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Thank you, Pete. I will do that. I appreciate your help!
Wendy
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In 2017, our income rose due to some investments. As intercst has pointed out, Obamacare has a "cliff" which cuts off above a specific income. In 2017, our income exceeded this income.

Not sure if this will help, but if you had HDHP insurance and haven't maxed out your HSA contribution, doing so would decrease your AGI, since the HSA contribution is a front page adjustment to income. If you and DH were both 55 or over at the end of 2017 and had a family HDHP plan, you could contribute up to $8750, if both of you were covered through Dec 1, 2017: up to $7750 into an HSA for one of you, and at least $1000 into an HSA for the other. The total can be no more than $8750. You can still make your 2017 contributions until April 17, 2018.

Can I claim the $14,000 as a health insurance cost in 2018 since I will be paying it in 2018 when I pay my 2017 income tax?

No, you actually claim it as a deduction for 2017. From Pub 502 https://www.irs.gov/pub/irs-pdf/p502.pdf in the "Premium Tax Credit" section:

Example 1. Amy is under age 65 and unmarried. The cost of her health insurance premiums in 2017 is $8,700. Advance payments of the premium tax credit of $4,200 are made to the insurance company and Amy pays premiums of $4,500. On her 2017 tax return, Amy is allowed a premium tax credit of $3,600 and must repay $600 excess advance credit payments (which is less than the repayment limitation). Amy is treated as paying $5,100 ($8,700 less the allowed premium tax credit of $3,600) for health insurance premiums in 2017. Because $5,100 is more than 10% of Amy's AGI, when she fills out her Schedule A, she enters $5,100 on line 1.

Note on the bolding: This publication was published on 12/1/17, so it did not include the new TCJA reduction to 7.5% for medical deductions.

Hopefully, the tax software did this for you - you should check your schedule A to see if the PTC repayment of $14k is included on line 1, along with the rest of the premiums you paid.

Since the standard deduction for MFJ increases to $24,000 in 2018, unless you will have enough other deductions for 2018 that you will still be itemizing, taking the deduction in 2017 is probably more valuable.

AJ
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AJ, thank you for responding. I am still very confused about this.

We paid $4,021 for health insurance during 2017 based on our expected income (which was based on 2016 income). Of this, $2,475 was paid for private health insurance for January-September 2017. ($275 per month with an ACA subsidy over $1332 per month.)

DH turned 65 in October 2017. DH went on Medicare. I continued with private health insurance.

My premiums added up to $1100 for October - December. DH paid $170 in Medicare premiums for October - December. Form 1095A lists a Premium Tax Credit of $555 per month which applied to me but not to DH.

Form 1095A shows $16,734.5 for the total of the monthly enrollment premiums. This is what we would have paid without the Premium Tax Credit. Column C, the Monthly Advance Payment of Premium Tax Credit (which was essentially loaned to us in 2017) totaled $13,653. I can't claim that as a deduction because it was a credit to us. We didn't spend it. I can claim our out-of-pocket insurance expenses as a deduction. This is $5493 including health insurance plus long-term care insurance.

I didn't realize that our income increased enough in 2017 to make us ineligible for the Premium Tax Credit. I will have to pay it back in 2018.

Since this expense of $13,653 is health insurance I think I should be able to deduct it as such in the year that we are actually spending it -- 2018 -- even though it was incurred in 2017. That follows the rule that a deduction is taken in the year the money is spent (which I used for various health care bills that I incurred in late 2014 but weren't billed until 2015).

Does that make sense?

Thank you!
Wendy
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AJ, to the best of my understanding our health insurance policy did not qualify for an HSA.

Wendy
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Since this expense of $13,653 is health insurance I think I should be able to deduct it as such in the year that we are actually spending it -- 2018 -- even though it was incurred in 2017. That follows the rule that a deduction is taken in the year the money is spent (which I used for various health care bills that I incurred in late 2014 but weren't billed until 2015).

Does that make sense?


Your argument makes sense but you can't assume that a logical argument is accurate for tax law. Tax law is as enacted. Consistency and logic may not apply.

AJ has a history of being correct.
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Like she said, don't always apply logic to taxes.

However, in this case logic works, just not as you expected.

Think of the advance payment of premium tax credit as a loan. You spent 16,734 for health insurance, of which 13,653 was paid with a loan from the government.

Expenses paid for with borrowed money are deducted when the expense was paid - when the money was borrowed. They are not deducted when the borrowed money is repaid. The same thing happens when you pay deductible expenses using a credit card. They are deducted when you present your card and pay the expense with borrowed money. They are not deducted when you pay the credit card issuer.

So the full 16,734 is deducted in 2017 when it was paid. The ultimate repayment of the loan in 2018 becomes irrelevant to your taxes.

--Peter
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<So the full 16,734 is deducted in 2017 when it was paid. The ultimate repayment of the loan in 2018 becomes irrelevant to your taxes.>

Peter, thank you for your response.

Unfortunately, I am still confused.

I searched Google and the IRS web site and did not find an answer to my specific problem.

Let me tabulate the items.

The Monthly Enrollment Premiums (what I would have paid, but did not due to the ACA Tax Credit) $16,734

What I actually paid out of pocket $4,650

Premium Tax Credit $13,653 (which I have to pay back)

My tax software tells me that I have to pay back this Premium Tax Credit in the 2017 tax year since our income in 2017 unexpectedly put us over the eligibility for a Premium Tax Credit. This leaves me with a large tax bill but makes sense to me. I am paying the government back for the Premium Tax Credit which I received but no longer qualify for.

When I ran the software claiming $16,734 as a deduction, the tax software said that I could claim a large refund on my 2017 taxes. This does not make sense to me since I did not pay $16,734 out of pocket. I would be double-dipping from the government -- first for receiving the Tax Credit and second for receiving a deduction for it. I also don't know how or when I would pay the government back for this "loan" in tax year 2018.

What makes most sense to me is to pay back the Tax Credit now but to add it to my insurance expense in 2018. But, as you said, taxes don't always make sense.

Thank you for your further explanation.
Wendy
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<AJ has a history of being correct. >

I'm well aware of that. I tremendously respect AJ. In fact, I nominated her for the Feste Award over 10 years ago. I deeply appreciate AJ's help.

Wendy
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Wendy,

The initial premiums and subsidy are reported to you on form 1095A. It is reconciled on from 8962 to determine what has to be paid back. Form 8962 Part 3 Line 29 carries to your 1040 line 46 which is where it's paid back on your 2017 tax return.
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When I ran the software claiming $16,734 as a deduction, the tax software said that I could claim a large refund on my 2017 taxes. This does not make sense to me since I did not pay $16,734 out of pocket. I would be double-dipping from the government -- first for receiving the Tax Credit and second for receiving a deduction for it. I also don't know how or when I would pay the government back for this "loan" in tax year 2018.

Check your 1040 schedule A and make certain that the tax software isn't automatically claiming the deduction and you have added it in again.

To understand the impact and verify that the software is properly handling your information, try the following. Copy your return and on the copy do the following test returns.

1.) To establish a baseline:
a. Remove ACA
b. Claim covered by health insurance for the entire year
c. Remove any deductions for health insurance premiums

2.) Add the deduction for health insurance premiums
$16,734 + $4,650
This likely will decrease your tax liability

3.) Delete the health insurance premiums added in step 2

3.) Add the received tax credits for ACA
This will increase your tax liability

4.) Verify the amount of health insurance premiums claimed as deductions on Schedule A
There are two possibilities. Either the software automatically claimed the repayment of tax credits or it didn't. If it didn't then add in the total of health insurance premiums ($16,734+$4650)

The tax credits need to be repaid. Increasing the deductions for health insurance should decrease your tax liability. Any refund pending would be applied to the repayment of the tax credits.

It is also possible that the tax software is confused. The above sequence will let you know if the answers the software is providing are reasonable.


What makes most sense to me is to pay back the Tax Credit now but to add it to my insurance expense in 2018. But, as you said, taxes don't always make sense.

Peter's explanation is logical. The premiums were paid in 2017. It doesn't matter that it turns out that the premiums were paid with essentially a loan. They are still a 2017 transaction and it doesn't matter when the loan is repaid or how the loan is repaid.
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The Monthly Enrollment Premiums (what I would have paid, but did not due to the ACA Tax Credit) $16,734

What I actually paid out of pocket $4,650

Premium Tax Credit $13,653 (which I have to pay back)


So, just to be clear - since $13,653 + $4,650 = $18,303, which is more than the $16,734 in premiums - out of your pocket, you paid $1,569 for co-pays, prescriptions, etc. and $3,081 in premiums?

When I ran the software claiming $16,734 as a deduction, the tax software said that I could claim a large refund on my 2017 taxes. This does not make sense to me since I did not pay $16,734 out of pocket.

Your tax software should have already accounted for the $13,653 tax credit that you are paying back in as a deduction. It should also account for the Medicare premiums taken out of DH's SS check. All you should be putting in as medical expenses would be the $1,569 in co-pays, prescriptions and the $3,081 that you paid out of pocket for your premiums, for the total of $4,650. If you are putting in the $16,734, you are probably double-counting the $13,653, which would result in a large refund.

AJ
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Category Sum - Amount
Diagnostic Test -$914.33

Insurance -$5,164.31 (includes private insurance, DH's Medicare & LTCI).
Breaks down to (4480 + 170) = 4650 for private insurance + Medicare and $514 for LTCI.

Medical care -$2,666.30

Prescriptions -$666.11

Total Result -$9,411.05



Form 1095A for ACA (private insurance only). Not including Medicare or LTCI. While subsidized, DH and I paid $275 per month to cover both of us. After he went onto Medicare, my premium was $211 per month just to cover me. (In 2018, without the ACA subsidy, my premium will be $825 per month for a bronze plan.)



Form 1095A Monthly Enrollment Premiums SLCSP Premium Advance Payment of Premium Tax Credit
January to Sept. 1603.9 1545.47 1332

October to Dec. 766.5 766.5 555

Total 16,734.6 16,208.73 13,653


AJ wrote: Your tax software should have already accounted for the $13,653 tax credit that you are paying back in as a deduction. It should also account for the Medicare premiums taken out of DH's SS check. All you should be putting in as medical expenses would be the $1,569 in co-pays, prescriptions and the $3,081 that you paid out of pocket for your premiums, for the total of $4,650. If you are putting in the $16,734, you are probably double-counting the $13,653, which would result in a large refund.

AJ, I understand what you are saying. But I think that my software does not automatically account for the $13,653 tax credit that we are paying back in as a deduction. If it does I can't find it.

What disturbed me was the sudden increase in tax owed of adding in the Form 1095A. I prepay taxes quarterly using estimated taxes based on last year's income. I like to prepare my taxes early. I bought the software in November and started inputting interest, dividends, etc., in January using my recorded earnings from 2017. I forgot about the ACA subsidy until WA State informed me that my 1095A was ready. BOOM! All of a sudden, my tax owed went from a discrepancy of less than $500 to >$13,000. Holy cow!

The added tax owed (calculated by the software) appears to be the entire amount of the Advance Payment of Premium Tax Credit. The software does not appear to have a way to use the additional $13,653 as a deduction which would reduce its impact to $11,605 (since we are in the 15% tax bracket). If I put it into the section for medical expenditure deductions it counts the Advance Payment of Premium Tax Credit as an expenditure instead of a credit, which results in a large, unjustified refund.

What I am looking for is a way to save ($13,653 - $11,605) = $2,048. But I can't figure out how to do it.

Thank you for your continued advice.

Wendy
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What I am looking for is a way to save ($13,653 - $11,605) = $2,048. But I can't figure out how to do it.

What you want to do is pay attention to line 1 of your schedule A.

Skipping to the crux of the issue, what should appear on that line on your final return is the total of the following:
-Out of pocket medical expenses (excluding insurance premiums). So medical co pays and deductibles. Prescriptions. Dentists. Hospitals. Eye doctors and glasses (or contacts).
-Medicare premiums deducted from DH's social security payments.
-Medicare supplemental insurance you paid for directly (if any).
-LTC premiums (limited by your ages if applicable).
-$16,734 of health insurance premiums paid.

I'd start by not making any extra entries. Because your net health insurance premium after accounting for your final Premium Credit is deductible as a medical expense, I would expect most software to carry that to line 1 of schedule A. So total up those items I mentioned above and see how that compares to what your software shows. If they match, you're good.

If they don't, you'll need to figure out what the software has included and what it has left out. I would hazard a guess that you'll need to enter as an expense either the full premium (16,735) or the amount of the advance premium tax credit (13,653).

--Peter
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Thank you, Pete. I will do that. I appreciate your help!
Wendy
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