks like I won't be using the free Credit Karma tax software this year that I otherwise would, unless someone can confirm that it does this calculation.

One aspect I still don't understand is how I can contribute the rest of my self employment income to my SE 401(k). That amount has to be documented by the end of the year, but now I see it depends on a calculation that I can't do until I do my taxes. I guess I just have to contribute a couple thousand $ less than the amount I estimate I'd be able to? I guess once I find out the real number, I could then contribute the difference to an IRA instead, since that doesn't have the end-of-year documentation deadline.
HomeStretch
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Joined: Thu Dec 27, 2018 3:06 pm

Re: Determining SE health insurance deduction with subsidy

Post by HomeStretch »

Sylvie wrote: Fri Nov 20, 2020 4:52 pm One aspect I still don't understand is how I can contribute the rest of my self employment income to my SE 401(k). That amount has to be documented by the end of the year, but now I see it depends on a calculation that I can't do until I do my taxes. I guess I just have to contribute a couple thousand $ less than the amount I estimate I'd be able to? I guess once I find out the real number, I could then contribute the difference to an IRA instead, since that doesn't have the end-of-year documentation deadline.
If you are a sole proprietor, you may make a 2020 401k employee deferral election by 12/31/20 that will allow you to contribute up to the amount of your election by your 2020 tax return filing deadline, including extension, in 2021. As Plan Administrator, you retain the election form in your plan files in case you are asked for it by the IRS upon audit.
J295
Posts: 2726
Joined: Sun Jan 01, 2012 11:40 pm

Re: Determining SE health insurance deduction with subsidy

Post by J295 »

HomeStretch wrote: Fri Nov 20, 2020 6:39 pm
Sylvie wrote: Fri Nov 20, 2020 4:52 pm One aspect I still don't understand is how I can contribute the rest of my self employment income to my SE 401(k). That amount has to be documented by the end of the year, but now I see it depends on a calculation that I can't do until I do my taxes. I guess I just have to contribute a couple thousand $ less than the amount I estimate I'd be able to? I guess once I find out the real number, I could then contribute the difference to an IRA instead, since that doesn't have the end-of-year documentation deadline.
If you are a sole proprietor, you may make a 2020 401k employee deferral election by 12/31/20 that will allow you to contribute up to the amount of your election by your 2020 tax return filing deadline, including extension, in 2021. As Plan Administrator, you retain the election form in your plan files in case you are asked for it by the IRS upon audit.
And I believe you have until your tax filing deadline to make the employer side contribution.
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