This post is my effort to translate an IRS regulation from legalese into English. It’s going to take a while. The source document is here: 26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement;
1. Some taxpayers are eligible to claim both a self-employed health insurance deduction and an insurance premium tax credit:
.03 Some taxpayers enrolled in a qualified health plan and eligible for the premium tax credit may also be allowed a deduction under § 162(l). Section 1.162(l)-1T of the Temporary Income Tax Regulations provides rules for taxpayers who claim a §162(l) deduction and also may be eligible for a § 36B credit for the same qualified health plan or plans. Under § 1.162(l)-1T(a)(1), a taxpayer is allowed a § 162(l) deduction for specified premiums not to exceed an amount equal to the lesser of (1) the specified premiums less the premium tax credit attributable to the specified premiums, and (2) the sum of the specified remiums not paid through advance credit payments and the additional tax imposed under § 36B(f)(2)(A) and § 1.36B-4(a)(1) with respect to the specified premiums after the application of the limitation on additional tax in §36B(f)(2)(B) and § 1.36B-4(a)(3)
If a self-employed taxpayer is eligible for an insurance premium tax CREDIT, then the amount of the DEDUCTION is calculated by subtracting the amount of the tax CREDIT from the maximum allowable DEDUCTION. Example: Taxpayer earns $40,000 and pays $8,000 for health insurance purchased from an exchange. If the calculation shows that the taxpayer is eligible for a $3000 premium tax credit, then the maximum allowable insurance deduction would $5,000.
If a self-employed taxpayer who bought insurance from an exchange has already received an ADVANCE CREDIT, and if that credit is more than the taxpayer is entitled to, then the maximum allowable DEDUCTION is equal to the sum actually paid out-of-pocket for the reduced premium, plus the sum of the total amount of any clawback tax owed because of the excess ADVANCE CREDIT payments. Example: Taxpayer claimed a credit based on an anticipated $40,000 income, but taxpayer in fact earned $70,000 in 2014. Taxpayer received $4500 in advance credits, and paid $3500 directly to the insurance company. Because of taxpayer’s higher income, no tax credit is allowed, and taxpayer owes an additional $4500 in taxes. However, that amount may be added to the out-of-pocket expenses to calculate the deduction — taxpayer then deducts the full $8000 deduction ($3500 paid in premiums plus $4500 of tax owed).