Here’s an update on how different tax software handle the issue of self-employed health insurance deduction and the premium tax credit under the Affordable Care Act.
First a quick recap. If you are self-employed and you buy health insurance from the exchange under the Affordable Care Act, depending on your income, you may get both a tax deduction and a tax credit but you can’t double dip with the same premium dollars paid. Figuring out how much you can claim as a deduction versus how much as a credit requires some tedious number crunching best done by a computer. For more background please read:
- Circular Reference In Self-Employed Health Insurance Deduction Under Obamacare Premium Subsidy
- IRS Guidance On Circular Reference in Obamacare Premium Subsidy and Deduction
I was hoping that tax software would just take care of this, because tedious calculations with paper and pencil takes less than a second on a computer. By now tax software vendors all had their opportunity to issue updates to their software. Let’s see how they do on this task.
I used Example 2 in IRS Rev Proc 2014-41 as the benchmark. It’s a very straight forward case.
In 2014 a self-employed person bought the second lowest cost silver plan for her family of four from the exchange for $14,000 a year. She did not request any advance credit. Her income before considering the self-employed health insurance deduction was $82,425. The question is how much of the $14,000 she can take as a deduction and how much she can take as a credit.
H&R Block Desktop
I tried H&R Block desktop software first because I use it for my own tax return. I created the above scenario in a new return file. After I finished the Affordable Care Act part, I got this:
And again in its Accuracy Review:
H&R Block software basically gave up on this. If you go ahead and file anyway, your return will be wrong. It puts the entire $14,000 as a deduction, and it claims $7,678 as the premium tax credit, both of which are larger than you are allowed to take, making you underpay your taxes to the tune of $2,000. No doubt the IRS will have a serious issue with that.
[Update on Feb. 21, 2017: H&R Block software caught up. The 2016 version makes the correct calculation. See ACA Self-Employed Health Insurance In H&R Block Software.]
H&R Block Online
It’s the same situation with H&R Block Online. I got this in the Accuracy Review:
When I went through the part about self-employed health insurance again as instructed, I got:
Not supported in the program. Must pay extra $50 to work with a H&R Block professional.
I then turned to TaxACT because you can get a free download of the federal return program with no strings attached. If I’m going to file with TaxACT I will pay for the Deluxe edition, but for testing purpose I’m OK with the free program.
Surprisingly the free TaxACT did the job very well.
After entering self-employment income, I entered the 1095-A health insurance premium information in the premium tax credit section: how much was paid, how much was the cost of the second lowest cost silver plan, and how much advance credit was received. Then it gave me this:
It calculated the right split between the self-employed health insurance deduction and the premium tax credit. The deduction is now $7,147, not $14,000. The IRS had the correct credit as $6,849 in its example. TaxACT had it as $6,853 due to rounding.
I also tested TurboTax Online. I had to upgrade to TurboTax Home & Business for self-employment income. I did not enter health insurance premium as a business expense in the business section. There was a separate section for Health Insurance under Personal.
After entering the same 1095-A information, I checked a box to indicate that the health insurance was related to self-employment.
Then TurboTax did some number crunching and said:
This was the same number TaxACT got, off by a few dollars from what the IRS had in the example due to rounding.
Conclusion: The least expensive (free) edition of TaxACT handled the circular calculations easily. TurboTax Online also did it successfully but you have to upgrade to the more expensive Home & Business edition. H&R Block software gave up without trying in the 2014 edition (its 2016 Deluxe edition makes the correct calculation).