IRS Provides Two Optional Methods for SE Health Insurance Deduction
Self-employed farmers are allowed to deduct their health insurance premiums in arriving at their adjusted gross income (AGI). However, beginning in 2014, many of these same farmers will also be eligible for a premium tax credit based upon their income. The premium tax credit is on a sliding scale and phases out at a maximum of 400% of the federal poverty level. For larger families, the premium tax credit may apply with income approaching $100,000. Since most farmers have that genetic chip that does not allow them to pay much income tax, many farmers will qualify for the premium tax credit, however, this credit is based upon AGI; which is based upon the amount of allowed SE health insurance deduction; which is also affected by the allowed premium tax credit.
As you can see, this results in a circular function. The IRS realizes this and has just released Revenue Procedure 2014-41 to allow for two option methods in calculating both items. The methods are described in the revenue procedure and to outline each method is beyond the scope of this post. However, it is worth noting that the examples used in the post involves a family of 4 who obtain family coverage costing $14,000. After applying the methods contained in the procedure, the actual premium tax credit was approximately $7,000 with an allowed deduction of about $6,000.
Under the 2013 tax laws, the farmer would pay $14,000 and get a $14,000 deduction. Under the 2014 tax laws, the farmer only gets a deduction for $6,000, however, their out-of-pocket cash costs for health insurance is now approximately $7,000 instead of $14,000. Since they are most likely in the 15% tax bracket, the tax credit saves them about $6,000 overall.
Paul Neiffer, CPA
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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