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Rakhi Vasavada
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
Satisfied Customers: 2598
Experience:  Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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Looking to get an answer on tax credit for health insruance

Customer Question

Looking to get an answer on tax credit for health insruance for self employed
Submitted: 4 months ago.
Category: Finance
Expert:  Lane replied 4 months ago.

Hi. My name's Lane ... I can help with this

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I have a law degree, (Juris Doctorate), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986.

...

What's your question?

Customer: replied 4 months ago.
I am considering refiling my 2015 tax return - in that instead of deducting the entire amount of my health insurance, can I deduct a certain amount then get a tax credit - in reading thru the irs documentation it is not clear how much credit I could gain
Customer: replied 4 months ago.
the oddity I have is that my llc provided a significant loss that effected my agi, so going thru the irs 8962 form, its not clear how much I could get as a credit
Expert:  Lane replied 4 months ago.

I'll have to do some homework on that one. There is a self-employed health insurance tax DEDUCTION, (taken on line 29 of the 1040) but I'm not familiar with a self-emplpoyed health insurance tax CREDIT.

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See this from IRS:

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If you are self-employed, the IRS wants you to know about a tax deduction generally available to people who are self-employed.

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You may be able to take this deduction if one of the following applies to you:

  • You had a net profit from self-employment. You would report this on a Schedule C, Profit or Loss From Business, Schedule C-EZ, Net Profit From Business, or Schedule F, Profit or Loss From Farming.
  • You had self-employment earnings as a partner reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc.
  • You used an optional method to figure your net earnings from self-employment on Schedule SE, Self-Employment Tax.
  • You were paid wages reported on Form W-2, Wage and Tax Statement, as a shareholder who owns more than two percent of the outstanding stock of an S corporation.
Expert:  Lane replied 4 months ago.

Ahhh what you're talking about is the Advance premium tax credit that pays for your health insurance

Customer: replied 4 months ago.
Customer: replied 4 months ago.
which if I've already paid the premiums the law reads I can claim for some amount as a credit, not as a deduction (up to 50%)
but how to arrive at the amount is unclear
Customer: replied 4 months ago.
save time the law allows for self employed to apply for the credit, not just parties that pay monthly
Customer: replied 4 months ago.
Expert:  Lane replied 4 months ago.

That's right ... anyone that has income low enough can apply for adv premium credits ... and then if you're self employed, there may also be a deduction... but this gets into a circular logic problem that IRS has recently admitted and has provided guidance.

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Bear with me ... while I pull up the Revenue Procedure ....

Essentially there's a circular logic problem becasue BOTH the deduction AND the premium credit dependon AGI

Expert:  Lane replied 4 months ago.

In July 2014, the IRS released 26 CFR 601.105, in which they acknowledged the circular relationship between self-employed health insurance premium deductions, AGI, and premium tax credits:

“… the amount of the [self-employed health insurance premium] deduction is based on the amount of the … premium tax credit, and the amount of the credit is based on the amount of the deduction – a circular relationship. Consequently, a taxpayer eligible for both a … deduction for premiums paid for qualified health plans and a … premium tax credit may have difficulty determining the amounts of those items.”

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In the regulation, the IRS provides two methods that self-employed taxpayers can use to calculate their deduction and their subsidy.

...

Customer: replied 4 months ago.
to save
Customer: replied 4 months ago.
I paid about 7100 in health insurance
Expert:  Lane replied 4 months ago.

Did you see my post?

Expert:  Lane replied 4 months ago.

lets put aside the self-employed H.I deduction for a moment ... Was your income low enough to qualify FOR the tax credit?

Customer: replied 4 months ago.
116% due to a significant k1 deduction
Customer: replied 4 months ago.
of poverty line
Expert:  Lane replied 4 months ago.

Ok then we're back to the two methods:

...

Customer: replied 4 months ago.
I paid 7200 in premiums, the silver plan base line for my zip code is 7100
Customer: replied 4 months ago.
I read online that 50% of this could be converted into a credit instead of a deduction
Expert:  Lane replied 4 months ago.

No it's not that simple

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Again, In the regulation, the IRS provides two methods that self-employed taxpayers can use to calculate their deduction and their subsidy.

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In the regulation, the IRS provides two methods that self-employed taxpayers can use to calculate their deduction and their subsidy. The iterative calculation will result in a more exact answer, but it is a little more time-consuming to compute. The alternative calculation is less exact (and appears to favor the IRS just slightly), but less time-consuming and easier to calculate. You have your choice of which one you want to use, and tax software might have the calculations built in, which would make them both simple to use.

Customer: replied 4 months ago.
if I used tax software... then wouldn't be asking you...
Customer: replied 4 months ago.
can do most taxes by hand
Expert:  Lane replied 4 months ago.

Ok then go rread the rev provedure and start doing the iterating calculatoins

Customer: replied 4 months ago.
not helpful...
Expert:  Lane replied 4 months ago.

In a nutshell, both methods have you do the calculations repeatedly, getting ever-closer to the correct answer (that’s what iteration means). But while the iterative calculation has you keep going until the difference between successive answers is less than $1, the alternative calculation lets you stop sooner.

Customer: replied 4 months ago.
I am using form 8962 to calculate the credit
Expert:  Lane replied 4 months ago.

Please bear ewith me ... I'm trying to get there ... but this nis NOT simple

Expert:  Lane replied 4 months ago.

Yes, EVERYONE uses 8962 to calculate the credit

Customer: replied 4 months ago.
great - then lets focus on that
Customer: replied 4 months ago.
I have put in a poverty rate of 116% due to significant deduction in k1
Expert:  Lane replied 4 months ago.

you can't just start dropping numbers in ... you must do the calcultion before ever gettin to the form

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The easiest way to understand how the two calculations work is to start on page 9 of the regulation and work through the examples the IRS has provided. When they mention the “limitation on additional tax,” they’re just referencing the caps on how much you have to pay back when you file your taxes if it turns out that your advance subsidy (the amount sent to your health insurance company each month) was overpaid because your income ended up being higher than projected.

Customer: replied 4 months ago.
they didn't pay my health insurance company
Customer: replied 4 months ago.
can we focus on what I am asking...
Customer: replied 4 months ago.
please let me ask my question...
Expert:  Lane replied 4 months ago.

Doesn't matter ... i know that... you've said that several times ... but still you MUST go through the calculation to see how the two work together ...whether the credit was paid in advance or not

Customer: replied 4 months ago.
you are not willing to let me ask a question - ??
Expert:  Lane replied 4 months ago.

Ask your question...

Customer: replied 4 months ago.
Expert:  Lane replied 4 months ago.

What's your question?

Customer: replied 4 months ago.
Have already read thru the entire 8962 - the question is I have paid 7200 in premiums, I have applied the requested poverty rate, I read the healthcare.gov amount allowed for my zip code and marital status to be 7100
Customer: replied 4 months ago.
what I can't figure out is am I allowed to apply more than the 30 dollars a month that the poverty line calculation results in
Expert:  Lane replied 4 months ago.

YOu can't answer that question until you do the calculation I'm talking about ... you're getting the cart ahead of the proverbial horse

Customer: replied 4 months ago.
frankly am not - did the calculation...
Expert:  Lane replied 4 months ago.

This revenue procedure applies to a taxpayer who is allowed a deduction under § 162(l) for the taxable year for specified premiums, as defined in § 1.162(l)-1T(a)(2). This revenue procedure is intended to provide taxpayers with calculation methods that resolve the circular relationship between the § 162(l) deduction and the § 36B tax credit and that satisfy the requirements of applicable tax law

Expert:  Lane replied 4 months ago.

Which one iterative or simplified?

Customer: replied 4 months ago.
page 16 of the instructions says can take up to 50% of the premium paid as a credit
Customer: replied 4 months ago.
tried both simplified and iterative - both resulted in around 50%
Expert:  Lane replied 4 months ago.

that's just the overall limit ... has nothing to do with how the credit and the deduction must be coordinated

Customer: replied 4 months ago.
Obviously...
Expert:  Lane replied 4 months ago.

The premium subsidy is dependent on AGI. But if you're self-employed, AGI is dependent on the premium

Customer: replied 4 months ago.
already know that the amount of the deduction has to be reduced relative tot he amount of the credit
Expert:  Lane replied 4 months ago.

Which method did you use? Iterative or simplified?

Customer: replied 4 months ago.
but what is still not clear is why they are stating in one section that the limit I can get is 30 buck a month due to agi of 116% but then in the worksheet it says I can take 50%, so it not clear where to apply the 50%...
Customer: replied 4 months ago.
Expert:  Lane replied 4 months ago.

Are you talking about the small business tax credit?

Expert:  Lane replied 4 months ago.

Federal law gives a tax credit to eligible small employers who provide health care coverage to their employees( up to 50% of premiums paid)

Customer: replied 4 months ago.
if not able to get the question posed and an answer how do I resolve this session - ?
Expert:  Lane replied 4 months ago.

I tink you're confusing two different things... the small business tax cedit and the premium credit

Expert:  Lane replied 4 months ago.

I'll opt out and see if someone else can help

Customer: replied 4 months ago.
not employer... self employed... which the law covers...
Expert:  Lane replied 4 months ago.

The 50% credit of premiums paid is a credit for employers (small businesses) why pay for premiums for their employers.

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For tax years beginning in 2014 or later, there are changes to the credit:

  • The maximum credit increases to 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers.
  • To be eligible for the credit, a small employer must pay premiums on behalf of employees enrolled in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace or qualify for an exception to this requirement.
  • The credit is available to eligible employers for two consecutive taxable years.
Customer: replied 4 months ago.
not sure this working - have tried to explain my situation but don't seem to want to understand the situation to then arrive at a productive answer
Expert:  Lane replied 4 months ago.

I'm really having a hard time following you... you're questions don't really make sense to me ... I've done this calculation for many clients... and this 50% you keep mentionin is not a part of the calculation ... again I think you are confusing two differt tax laws. ... the 50% credit and the premium credit (which must be coordinated with the self-employed health insurance deduction ... again, becasue the premium subsidy is dependent on AGI. But if you're self-employed, AGI is dependent on the premium...

I'm opting out now ... good luck with it ... maybe comeone else can help

Customer: replied 4 months ago.
the detail you provide I have tried to communicate that I can't figure out which to use - the 50% or the agi amount - but since I already paid the premiums, then can't tell what I can get as a credit... but clearly your agressive and not willing to be clear in your communications, especially using all caps to be difficut
Expert:  taxmanrog replied 4 months ago.

Hi! My name is***** am a CPA with over 31 years' tax experience. I have a Master's in Taxation as well as a Master's in Accounting. I should be able to help you.

I think that the best way to answer your questions would be to actually enter your tax information into my tax program. Lane was correct in that the calculations have to be done. However, I have a very good (and very expensive) tax program that will calculate the "tax circle". So if you can give me your gross self-employment income, your K-1 information, and any other item of income (interest, dividends, gains, etc), the monthly premiums that you paid, and your city and ZIP code, I should be able to calculate the the deduction and the tax credit.

Thanks!

Roger