The IRS issued regulations and revenue procedures addressing how to calculate the Sec. 36B premium tax credit, 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 (T.D. 9683) 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 (REG-104579-13).)
Computing and Allocating the Credit
The premium tax credit is designed to make health insurance affordable to low- and moderate-income taxpayers by subsidizing part of their health insurance premium amounts. 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 for determining their premium tax credit and reconciling advance credit payments when two taxpayers have dependents enrolled in different health care plans. For example, one adult taxpayer enrolls her three children in her health care plan assuming all three will be claimed as dependents, but a second adult taxpayer actually is entitled to the dependency exemption for one of the children (the shifting enrollee). The temporary regulations state that the premiums and any advance credit payments for the plan in which the shifting enrollee was enrolled 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%. In addition, the temporary regulations 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 similarly must 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. The rules allow them to allocate the credit as they agree, provided they both use the same proportion (e.g., 40%/60%). If they do not agree, the rules require a 50%/50% split. Special rules 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 a qualified taxpayer as unmarried. To qualify for the exception, a taxpayer must live apart from his or her spouse 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 that many abused spouses could not meet these requirements and issued relief for 2014 (Notice 2014-23). It also promised to issue regulations to apply going forward, which it has now done. Adopting rules similar to those that apply in the innocent spouse area, 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 that 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 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
Finally, the regulations and Rev. Proc. 2014-41 provide rules for 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.