Self-employed Deduction/subsidy - Circular Relationship?

[dgoldenz]

Scenario: Family of 5, self-employed, income $110k based on prior year in which they had a $10k write-off for health insurance (i.e. $120k income, less $10k deduction = $110k).

For 2015, they get a $6k/year subsidy based on $110k reported income, thereby increasing their income to $116k (since they can only write off $4k instead of $10k). With income of $116k they are ineligible for subsidy. If they pay back subsidy, they can now take the full $10k deduction since they would have paid the entire premium, which puts them back under the limit and should re-instate the subsidy. How's this work?

I asked a couple CPA clients and none of them had any idea. Anyone tried to figure this on tax software yet? Maybe I should ask H&R Block on January 8th

 

[Ann H]

I think we talked about this issue in this thread http://www.insurance-forums.net/for...self-employed-lower-future-income-t70831.html.

The IRS rule is found here: http://www.insurance-forums.net/for...self-employed-lower-future-income-t70831.html

Basically, it is a circular problem as you said, and these rules show how you repetitively calculate it until you come to resolution.

If the client purchased insurance on the exchange, their CPA should be able to reconcile it. If they were allowed a subsidy, they will get it at tax time. At that point, they will also know how much self-employed tax deduction they can take.

 

[dgoldenz]

I think we talked about this issue in this thread http://www.insurance-forums.net/for...self-employed-lower-future-income-t70831.html.

The IRS rule is found here: http://www.insurance-forums.net/for...self-employed-lower-future-income-t70831.html

Basically, it is a circular problem as you said, and these rules show how you repetitively calculate it until you come to resolution.

If the client purchased insurance on the exchange, their CPA should be able to reconcile it. If they were allowed a subsidy, they will get it at tax time. At that point, they will also know how much self-employed tax deduction they can take.

The other post was a bit of a different issue. The APTC is paid directly to the carrier though....I would be curious to see some real world examples of how this works. None of the CPA's I've talked to had any clue about how this works. Wonder if tax software has this incorporated already?

 

[Yagents]

A dollar of tax credit is more valuable than a dollar income deduction. It is a full dollar vs value of your tax rate only.

If $10k total premium, and $5k is a.p.t.c., it is not counted as income for taxation or in m.a.g.i. calculation.

Self employed can take the other $5k of paid premium as a income tax deduction on 1040 line 29 if qualified, and it does reduce m.a.g.i for a.p.t.c. calculation

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Or, talk to H.R. Block

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I get it now. Ignore my post. Another 400% f.p.l. cliff problem

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This where u put the a.p.t.c amount into an h.s.a and arrive at same income level, and the amount is yours for life. Lots of my higher end 400% clients had to take h.s.a. to have this flexibility

 

[Ann H]

You are brilliant, Yagents.

 

[SouthernComfort]

Someone explain this to me PLEASE.

 

[Ann H]

Someone explain this to me PLEASE.

1. Self employed people can usually deduct the premium they pay for health insurance for themselves and their families. This lowers their MAGI income.

2. In this case, it lowered the client's MAGI income so much that he qualified for a subsidy.

3. BUT. The IRS only allows the tax deduction (mentioned in #1 above) for the part of the premium that YOU pay, not the subsidized portion. So, now his tax deduction goes down, and his MAGI income goes up.

4. Catch 22, his MAGI income went up to such a degree that he no longer qualifies for a subsidy.

So, Brilliant Yagents said he should go for the subsidy first, because it's better to take a tax CREDIT than a deduction. The way Yagents recommended doing that is contributing to an HSA, which lowers his MAGI. That way he gets the subsidy, and gets the SE premium tax deduction, and also has a MAGI low enough to qualify for the subsidy.