ACA premium credit applied before lifetime learning credit

[gschare]

Helping my sister with her taxes. She's currently in grad school full time, paying tuition from her savings, while also doing a little freelance consulting. She's in her 50s. 

She wound up with about 6K in 1099 income so TT showed her owing about $500. Then she added her 1098-T with 32K in tuition expenses. Then TT computed the lifetime learning credit and it zeroed out her tax owed, which makes sense. Then she added her ACA 1095 and it recomputed and gave her a 1300 health insurance premium tax credit and zeroed out her LLC education credit, saying she can't use the credit since she doesn't owe any taxes.

This seems backwards. Shouldn't she get LLC to reduce her tax bill to zero and then add on the ACA premium credit since that's simply an overpay of premiums based on her income level? 

I'm wondering if TT doesn't handle this properly by default and if it needs some sort of override. 

[gschare]

I did a bit more research and asked Claude.ai about the order of operations. It says that PTC should be applied after LLC which makes sense to me but is the opposite of how TurboTax works. How can I override the order?

Claude response:

Let me explain the tax credit ordering from a tax preparation perspective.

The order of tax credit application isn't arbitrary - it's determined by IRS rules and optimized for maximum benefit to the taxpayer. The Premium Tax Credit (PTC) for ACA healthcare is considered a refundable credit, while the Lifetime Learning Credit (LLC) is nonrefundable.

Here's why the order matters:

1. The PTC must be calculated first because it can affect your modified adjusted gross income (MAGI), which in turn impacts your eligibility for other credits like the LLC.
2. The LLC is nonrefundable, meaning it can only reduce your tax liability to zero but cannot generate a refund. It's limited by your tax liability after other adjustments.
3. The PTC is refundable, which means you can receive it as a refund even if you have no tax liability. By applying it after nonrefundable credits, you ensure you get the full benefit of both credits.

If you were to reverse the order, you might actually receive less total credit because:

• The LLC might reduce your tax liability first
• Then the PTC would be calculated based on the reduced liability
• This could result in a smaller total credit amount

The IRS ordering maximizes your total credit by ensuring nonrefundable credits can offset as much tax liability as possible before refundable credits are applied.

[NCperson]

@gschare I would contact TT and explain your position.   The problem is that if you override TT, you will invalidate the TT guarantee and I do not believe you will be able to efile. 

Let me ask you this from Form 1040: 

1) without the PTC and LLC entered, what is on line 22? what is on Line 17? 

2) now enter the LLC, what is on line 22? What is on line 17? 

3) now enter the PTC, what is on line 22? what is on line 17? 

Once you post back I can explain.....

[gschare]

Thank you for jumping in to help.

While I started to pull the data you asked for, I got a call back from TurboTax. Turns out it is working correctly.

The issue is that no federal tax is due because her income is well below the standard deduction (obvious to me now!). The $407 tax due that TurboTax is showing before applying PTC is self-employed social security and medicare which can't be offset by LLC. So it then applies the PTC and nets out to $892 refund (1299 PTC - 407 SS and medicare). 

I get smarter about taxes every year! 🙂

[NCperson]

yup, that is why I was asking for those line numbers and the sequencing.  I wanted to see if the non-refundable credit was limited by the INCOME tax (which is Line 22).  I specifically didn't ask for Line 24 because that includes the self-employment tax!