Tax Software Update

Calculation of self-employed health insurance deduction & advance premium health credit:

TaxAct:   MAYBE(?). Calculates using IRS iterative calculation

TurboTax:  MAYBE (?). Calculates  using IRS iterative calculation

HRBlock:  FAIL.  After install of 2/12/15 update, software reports:

Since you’re claiming the ACA premium tax credit and the self-employed health insurance deduction, you’ll need to get our next update to complete our return.

You must fix this problem before filing.

Next expected update: March 12, 2015

(Based on individual, anecdotal reports. One user reports differing results from TaxAct vs. TurboTax)

A little bit of good news from IRS

Worried about paying a clawback?  If you received an Advance Premium Tax Credit to subsidize your health insurance in 2014, but then had an unexpectedly good year financially in 2014,  you may be required to pay all or part of the credit you received. However, IRS has announced that it will waive penalties for late payment for taxpayers who are otherwise current on their taxes and who file their returns on time — either April 15th or in October after filing for an automatic extension.   The waiver of penalties includes an extension of time to pay the clawback amount.   Interest will still be charged, so it’s advisable to pay by April 15, 2015 if possible; but this may be welcome news for taxpayers who did not anticipate the impact of the clawback amount.

Here’s what the IRS says:

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Tax Software — Fail?

I had assumed, apparently too optimistically, that the major tax prep software programs would be able to easily handle the problem of reconciling the self-employed health insurance deduction (line 29 on form 1040) with the premium tax credit calculation (form 8962).  After all, as complex as the IRS instructions may be, the actual calculation is simple math.   IRS regulations have now given clear guidance, with two methods for calculation, and this should be a fairly easy task to integrate into the program software.

Unfortunately, this does not appear to be the case.  I personally use H&R Block tax prep software and buy the “Premium” version which is advertised as best for self-employed.  But when I experimented with the program, I found it didn’t seem to be making any reconciliation at all.  Instead, the program was erroneously calculating the tax credit based on the MAGI with whatever value had been previously entered as the total self-employment premium, without making any adjustments as required by IRS.

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More on Self-Employed Health Deduction

Blogger Harry Sit has prepared a useful graphic illustration to show the difference, to the taxpayer, between using the IRS “iterative” vs. “alternative” calculation of the interplay between self-employed health insurance deduction and the premium tax credit for eligible taxpayers:

ACA Subsidy Calculation Comparison

For more detail, visit thefinancebuff.com

Self Employed Health Insurance Deduction – Alternative Calculation

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.”

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Self-Employed Health Insurance Deduction — the Iterative Calculation

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;

The IRS has figured out that the interplay between the ACA premium tax CREDIT and the self-employed health insurance DEDUCTION is “circular” –the amount of each is influenced by changes in the amount of the other.   IRS says that taxpayers can use any approach they choose to figure this out, but IRS suggests two possible approaches.  The first is called the “Iterative Calculation”

IRS says:

Specified premiums are premiums for a specified qualified health plan or plans for which the taxpayer may otherwise claim a deduction under § 162(l). A specified qualified health plan is a qualified health plan, as defined in §1.36B-1(c), covering the taxpayer, the taxpayer’s spouse, or a dependent of the taxpayer (enrolled family member) for a month that is a coverage month within the meaning of § 1.36B-3(c) for the enrolled family member

This means:

The SPECIFIED PREMIUM amount is the actual total premiums charged for health insurance coverage from a qualified health plan.  For our purposes we will assume a single taxpayer, buying insurance via an exchange, and that if the taxpayer paid the full cost of the premium, it would cost $8000 for a year of coverage.

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