IRS issues guidance on health insurance premium tax credits


Allocation of credit, abused spouses, and self-employed taxpayers are among issues addressed.

The IRS issued regulations and revenue procedures addressing how to calculate the Sec. 36B premium tax credit (subject of the lawsuits discussed in the previous item), including how the credit is calculated in conjunction with the Sec. 162(l) deduction for health insurance premiums of self-employed individuals. The temporary regulations also provide rules for taxpayers who are victims of domestic abuse to claim the tax credit on a separate return, and add a provision for abandoned spouses. (Identical proposed regulations were also issued.)

Computing and allocating the credit. To compute the premium tax credit, a taxpayer determines his or her contribution amount by multiplying an applicable percentage by the taxpayer’s household income. These amounts are adjusted to reflect the excess of the rate of premium growth over the rate of income growth for the preceding calendar year. Sec. 36B(b)(3)(A)(ii) does not specify what measures should be used for premium growth and income growth. The regulations and Rev. Proc. 2014-37 describe the measures to calculate premium and income growth. However, the IRS is asking for comments on whether the method it has adopted is appropriate and whether other methods should be used.

Under the premium tax credit rules, when taxpayers file their income tax returns, they must reconcile advance payments of the credit that they receive to pay for health insurance during the year with the amount of the final credit they qualify for. The temporary regulations provide rules to determine the premium tax credit and reconcile advance credit payments when an individual is enrolled by one taxpayer but another taxpayer claims a personal exemption deduction for the individual. The premiums and any advance credit payments are allocated between the enrolling taxpayer and the claiming taxpayer using an allocation percentage. The two taxpayers can agree to any allocation percentage between zero and 100%. The temporary regulations also provide an alternative calculation that is used to determine each taxpayer’s benchmark plan premium when advance credit payments are allocated, using the same allocation percentage.

Taxpayers who divorce during a plan year must similarly allocate the benchmark plan premium, the premium for the plan in which the taxpayers and their dependents enroll, and the advance credit payments for the period the taxpayers are married during the tax year. They may allocate the credit as they agree (e.g., 40%/60%). If they do not agree, the rules require a 50%/50% split. There are also special rules that apply to reconcile credits claimed by abused or abandoned spouses.

Treating abused taxpayers as unmarried. Sec. 36B(c)(1)(C) requires taxpayers who are married (as defined in Sec. 7703) at the end of the tax year to file a joint return to qualify for the credit. Sec. 7703(b) contains a general exception from the requirement that married taxpayers file jointly or separately by treating as unmarried taxpayers who live apart from their spouses for the last six months of the year, file a separate return, maintain a household that is the abode of a dependent child for more than half of the year, and provide over half the cost of that household for the tax year.

The IRS recognized earlier that many abused spouses could not meet these requirements and issued relief for 2014. The new temporary rules in this regard are similar to those applying to innocent spouses. Domestic abuse is defined to include physical, psychological, sexual, or emotional abuse, including efforts to control, isolate, humiliate, and intimidate, or to undermine the victim’s ability to reason independently, and all facts and circumstances are considered in determining whether an individual is abused.

The regulations permit victims of spousal abandonment to claim the credit on a separate return. A taxpayer is defined as abandoned by his or her spouse, if, taking into account all the facts and circumstances, the taxpayer is unable to locate his or her spouse after reasonable diligence. A taxpayer who qualifies for relief as a victim of domestic abuse or abandonment may claim the relief only for a three-year period.

Interaction between Secs. 162(l) and 36B. The regulations and Rev. Proc. 2014-41 address the interaction between the above-the-line deduction under Sec. 162(l) for premiums for health insurance coverage and the Sec. 36B premium tax credit that self-employed taxpayers may also qualify for. Under the rules, a taxpayer is allowed a deduction under Sec. 162(l) for health insurance premiums not to exceed the lesser of (1) the premiums less the premium tax credit attributable to the premiums and (2) the sum of the specified premiums not paid through advance credit payments and the additional tax imposed (if any) under Sec. 36B(f)(2)(A) for excess advance payments on the premiums after applying Sec. 36B(f)(2)(B), which provides a limit on the amount of advance credit payments taxpayers have to repay, depending on their income level.

The regulations and Rev. Proc. 2014-41 apply to tax years beginning after Dec. 31, 2013. Rev. Proc. 2014-37 applies to tax years and plan years beginning after Dec. 31, 2014.

- T.D. 9683, REG-104579-13, Rev. Proc. 2014-37, and Rev. Proc. 2014-41

By Sally P. Schreiber, J.D., a JofA senior editor.


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