This post is my continuing effort to translate an IRS regulation from legalese into English. The source document is here: 26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement;
This post won’t make any sense at all unless you read my previous explanation of the Iterative Calculation.
If you have read that post, you know that the problem, mathematically, is that calculation of the correct insurance premium tax credit together with the self-employed health insurance deduction creates a circular reference. As the CREDIT increases, the amount that might be claimed as a DEDUCTION for payment of premiums is reduced, but when the DEDUCTION is diminished, the MAGI is increased, which in turn reduces the amount of available CREDIT.
If a taxpayer has accepted and advance premium subsidy in excess of the amount of the actual CREDIT to which he is entitled, then the impact of clawback limitations may effectively prevent the need for repeat calculations.
But in the case of a taxpayer who has not taken the advance premium credits — or one who has accepted less money in advance payments than the amount allowed based on family income– an exact calculation when done by hand will require multiple repetitions until an exact figure is reached. The IRS “Iterative Calculation” requires that the taxpayer repeat the calculation until the difference between the new calculation and the previous result is less than $1. As IRS practice always allows for rounding of figures to the nearest dollars, this procedure will result in the taxpayer receiving the maximum possible credit mathematically.
However, IRS also sets forth an “Alternative Calculation”. I am not going to go through a step-by-step analysis of the Alternative, because the instructions are the essentially the same as what is printed on a shampoo bottle: “lather once, rinse, repeat.”