How the Health Insurance Premium Assistance Tax Credit Impacts the Self-Employed Health Insurance Income Tax Deduction

Starting in 2014, taxpayers having household income below 400% of the Federal poverty line will receive a premium assistance tax credit if they purchase health insurance on a government health insurance exchange or marketplace.  Currently there is a legal challenge as to whether this credit is permitted if the purchase is made on the Federal exchange instead of on a State exchange (see my previous blog article for a brief description of the challenge).

Generally, self-employed individuals may deduct the cost of health insurance premiums as an adjustment for Adjusted Gross Income.  How is this deduction calculated if a premium assistance tax credit is received?  Surprisingly, the calculation is extremely complicated!  The deduction is limited to the lesser of:  1) the amount of the premiums paid less the premium credit claimed on the tax return, or 2) the sum of the premiums paid as reduced by an advance of the premium credit plus any required repayment of excess premium credits advanced once the income tax return is completed.  Many people ask for the premium assistance tax credit to be advanced in order to reduce their monthly premium cash expense.  Since the amount of the premium credit is based upon an estimate of AGI, a portion of the advance may be required to be repaid on the income tax return if the estimate of household income was too low.  Because household income is based upon modified AGI, and because AGI is reduced by the amount of the self-employed health insurance deduction, the amount of the premium tax credit changes based upon the amount of the deduction, and the deduction changes based upon the amount of the credit!  This is a circular calculation.

In Revenue Procedure 2014-41, the Internal Revenue Service provides instructions on how to compute the self-employed health insurance deduction as impacted by the premium tax credit.  The revenue procedure provides an iterative and an alternative calculation method in an attempt to resolve the circular computation.  Either method may be used.  Based upon the examples provided in the revenue procedure, the amount of the deduction and the amount of the premium credit may both be larger in many cases if the more complex iterative calculation method is used.  These complex calculations will require the use of a computer!  Thus, self-employed taxpayers who qualify for both the deduction and the premium tax credit will need good tax software and/or the services of a tax advisor in order to calculate the deduction and the credit.

Some Updates Regarding the Affordable Care Act

Several interesting developments regarding Obamacare occurred during July 2014.

Premium Tax Credit for Federal Exchanges

One of the primary features of the ACA is the establishment of so-called health insurance exchanges, now termed “marketplaces.”  The law contemplated that the marketplaces would be established by most of the States with a Federal backup for those States that did not establish their own marketplaces.  The reality is that 36 States chose not to establish their own exchanges requiring their citizens to purchase needed health insurance through the Federal exchange.  The ACA provides for substantial premium assistance tax credits to help make health insurance premiums affordable to lower income and middle class individuals and families.  These credits apply to taxpayers “enrolled through an Exchange established by the State” according to the statutory language.  The IRS interpreted this language to include Federal exchanges.  This interpretation was challenged in court and could affect an estimated 5 million people who are receiving the premium tax credit on the Federal exchange.

Two Federal Appeals Courts ruled on this challenge on July 22, 2014.  A three-judge panel of the District of Columbia Circuit Court ruled the IRS interpretation invalid with the consequence that the credits should not be available to those who enrolled through the Federal exchange.  The Fourth Circuit held that the IRS interpretation was consistent with congressional intent.  The conflicting opinions will need to be resolved by the U.S. Supreme Court.  The credit will remain in place for the Federal exchange until final resolution.  On August 1^st, the U.S. Justice Department asked the full District of Columbia Circuit Court to reconsider its opinion, which if it does, could delay the time that this matter will be heard by the U.S. Supreme Court.

Update:  the District of Columbia Circuit Court agreed on September 3, 2014, to rehear the case before the full court and vacated the earlier decision that would deny credits for those enrolling through a Federal exchange.

Second Update:  the U.S. Supreme Court agreed on November 7, 2014, to hear this matter.  If it rules that credits are not permitted for Federal exchanges, the decision could be the death knell for the ACA as health insurance would no longer be affordable by millions of people relying on the credits.

Draft Information Reporting Forms Released

On July 24, 2014, the IRS released drafts of the following information forms to report health insurance coverage:

·       Form 1095-B:  used by health insurance providers (including self-insured employers) to report monthly coverage of individuals.

·       Form 1095-C:  used by employers subject to the mandate to report the offering of health insurance to employees and to list the covered individuals.

·       Form 1094-B:  the transmittal form for submitting Forms 1095-B to the IRS.

·       Form 1094-C:  the transmittal form for submitting Forms 1095-C to the IRS; but this form also requires additional information pertaining to the aggregation of related employers and for indicating whether transition relief for 2015 applies (mid-sized employers having 50 to 99 full-time employee equivalents).

In addition, the IRS released a draft of Form 8965 that is to be used by individuals to report a marketplace-granted coverage exemption (e.g. premiums exceed 8% of household income) or a coverage exemption (e.g. a religious objection) from the individual mandate.  This form informs the IRS why the individual claims exemption from the penalty for not having minimum essential coverage health insurance.

2014 National Bronze-Level Premium Set for Individual Mandate Penalty

Unless an exemption applies, individuals and members of the individual’s tax household must be covered by minimum essential health insurance each month during 2014 or else pay a tax penalty for each month of non-coverage.  An exception is granted once each year for short periods of non-coverage that does not exceed three months.  The penalty is the greater of a flat dollar amount or a percentage of household income, not to exceed the national bronze-level premium amount.  Revenue Procedure 2014-46 sets the bronze-level national premium amount for 2014.  The annual penalty amount is calculated as follows.  Note, the amounts shown below are annual amounts; they should be converted to monthly amounts for purposes of computing the monthly penalty.

·       Flat dollar amount per adult age 18 and older: $95.00.  Flat dollar amount per child under age 18: $47.50.

o   The total flat dollar amount can’t exceed three times the per-adult penalty, so for 2014 the upper limit on the flat dollar amount is $285.

·       The percentage of household income (assessed on the amount in excess of the income tax return filing threshold amount) is 1%.

·       The national bronze coverage premium for each individual to be covered is $2,448 with the premium capped at $12,240 for a family with five or more members.