TurboTax Giving Way Too High of Self-Employed Health Insurance Deduction by Ignoring APTC Repayment Limitation

[lac528]

I’m a sole proprietor with marketplace health insurance using TurboTax Home & Business Desktop 2024. So I enter my 1095-A data and link my plan to one of my Schedule C businesses and it calculates my Self-Employed Health Insurance Deduction (SEHID) which it then puts on Schedule 1, Line 17.

I’m still deciding how much Traditional retirement contribution I want to make. So I’m testing different amounts and each amount changes my AGI. At many AGIs, TurboTax seems to calculate my SEHID accurately. But at quite a few AGIs, it’s calculating what seems to be a very incorrect SEHID.

It’s actually calculating the SEHID seemingly incorrectly in a couple different ways at different AGIs. But there is one way in particular that seems to be a clear and common pattern.

When my AGI gets below the 400% FPL level, my APTC repayment is then limited to $1575 and I only pay back that $1575. It seems like my SEHID then shouldn’t possibly be allowed to be more than the premiums I already paid before plus $1575. However, TurboTax is calculating the SEHID to be the premiums I already paid before plus the APTC repayment that I would have to pay if it wasn’t limited.

So imagine I paid $1000 in premiums out of pocket throughout the year. And imagine the APTC repayment amount without the limitation would be $4000. But the repayment is actually capped to $1575 since my AGI is below 400% FPL. TurboTax is calculating an SEHID of $5000 ($1000+$4000), when it seemingly should only be $2575 ($1000+$1575). That SEHID of $5000 seems much higher than it should be or I think it’s allowed to be. I don’t think the IRS allows an SEHID that’s more than the total premiums plus actual APTC repayment you pay out of pocket, do they?

You might think TurboTax would catch that things don’t add up correctly at the end during its Review, but it does not flag it at all.

I’ve heard problems like this sometimes happen when the AGI is near a cliff like the 400% FPL level. And the problem is happening at those AGIs, which is bad enough since it’s exactly those cliff levels we often want to target when reducing our AGI with Traditional contributions. But it’s also happening at other AGIs farther away from the cliff too.

I also know some people mistakenly think their SEHID is wrong because they don’t realize it’s capped by their net business profit minus the deductible half of Self-Employment tax minus their Traditional contributions. However, this is a totally different issue. And in this case, the problem is it’s giving me way too high of an SEHID, not seemingly too low of one as in that other scenario.

This is causing a problem in multiple ways.

First, if many of the SEHID calculations are incorrect, I can’t trust the data when testing which level of Traditional contributions gets me the best results. Many of the results are actually faulty. So I have no idea how to figure out my best Traditional contribution number.

Second, I want to file soon and I don’t see how I can file with an SEHID that’s thousands of dollars higher than seems like should be allowed.

Perhaps there is something about the SEHID calculation that I don’t understand and these SEHIDs are actually correct. I would love to find out that’s the case. But I’m highly doubtful based on my knowledge of the rules, how the results compare with those from other online calculators given the same numbers, and also some other strange things TurboTax is doing as I move between different AGIs.

If I’m correct and TurboTax is calculating many of these SEHIDs wrong in this way, it would seem a great number of self-employed people may be filing with very incorrect SEHIDs.

One way to troubleshoot this would be to look at Form 7206. However for self-employed people using ACA, TurboTax doesn’t actually fully complete Form 7206 and just puts a footnote with the calculated SEHID at the bottom of it that can be viewed in Forms mode. So not only can’t we use Form 7206 to see what’s happening with the calculation, but maybe that’s part of why it’s calculating the SEHID incorrectly. If it correctly filled out Form 7206, it seems like the very first line on the form would prevent this issue from happening.

Given that it’s only weeks from April, this is becoming an urgent problem. Can someone help? I’d appreciate help here on this forum. And I’d also be happy to call in and talk to someone at TurboTax and show them in detail what’s happening if that will help them troubleshoot this problem and advise me what to do.

[lac528]

@BillM223 @CatinaT1 @dmertz @LisaNMex I've seen you post very insightful replies to other posts related to issues with calculating SEHID. I wondered if you'd be willing to read over my post here about a possibly different problem with SEHID and offer your help. I'm really struggling with this and not sure what to do and would greatly appreciate your wisdom.

[dmertz]

I no longer comment on how TurboTax calculates the SEHID when PTCs are involved.  The IRS says that you can use any reasonable method that ensures that sum of the SEHID and the PTC does not exceed the cost of the health insurance and that the PTC is correct given the the AGI that results from the SEHID.  TurboTax's calculation that follows the IRS guidance in IRS Pub 974 ensures that, but might not be optimal when the iterative calculation does not converge.

[lac528]

@dmertz Thank you so much for responding.

But how does the APTC repayment limitation factor in? Without the limitation, my PTC + SEHID may add up to the total cost of the insurance. However, what I'm experiencing is that in quite a few cases, even after my AGI is low enough that I do have an APTC repayment limitation, my PTC + SEHID still add up to the total cost of the insurance even though due to the repayment limitation, I'm not actually paying back a huge % of the original repayment.

Take the example in my original post:

"So imagine I paid $1000 in premiums out of pocket throughout the year. And imagine the APTC repayment amount without the limitation would be $4000. But the repayment is actually capped to $1575 since my AGI is below 400% FPL. TurboTax is calculating an SEHID of $5000 ($1000+$4000), when it seemingly should only be $2575 ($1000+$1575). That SEHID of $5000 seems much higher than it should be or I think it’s allowed to be. I don’t think the IRS allows an SEHID that’s more than the total premiums plus actual APTC repayment you pay out of pocket, do they?"

In a case like this, with the $5000 SEHID, that $5000 SEHID plus my PTC qualified for may add up to the total health insurance cost, seeming to pass the test you mentioned from the IRS (if I'm reading it correctly). But since I'm not actually paying back the full $4000 repayment and only paying back $1575, it seems like it can't be correct that I get a $5000 deduction.

Am I thinking about this correctly?

[dmertz]

I no longer try to make sense of the results under these circumstances.

[lac528]

@dmertz That's a terrifying response given what it says about how screwed up this problem is. However, even without trying to make sense of the results, we still have to figure out how to work around them. Your previous posts have been very helpful in getting to the point where I understand what the problem even is to the extent I do. So any wisdom you are willing to offer is much appreciated.

Might you (or others), even if you don't want to try to decode why TurboTax messes up in the particular way it does, comment on the solution I think I may have found to get around all of this in this post?

[dmertz]

I'm don't know if TurboTax is messing up or not.  I stopped looking at this years ago, so I don't know if anything has changed.

[lac528]

@dmertz Your posts sound like trying to make sense of and deal with how badly TurboTax handles this over the years gave you PTSD to the point where now you can't even talk about it anymore. Sadly, I completely understand the feeling. I'm starting to feel the same.

TurboTax is definitely handling this incorrectly in quite a few situations. It's giving an SEHID that's larger than the entire total of money paid out of pocket for the health insurance because it's ignoring the APTC repayment limit when calculating the SEHID in many cases. Take that as a given. If TurboTax was concerned with this they'd be knocking down my door asking me to show them all the situations where this is happening but clearly, as you've experienced, they are ok with this even though it could easily lead to tons of people filing with completely wrong SEHIDs. And maybe the IRS won't even notice in most of those cases. But in some they might because it's getting SEHID off by thousands of dollars.

The question then is how to work around all that. Obviously if we can't trust TurboTax's calculations of SEHID, then we have to calculate it on our own some other way and then enter it. It appears the place to enter it is Form 7206, Line 1. I'm wondering if that will work. If that does work, then the issue is simply how to figure out the correct SEHID some other way to put on Form 7206, Line 1. But perhaps I'm missing something and it's more complicated than that.

[dmertz]

Seventeen pages an eight worksheets in the 68-page IRS Pub 974 are dedicated to this issue.  This issue will never apply to me personally, so it just ended up being that I don't have the time to understand it thoroughly enough to continue trying to answer questions about it.

Still, with regard to the amount of APTC that you don't have to pay back due to the repayment limitation,  I don't know that that needs to be taken into account when figuring your SEHID.

[lac528]

@dmertz As shown in my example in my original post, if the APTC repayment limitation isn't taken into account in calculating SEHID, then you can have a situation where I've paid a total of say $2575 for health insurance (premiums paid + limited APTC repayment), yet get to deduct $5000 in SEHID.  This seems wrong to me. But it's pretty important for me to understand if it actually is wrong or not.

Obviously, it would be great for me if it's not wrong and I get to both limit my APTC repayment by thousands of dollars and at the very same time take a deduction on those same thousands of dollars I didn't have to actually pay. If that's the case, I need to know so I don't fail to take advantage of it. But if it's not the case, I need to know that so I don't take a SEHID on thousands of dollars I didn't actually pay due to the repayment limitation and get on the bad side of the IRS. The stakes are high on both sides. On one hand, thousands of dollars of additional deductions and on the other hand not filing a significantly incorrect return.

I really wish someone could tell me definitively what the fact is here. Can the SEHID actually include the full APTC repayment amount before limitation even though your actual repayment is limited? Or can the SEHID never be more than the total amount you actually end up paying in premiums + APTC repayment factoring in any limitation?

Whatever the answer is there's a problem with TurboTax though because it's not consistent. At one MAGI it will factor in the repayment limitation when calculating SEHID and at another, sometimes not very far apart, it won't factor in the limitation, even though in both cases the limitation is qualified for.

[Mike9241]

the answer to your question lies in IRS PUB 974 which covers the situation when you have marketplace insurance. you can skip worksheet P and start with worksheet W (there are no worksheets Q-V) .  

I did several workthroughs and what I came up with is what I paid out of pocket for the premiums + the ACTUAL REPAYMENT  is the SE Health Deduction. However, your numbers will be different. I believe your results should be actual repayment + payments.

https://www.irs.gov/pub/irs-pdf/p974.pdf 

Turbotax does not include these worksheets in your tax file so you can't review its computations.

part of the complication is that the allowable PTC depends on your income less the SE health but the SE Health deduction depends on the allowable PTC.  So Turbotax does successive iterations to get both.  

[lac528]

@Mike9241 Everything I've seen also tells me it's premiums paid plus the ACTUAL repayment amount. So I'm pretty confident TurboTax is in many cases messing up due to the iterative method and giving an SEHID that's thousands of dollars too high. I don't know how to make sense of the fact that they don't seem to care about this or take it seriously. Why are they not racing to see the examples of this and fix it? Even if it's a small % of the overall users, giving people an SEHID thousands of dollars above what it's supposed to be, which most people probably won't notice is happening and go ahead and file with (with TurboTax showing no error despite it breaking a very basic rule of how big the SEHID is allowed to be), seems like a big deal to me.