Certain individuals who purchase qualified health care coverage through an American Health Benefit Exchange located in their state of residence are entitled to a refundable income tax credit equal to the premium assistance credit amount.
In general, you may be eligible for the credit if you meet all of the following:
buy health insurance through the Marketplace;
are ineligible for coverage through an employer or government plan;
are within certain income limits;
do not file a Married Filing Separately tax return (unless you meet certain criteria, which allows victims of domestic abuse to claim the premium tax credit); and
cannot be claimed as a dependent by another person.
A self-employed individual may also be allowed a deduction for all or a portion of the premiums paid during the tax year for health insurance for the taxpayer, the taxpayer’s spouse, the taxpayer’s dependents, and any child of the taxpayer under the age of 27. This deduction is limited to the taxpayer’s earned income from the trade or business with respect to which the health insurance plan is established.
The taxpayer must know the allowable health insurance premium deduction to compute the premium tax credit because the health insurance premium deduction is allowed in computing adjusted gross income and the adjusted gross income is necessary to compute the premium tax credit. A taxpayer who is eligible for both the deduction and a premium tax credit may have difficulty in making the determinations of those items.
Therefore, the IRS has issued guidance that is intended to provide taxpayers with calculation methods that resolve the circular relationship between the deduction and the tax credit. This guidance includes a special section for taxpayers who have a premium assistance amount with coverage months for which no health insurance premium deduction is allowed.
The use of the calculations provided by the IRS is optional; a taxpayer may determine the amounts of the deduction and the tax credit using any method that satisfies the requirements of the applicable tax law and regulations. Your tax professional can help you determine how to get the greatest benefit from the deduction and credit available to you.