Many self-employed business owners buy health insurance through the ACA marketplace (healthcare.gov or a state-specific exchange). If your income qualifies for a subsidy, the exchange will pay part of the premium directly to the insurance company.
However, the advance subsidy is only an estimate based on the income estimate you provided when you signed up. As self-employed people know full well, the actual income from self-employment can vary greatly from year to year. After the year is over, you have to square up and calculate the actual subsidy you really qualify for. If your business didn’t do as well as you anticipated, you may qualify for more subsidy. If you had a great year, you may have to pay back some of the advanced credit.
If you’re self-employed, you also qualify for a tax deduction for the health insurance premium. If you qualify for both a subsidy and a deduction, they form a circular relationship. The IRS prescribed a method to calculate the split between the subsidy and the deduction. It’s difficult to calculate by hand but tax software will take care of it for most people. Here’s how to do it in TurboTax.
I will use this simple example with TurboTax Deluxe downloaded software. The downloaded software is way better than online software. If you haven’t paid for your TurboTax Online filing yet, you can buy TurboTax download and switch from TurboTax Online to TurboTax download.
You are single, self-employed, with no dependent. You had health insurance through the ACA exchange for all 12 months in the year. The second lowest cost Silver plan was $600/month. The full unsubsidized premium for the plan you chose was $500/month. Based on your estimated income, you got a $150/month advance credit. You paid net $350/month. After deducting your business expenses, your income from self-employment was $45,000 for the year. You don’t have any other income or deductions.
Under Federal Taxes -> Deductions & Credits, scroll down and find Affordable Care Act (Form 1095-A).
Enter the monthly premiums from your Form 1095-A. It’s tedious to repeat for all 12 months but you have to do it. The first column is the full unsubsidized monthly premium for your plan. The middle column is the full unsubsidized premium of the second lowest cost Silver plan, which is used to calculate your subsidy. The last column is the advance subsidy the ACA exchange already paid directly to the insurance company.
This is important but easy to miss. Even though TurboTax knows you’re self-employed and you have the 1095-A form from the ACA exchange, you still must check the box.
Associate the health insurance with your self-employment and say during which months it applied. If you have more than one Form 1095-A, repeat and add them all. We only have one in our example.
TurboTax crunches the numbers in a split second. It says we’re eligible for more tax credit than the ACA exchange already paid directly to the insurance company. We’ll get the difference in our tax refund. If you qualify for less subsidy than the advance already paid, you’ll pay back the difference, subject to a cap (see Cap On Paying Back ACA Health Insurance Subsidy Premium Tax Credit).
To see your self-employed health insurance deduction, click on Forms on the top right. Find Schedule 1 in the left navigation pane. Look at Line 16. It shows we are getting a $2,633 tax deduction for health insurance.
To see the subsidy you qualify for based on your actual income, find Form 8962 in the forms list navigation pane. Look at Line 24. $2,633 in self-employed health insurance tax deduction plus $3,367 in premium tax credit equals $6,000 ($500/month), which is the full unsubsidized premium for our health plan (plus any dental and vision insurance premium, which we didn’t have in our example). The numbers add up! TurboTax figured out the split between the tax deduction and the tax credit. It also matched the result from H&R Block software for the same example.
TurboTax works for most cases but it doesn’t work for everyone. You know you’re running into one of the edge cases for which the software doesn’t work when the numbers from the software fail this equation (except for a small difference due to rounding):
Self-Employed Health Insurance Deduction + Premium Tax Credit = Unsubsidized Health Insurance Premium (including any dental and vision premiums)
When this happens, you need a better calculator. See When TurboTax and H&R Block Give Self-Employed Wrong ACA Subsidy.