Self-employment health insurance deduction is being reduced, I don't understand why.

[Derek G]

I believe there is a bug in the calculation under certain circumstances for self-employed individuals with 1099 income, and healthcare purchased from an ACA healthcare site. So, I created a blank tax file. Entered my info (age 62, spouse 58, married filing jointly), consultant, $100,000 in 1099 income, 12,000 in healthcare premiums on 1095-a. (14,400 SLCSP and 0 advance payment if that matters.) The program correctly puts 12,000 as a deduction on Sched 1 line 16. I then reduced the income to $80,000 it reduces the insurance deduction on sched 1 line 16 to $3,698 and puts the rest of the premium as a medical deduction I think. At that point I think it should still deduct $12,000 there. If I then reduce the income to $30,000 it goes back to 12,000.  Seems to be a bug to me. Anyone understand what's going on here, I'd appreciate any input. I searched and couldn't find a similar issue.

[BillM223]

There is a difficult to predict interaction between the Self-employed Health Care deduction and the Self-employed SEP IRA deduction. Are you also contributing to an SEP IRA?

Also, has your Schedule C income dropped to near zero? If so, these deductions become limited.

[dmertz]

The calculation of PTC with self-employed health insurance is convoluted and TurboTax cannot always calculate the optimal result for this situation.  TurboTax uses the basic calculation provided in IRS Pub 974, but the IRS permits other ways that TurboTax does not implement for calculating the PTC and the self-employed health insurance deduction.  This issue has been reported to TurboTax Product Qualify since 2015 and is unlikely to be changed in TurboTax, so if you have a different way to do a legitimate calculation of PTC and your self-employed retirement contribution, you might have to overrides and paper-file.  You just need to make sure that the sum of your health insurance deductions (self-employed and Schedule A) plus PTC does not exceed your premiums paid and lines 14, 15 and 16 of Schedule 1 do not exceed net profit from self-employment.

[Edit]  You might be able to get an appropriate result without using overrides by telling TurboTax that your self-employed health insurance was not through the Marketplace and specifying your self-employed health insurance deduction yourself, as long as you ensure that the sum of the PTC determined on Form 8962 and the self-employed health insurance deduction you entered do not exceed the amount of premiums paid.

[Derek G]

There was no SEP contribution and the Sched C income was high enough (at $100,000 or $80,000 or even $30,000) for the health care premium deduction not to be limited. It wasn't limited at $100,000 or $30,000 so why did Turbo Tax reduce it at $80,000?

[Derek G]

At $100,000, $80,000 or $30,000 of 1099 income there is no PTC. It's $0 in each case. So it does not make sense that the health care premium deduction is reduced. I do think it is related to the PTC calculation, but I don't think it's doing it right. At each of the three income levels I mention PTC is $0. So it should not be reducing the health care premium deduction as I understand it! I do understand that the deduction + PTC can't exceed the premiums. But as I say, PTC is $0 in each case and the deduction is being reduced significantly below the premium for $80,000 of income. 

[dmertz · Accepted solution]

After rereading your question and realizing that your compensation was high enough that there was likely no concern regarding a self-employed retirement deduction affecting the results, so I revised my original reply.  Please ignore the original reply that you might have seen a reread my first reply.  The problem is almost certainly TurboTax's simplistic approach to calculating the combination of PTC and the self-employed health insurance deduction which does not always produce the best result given that the IRS allows other methods of calculation that TurboTax simply does not implement.

If you expect the PTC to be zero (and that's the end result that you get), just enter the insurance premiums directly in the Profit & Loss from Business section without marking the box in the health insurance section that is used to indicate that you are self-employed and bought a Marketplace plan.  That will avoid TurboTax trying to do the iterative calculation and failing to get it to converge, producing a suboptimal result.