Take Subsidy As Tax Credit for Self-employed to Lower Future Income?

[dgoldenz]

Was thinking about this yesterday - if you are self-employed and can deduct your entire cost of health insurance on your taxes, wouldn't you be better off paying the health insurance cost up front and taking the subsidy as a tax credit? Example:

Person A earns $60k/year and has a $10k/year health insurance expense. They qualify for subsidy of $9k/year and write off $1k/year on their taxes, reducing their 2015 income to $59k.

Person B earns $60k/year and has a $10k/year health insurance expense. They qualify for subsidy of $9k/year, but elect to take the subsidy as a credit on their tax return. They write off $10k in health insurance costs, reducing their income to $50k, qualifying them for an even larger subsidy the following year, and they still get a $9k tax credit.

Am I missing something here?

 

[AllenChicago]

Elegantly simple, assuming that health insurance premiums are 100% deductible, and the insured is within the subsidy-eligible income range.

I'll be watching this thread. Good thinking DGoldenz. Input like yours makes this forum soooo valuable.
ac

 

[Yagents]

I'm going to take a WAG, and assume like everything else, you can't "double dip", meaning take a tax deduction and take APTC on same dollars.

Ex: HSA - you can't reimburse costs that are reimbursed by 3rd party MM or indemnity policy.

HSA - can't itemize expense and HSA same expense.

 

[dgoldenz]

One of my CPA clients just sent me this link - http://www.irs.gov/pub/irs-drop/rp-14-41.pdf

Hard to decipher with the references to IRS code, I'll have to look at it later. Apparently this was just released a couple weeks ago.

 

[Ann H]

...qualifying them for an even larger subsidy the following year, and they still get a $9k tax credit.

Am I missing something here?

Reducing their income in 2014 will not help them qualify for a larger subsidy in 2015, because 2015 subsidy is based on 2015 income. If they get the $9,000 refund in 2015, it could work against them.

 

[RayNY]

dgoldenz, I think that link you posted is exactly what we're looking for.

I'm no accountant, so take this with the "not an expert, not legal advice, consult a CPA or lawyer before trusting my words" disclaimer, but:

Section .03 states "Some taxpayers enrolled in a qualified health plan and eligible for the premium tax credit may also be allowed a deduction under S 162(I)" implying yes, you can get the deduction and an APTC.

162(I) is the self-employed health insurance cost deduction, for reference.

It goes on to specify the limits for this deduction with respect to premium tax credit:

Deduction is "...not to exceed an amount equal to the lesser of (1) the specified premium less the premium tax credit...and (2) the sum of the specified premiums not paid through APTC's and the additional tax imposed under (some additional sections)."

Moral of the story, it looks like Self Employed can deduct premium expenditure in accordance with 162(I), but it's limited to the post-APTC premium, not the total premium, even if you choose to pay in full and take the APTC at a later date.

Assuming my interpretation is correct, it seems like a pretty reasonable solution, but the loophole posed in the OP appears to be closed. Like the other posters mentioned, it doesn't appear that you can "double dip".

 

[Ann H]

It gets pretty complicated. The basic problem is that taking the self-employed tax deduction lowers your MAGI upon which subsidy is based, and the subsidy lowers your self-employed tax deduction upon which AGI is based - a circular problem. They state it pretty well as:

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. Consequently, a taxpayer eligible for both a §162(l) deduction for premiums paid for qualified health plans and a § 36B premium tax credit may have difficulty determining the amounts of those items​

So, they have a couple of solutions! hahaha. Get a load of this:

Iterative calculation
(1) Step 1: Determine adjusted gross income, modified adjusted gross income, and household income by taking a § 162(l) deduction for the amount of specified premiums after applying the limit in section 5.03;
(2) Step 2: Compute the premium tax credit using the adjusted gross income,
modified adjusted gross income, and household income determined in Step 1;
(3) Step 3: Determine the § 162(l) deduction by subtracting the Step 2 premium tax credit amount from the specified premiums and then applying the limit in section 5.03;
(4) Step 4: Compute the premium tax credit using the adjusted gross income, modified adjusted gross income and household income determined by taking into account the § 162(l) deduction in Step 3;
(5) Step 5: Repeat Step 3 by substituting the Step 4 premium tax credit for the Step 2 premium tax credit.
(6) Step 6: If changes in both the § 162(l) deduction and the premium tax credit from Steps 2 and 3 to Steps 4 and 5 are less than $1, use the section 162(l) deduction and premium tax credit amounts for the specified premiums determined in Steps 4 and 5. 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​

hahaha. That's funny. And they thought the website was the only ridiculous problem!

It reminds me of a dance we did in Jr. High School. One step forward, 2 back, 1 forward, 2 back, until you circle around the room and wind up where you started.

I can't wait until TaterPeeler sees this. Can you imagine estimating the client's MAGI, then the subsidy, then the MAGI again, then the subsidy, then the MAGI again..... ad nauseum, until you come to less than $1 difference since the last time you did it? LOL.

 

[AllenChicago]

Oh well...this thread was fun while it lasted. Thanks Ann for removing another potential "loop-hole" from our arsenal, LOL.

I guess the only good one available (until it's closed) is the non-clawback for those who estimate over 100%/138% of FPL, but end up under 100% or 138% of FPL.

 

[Yagents]

Some get technical, and some just answer the question quickly in post #3.