SECTION 2. BACKGROUND

.01 Under § 162(l), a taxpayer who is an employee within the meaning of § 401(c)(1)—generally, a self-employed

individual—is allowed a deduction for all or a portion of the taxpayer’s premiums paid during the taxable year for health insurance for the taxpayer, the taxpayer’s spouse, the taxpayer’s dependents, and any child of the taxpayer under the age of 27. The deduction allowed under § 162(l) is limited to the taxpayer’s earned income from the trade or business with respect to which the health insurance plan is established. A taxpayer’s § 162(l) deduction is allowed in computing adjusted gross income. See § 62(a)(1).

.02 Section 36B allows a premium tax credit to taxpayers who enroll in a qualified health plan, as defined in § 1.36B– 1(c) of the Income Tax Regulations, to assist with the cost of health care coverage. The amount of a taxpayer’s premium tax credit is based on the taxpayer’s household income as defined in § 36B(d)(2)(A). A taxpayer’s household income is calculated using modified adjusted gross income. Modified adjusted gross income is adjusted gross income

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plus certain items enumerated in § 36B(b)(2)(B). Consequently, the amount of a taxpayer’s premium tax credit is based in part on the amount of the taxpayer’s adjusted gross income.

.03 Some taxpayers enrolled in a qualified health plan and eligible for the premium tax credit may also be allowed a deduction under § 162(l). Section 1.162(l)–1T of the Temporary Income Tax Regulations provides rules for taxpayers who claim a § 162(l) deduction and also may be eligible for a § 36B credit for the same qualified health plan or plans. Under § 1.162(l)–1T(a)(1), a taxpayer is allowed a § 162(l) deduction for specified premiums not to exceed an amount equal to the lesser of (1) the specified premiums less the premium tax credit attributable to the specified premiums, and (2) the sum of the specified premiums not paid through advance credit payments and the additional tax imposed under § 36B(f)(2)(A) and § 1.36B–4(a)(1) with respect to the specified premiums after the application of the limitation on additional tax in § 36B(f)(2)(B) and § 1.36B–4(a)(3). Specified premiums are premiums for a specified qualified health plan or plans for which the taxpayer may otherwise claim a deduction under § 162(l). A specified qualified health plan is a qualified health plan, as defined in §1.36B–1(c), covering the taxpayer, the taxpayer’s spouse, or a dependent of the taxpayer (enrolled family member) for a month that is a coverage month within the meaning of § 1.36B– 3(c) for the enrolled family member. See § 1.162(l)–1T(a)(2). If a specified qualified health plan covers individuals other than enrolled family members, the specified premiums include only the portion of the premiums for the specified qualified health plan that is allocable to the enrolled family members under rules similar to § 1.36B–3(h), which provides rules for determining the amount under § 1.36B– 3(d)(1) when two families are enrolled in the same qualified health plan. See § 1.162(l)–1T(a)(2). Specified premiums not paid through advance credit payments equal the amount of the specified premiums minus the advance credit payments attributable to the specified premiums. See § 1.162(l)–1T(a)(3).

.04 Taxpayers who receive advance credit payments for a plan for which

they claim a § 162(l) deduction determine the limit on additional tax under § 36B(f)(2)(B) using the rules in § 1.36B– 4T(a)(3)(iii). These rules require the taxpayer to determine whether the taxpayer can meet the requirements to use a limitation on additional tax by testing the lowest limitation amount and sequentially moving up to the highest limitation amount. To meet the requirements for a limitation amount, the taxpayer’s household income as a percentage of the Federal poverty line must be less than or equal to the maximum household income as a percentage of the Federal poverty line for which that limitation is available. For these purposes, household income is determined by using a § 162(l) deduction equal to the sum of specified premiums for the plan not paid through advance credit payments and the limitation amount in addition to any deduction allowable under § 162(l) for premiums other than specified premiums. If the taxpayer cannot meet the requirements for any limitation amount, the limitation on additional tax in § 36B(f)(2)(B) does not apply to the taxpayer.

.05 Because the § 162(l) deduction is allowed in computing adjusted gross income and because adjusted gross income is necessary for computing the premium tax credit, the taxpayer must know the allowable § 162(l) deduction to compute the premium tax credit. Thus, the amount of the § 162(l) deduction is based on the amount of the § 36B premium tax credit, and the amount of the credit is based on the amount of the deduction - a circular relationship. Consequently, a taxpayer eligible for both a § 162(l) deduction for premiums paid for qualified health plans and a § 36B premium tax credit may have difficulty determining the amounts of those items.