I’ve encouraged many of self-employed clients to sign up for Obamacare over the past 2 years, particularly those whose “household income” on their tax returns can be reported at a level below 400% of the Federal Poverty Line ($62,920 for a family of two or $95,400 for four for 2015) which qualifies them for premium assistance, the Premium Tax Credit (PTC). Self-employed taxpayers have the advantage of being able to manipulate taxable income, sometimes quite a lot. For instance, different methods of depreciation are often available. Sometimes invoicing for some customers can be put off from one year to the next. Sometimes a bad debt might be written off or a taxpayer can dispose of a piece of machinery not being used to realize a Section 1231 loss. I’ve had a few clients set up Individual or One-Participant 401k plans on the chance that an extra 401k contribution at the end of the year could get them under the 400% limit. I also encourage many clients to use accrual accounting because of the flexibility it affords as compared to cash accounting. Some people might call all of this accounting trickery, but everything I’ve mentioned is perfectly above board. I call it tax planning.
The Obamacare law throws two more elements into the tax planning mix. The first, as I mentioned, is the PTC, which is quite substantial, depending on age and family size. The PTC can range from $2,000 or $3,000 for a single taxpayer all the way up to $10,000 or $12,000 for families, even if household income falls just a few dollars below the 400% or poverty line limit. The second element is the Self-Employed Health Insurance Deduction which is based, believe it or not, on the same health insurance premiums paid to qualify for the PTC. The deduction is what we call above-line, meaning that it’s used to determine AGI (as compared to itemized deductions, which aren’t). Because the Self-Employed Health Insurance Deduction reduces AGI, in effect it increases the PTC. So self-employed persons with Obamacare are potentially getting two tax breaks for the price of one.
Unfortunately, the Obamacare law was so poorly written that you can’t actually compute the Self-Employed Health Insurance Deduction in any reasonable way. The law creates a computation vicious circle — the deduction depends on the amount of PTC and the amount of PTC depends on the deduction. So the IRS eventually created two approximation methods for computing the deduction, the “Simplified Method” and the “Iteration Method”. These are published along with a series of worksheets in IRS Pub 974. Good Luck with them. I couldn’t figure them out. So I created my own more streamlined (it’s still 2 dense pages) version for the tax preparers in one of the offices where I work part-time. You can download it here and use it yourself if you wish. BY the way, don’t settle for the IRS Simplified Method – it’s the worst possible way to compute the deduction.
Note that if you are self-employed through a Sub-S corporation, what’s called a “more than 2% Subchapter S shareholder”, there are very specific rules for how Obamacare premiums are to be paid and how those premiums are to be treated on the company books and reported to the shareholder on W-2 forms.