Self Employed With Advanced Credit - OH SHIT!

[BulldogTom]

I have tried to read Rev Proc 2014-41 and I guess I am stupid, cause I don't get it. 

 

TP is 63, Self Employed and draws SS.  Went to Covered CA and got coverage based on his income 2 years ago (No SS at that time and a bad year for a construction contractor).  They gave him an advanced PTC of $5,834.  Premium for the year is $6,179.  Income from SE is $31666 (the best year he has had since I got him as a client 5 years ago).  SS Gross amount is $19,764.  SE tax is $2,237.

 

I have the return almost done when the TP brings me the 1095A today.  I plug in the numbers on the 8962 and he has to pay back some of the credit.  OK, we expected that.  Then I go change the SE HI deduction based on the calc of the 8962, and he has to repay 100% OF THE ADVANCED PREMIUM TAX CREDIT.  His income is now more than 400% of income. 

 

So I heard about this situation in my update class, that it is a circular calculation and if you go to Rev Proc 2014-41 they tell you how to make the calculation.  I can't figure out what the Rev Proc is saying.

 

The problem is, the other moving number is the SS benefits.  So every time I move down the amount of the SE HI Deduction, more of the SS is taxable, which increases the income level to over 400% of the poverty level, which makes the whole credit go away.  But if the whole credit goes away, the taxpayer gets to deduct the entire amount of the premium tax credit that he gets to repay, making him below 4 times the poverty level and I start all over again.

 

Can someone explain Rev Proc 2014-41 to me?  Is there a formula that I can use?  Something that will get me to the final answer?  Please.

 

I just feel stupid.

 

Tom

Newark, CA

[jklcpa]

Tom, if you are using 2014-41 and the first method, the "iterative calculation", step 6 says that if repeat step 5 results in a difference in the SEHI and PTC of less than $1, then use the 162 deduction and the PTC with those specified premiums, but if the difference is more than $1, then basically it means that you have to keep playing with the amounts until you get the difference down to that $1 (basically fooling with the numbers until it works out). That is a maddening situation. If you can't get it to work, you are supposed to then use the second calculation in 2014-41.

 

Let me ask you this - does he have a retirement plan established for the business that he could contribute toward to alleviate this problem, or fund an IRA?  If he had a high deductible plan, he's still under the 65 age limit and could also still open and contribute to an HSA for 2014 up until 4/15 of this year. Any of those can be used to reduce AGI for a taxpayer that exceeds the MAGI and is in a situation where they might have to repay the advanced premium credit and haven't greatly exceeded the 400% of FPL amount that applies to them. Also, without repaying that advanced credit, if the return would otherwise show a refund, the refund could be used to help fund those contributions.

[jklcpa]

Is this person single with 1 exemption, and were his total premiums before the advanced credit the $6179?

[BulldogTom]

Is this person single with 1 exemption, and were his total premiums before the advanced credit the $6179?

Yes.  That is the amount on Line 33a of the 1095A. 

 

And I like your idea about the IRA.  I think he can use that.

 

I don't understand the alternative method.  I think I am going to read it one more time and then go to bed and see if I am smarter in the morning.

 

Thanks

 

Tom

Newark, CA

[jklcpa]

Ok, trying to make sense of the 2nd optional calc in 2014-41, the max sec 162 deduction would be $2,845. That is made up of the net out of pocket prem of $345 (after the advanced credit he received ) plus $2500, his max amount of the repayment. That much seems clear (ha!), and kind of makes sense that if he has to repay some of that credit, then he should be given the opportunity to use that as part of the sec 162 limitation. So, going with that assumption...

I think his MAGI and AGI would be :

 

SE income              31666

SEHI                        (2845)

SE tax                      (2036)

subtotal                   26785

SS inc @ gross       19746

MAGI =                    46531   exceeds 400% FPL and would eliminate him ever having qualified for the PTC

 

Actual - SE inc         31666

SS taxable                 6759

162 SEHI                  (2845)

1/2 SE tax                 (2036)

AGI                          33544

 

I think....  I did this on scrap paper by hand including the taxable portion of SS, all late night. Don't hold me to it and please recheck. It does appear though that this person would benefit by making a contribution to an IRA or HSA, at least enough to have the MAGI to not exceed the 400% FPL and possibly limit that payback. I didn't go any further to calculate the actual premium tax credit to see if this all proves out either.

 

I also started with the optional calculation since you said trying to use the iterative calculation wasn't working out, and I wasn't using a spreadsheet or program to easily plug in the continual changing of numbers to see if the differences were truly within $1. 

[BulldogTom]

Ok, trying to make sense of the 2nd optional calc in 2014-41, the max sec 162 deduction would be $2,845. That is made up of the net out of pocket prem of $345 (after the advanced credit he received ) plus $2500, his max amount of the repayment. That much seems clear (ha!), and kind of makes sense that if he has to repay some of that credit, then he should be given the opportunity to use that as part of the sec 162 limitation. So, going with that assumption...

I think his MAGI and AGI would be :

 

SE income              31666

SEHI                        (2845)

SE tax                      (2036)

subtotal                   26785

SS inc @ gross       19746

MAGI =                    46531   exceeds 400% FPL and would eliminate him ever having qualified for the PTC

 

Actual - SE inc         31666

SS taxable                 6759

162 SEHI                  (2845)

1/2 SE tax                 (2036)

AGI                          33544

 

I think....  I did this on scrap paper by hand including the taxable portion of SS, all late night. Don't hold me to it and please recheck. It does appear though that this person would benefit by making a contribution to an IRA or HSA, at least enough to have the MAGI to not exceed the 400% FPL and possibly limit that payback. I didn't go any further to calculate the actual premium tax credit to see if this all proves out either.

 

I also started with the optional calculation since you said trying to use the iterative calculation wasn't working out, and I wasn't using a spreadsheet or program to easily plug in the continual changing of numbers to see if the differences were truly within $1. 

Judy,

 

Why did you use $2500 as the max payback.  He is single and I think the max payback for a single person is $1250.  This is where I kept falling back into the over 400% trap.

 

And thank you so much for taking the time to work on this.  I appreciate you.

 

Tom

Newark, CA

Edited February 5, 2015 by BulldogTom

[jklcpa]

Judy,

 

Why did you use $2500 as the max payback.  He is single and I think the max payback for a single person is $1250.  This is where I kept falling back into the over 400% trap.

 

And thank you so much for taking the time to work on this.  I appreciate you.

 

Tom

Newark, CA

 

Errrg!  Tom, you are correct.    In my haste I looked at the wrong column. The max payback is the $1250, and that makes the max sec 162 deduction under the alternative formula #2 to be $1595...if *I'm * on the right track with this mess.  That will also raise his MAGI and AGI, so if trying to use the retirement contribution or HSA to get him below the 400% of FPL it will need a larger investment of funds.

[RitaB]

This is a beautiful thing.  Tom and Judy, you are both awesome.

[BulldogTom]

Update - I am back in the game again.

 

So, I still don't know the answer to the problem with the iterative method when it keeps bouncing back and forth.  I think it is an issue that the IRS has not contemplated, especially with the added confusion of the taxable part of SS changing.

 

Using the Alternative Method would have meant that the TP would have had to pay it all back, because if I am reading the Rev Proc 2014-41 correctly, you only do the entry one time and stop.  So that was not a good answer.

 

If I put a $2000 IRA contribution into the equation, I can use the iterative method and it actually was not bad.  I think it took me 3 turns through the changes and I got to even on the amount of the credit payback and the amount of the SE HI deduction.

 

Thank you Judy for that wonderful suggestion about contributing to an IRA.  It saved my client about 4K.

 

Tom

Newark, CA

[jklcpa]

That's great, Tom, and I'm glad to have helped both you and your client. That is a big savings to not have to pay with the added bonus of saving for retirement too.

[B. Jani]

Hi Tom & Judy:

I am also lost with the same problem. I know that there is no worksheet but would you be kind to list both way steps for (certainly my benefit) but the benefit of all the friends of the board. I heard that Drake as well as Turbo Tax and HR Block and Tax Act has some kind of worksheet for calculations.

Thanks in advance.

[BulldogTom]

B. Jani,

 

I will try to explain what I did, and try to interpret the rules as best I can, but as you can see from my expletive in the post name, I don't know it all.

 

The difference between the two methods as I understand it is very minor.  The alternative method is the same as the iterative method, but you just stop after the first calculation. 

 

In order to get the right answer, the entire front page of the return less the SE HI deduction and the 8962 must be complete.  You can play with the schedule A after the fact, but nothing that affects AGI.

 

Next, take the amount of out of pocket expense that the taxpayer paid out of pocket (Premium minus advanced credit from the 1095A), plus the amount of the max payback ($1250 or $2500 depending on filing status).  Enter this on the front of the 1040 as the SE HI deduction.

 

Then go to the 8962.  The software will have the MAGI calculated for you unless there is a family member whose income you are adding to get to family AGI.  In my case, this was a single TP, so it did not apply.

 

Once you have MAGI calculated, enter the information from the 1095A into the 8962.  At the bottom of the form, it will give you the amount the TP is required to repay.

 

If the amount is $1250 or $2500, you are done.

 

If the amount is less than those amounts, go back and add the out of pocket cost plus the amount just calculated on the 8962 to the SE HI Deduction on the front of the 1040.  This will change your MAGI on the 8962 (it will make the repayment amount higher, because the SE HI is less, bringing down MAGI).  ***STOP HERE if you are using the Alternative Calculation***  If you are using the iterative method, continue on.

 

Go back and keep changing the SE HI deduction amount (which will be a little larger every time because of the increased repayment amount) until the amount of the repayment does not change more than $1 on the 8962.

 

I hope this is helpful to you.  Let me know if you have any questions.

 

Tom

Newark, CA

[jklcpa]

Drake has general worksheets for the health care input and basic worksheets for the 8962 and 8965, but nothing that comes close to the calculations for this situation, at least not that I've found. As I said, I did all those calcs by hand on paper, and did make an error in looking up the one limitation. I didn't have the benefit of inputting the numbers into a return to see how the figures would change, so I was working only in theory.  Tom's client had the added complication of having a social security limitation in the mix as well. 

 

One thing that I spotted was that Tom's client had only exceed the 400% of FPL limitation by a small amount, relatively speaking. When that limit is exceeded, any chance of the subsidy is lost and would result in a repayment. That is when it can be extremely beneficial to consider the contribution to the retirement account or HSA that can be made up until April 15th that may remedy some of the situations where the client has the shared responsibility penalty.

 

 

If you don't have it, here's a link to Rev Proc 2014-41 with the 2 methods.  The method #2 (the alternative method) has some examples to try to clarify the calculations.  

[joanmcq]

I was having the same issue on my own return; I kept bouncing from having a 3k refund to owing that amount (I've received no advanced credit because when I got insurance I didn't think I was even in the ballpark for getting a subsidy). I figured next year if I am close, it is very easy to manipulate income when you are SE; sec 179, IRA, solo K contributions. Or just take a week of CPE at Disney World again :)

[B. Jani]

Thanks Tom & Judy. This is the English I understand now. At one time I was planning to claim the whole premium paid minus credit and let the IRS bounce it back with CP notice and deal with it. The problem is from 60k SE income with MFJ & 1 dependent, 11K out of pocket premium and 3k Credit from market place in NY. So playing with the formula the REG 14-41 explains is from 6+K refund to -3K pay back is crazy. I am not even sure IRS computer has some kind of cross check for SEHI for now. But then it becomes issue with wrong filing and possible preparer penalty. I am sure that I am having fun this year. All other cases of Shared responsibility is easy to work with so far but this SEHI seems like a BIG ONE.

Again Thanks for explaining in plain English. I appreciate it.

[BulldogTom]

I am glad this helped you.  I know what it feels like to be ready to throw up all over your computer when it is just not making sense.

 

Tom

Newark, CA

[carolynm]

I'm confused on the advance tax credit repayment addback. Would you use the table that limits repayment based on % of poverty income to calculate the addback? I'm doing a client who only has HI of $20000 so they're addback wold be 600? 

 

Would anything in the calculations be changed if the taxpayer paid 4 months of premiums outside of the exchange and then opted in?

 

So confused...

 

Carolyn

[carolynm]

In the case I'm working on now the couple is actually get additional PTC on form 8962 so I'm guessing I don't use and addback and subtract the additional PTC? I did this a couple of times until the figures matched..

[jklcpa]

Yes, the add back would be the $600 if they were below 200% of FPL and filing as any status other than single.  So the amount you should have started with for the initial calc would have been the out-of-pocket portion of the premiums your client paid plus the $600 and go from there.

 

As for your second post above, I don't think you need to do the calculations in 2014-41 if the taxpayer does not have any repayment of the subsidy he used during the year.  Is that how you ended up working it out?

[carolynm]

On the 2nd case I took premiums paid less advanced credit-additional credit calculated on return. And then that changed the return credit so reinput until credit claimed on Line 29 matched the Form 8962.

[BulldogTom]

On the 2nd case I took premiums paid less advanced credit-additional credit calculated on return. And then that changed the return credit so reinput until credit claimed on Line 29 matched the Form 8962.

I think you did it correctly. 

 

Tom

Newark, CA

[Margaret CPA in OH]

Oh my - my first client with ACA issues. She will be majorly upset owing the entire advance payment. I followed all the steps described here and with her MAGI of $66,000 I see no way to limit it. I believe she seriously underestimated her projected income the withdrew $29,000 from her pension plus received $9200 of disability for 2013 in 2014. Her percentage is 579%, well over the max of 400 to have a limit.

She was expecting a refund. Sigh...

[jklcpa]

Margaret, it looks like this person is single and needs about a $20K reduction to be below the 400% of FPL. There might be nothing to do, but is there any possibility that the pension distrib was late enough in Dec to still be within the 60 days to consider a rollover of enough funds?  If the person has a HD plan that would allow a contribution to an HSA, you could play with the figures to have a somewhat smaller rollover of the pension (if that is even still a possibility), and use the tax refund to partially or totally fund the HSA.  

 

When a person is closer to the FPL and has a large payback, retirement contributions and funding HSAs are an easy sell if they can afford it because they get to keep their money and save for retirement too.

[Margaret CPA in OH]

Thanks for all the great ideas. It is so aggravating that we have to be about manipulation, even within regs and rules, to this extent to have a more favorable outcome for clients.

Her distribution was in August so no 60 days. She wasn't covered in January as she says a computer glitch at the end of December or something made it effective in February. I see no way to get $20,000 reduction in income.

Yes, she is single, 62 and her 1095-A shows her premium of $656/mo and second lowest plan cost of $534 with $475 premium credit each month. I'm thinking it isn't close to a high deductible plan at that rate but will ask. And with her now owing so much (more than $4000, no refund) there is little chance of a retirement contribution or HSA.

And she will be unhappy about the time it is taking to do all this. I think she and I will just have to have a meeting and go over carefully the reasons why this is happening.

I hope this is the only one of these things I see. It took me by surprise because I thought she had other insurance. My brain hurts.

[joanmcq]

She screwed up when she put her income into the marketplace calculator. 66k is nowhere near the poverty level for a single person. Don't feel bad. She should have called you before she took out that pension distribution!

Oh, and yes, it's likely a high deductible plan. I'm only 54 and paying $598/mo. I'm on a silver plan.