SECTION 5. COMPUTATIONS

A taxpayer described in section 3 of this revenue procedure may use the calculations described in this section 5 to determine the amounts of the § 162(l) deduction for specified premiums and the premium tax credit. Taxpayers who received advance credit payments should determine which limit on additional tax applies by following the rules in § 1.36B– 4T(a)(3)(iii) before performing the computations in this section. Taxpayers may use either the iterative calculation in section 5.01 or the alternative calculation described in section 5.02 to compute the § 162(l) deduction for specified premiums and the premium tax credit. Section 5.03 provides additional detail on applying the

Bulletin No. 2014–33 365 August 11, 2014

limitations in § 162(l) when performing the calculations in sections 5.01 and 5.02.

.01 Iterative calculation

(1) Step 1: Determine adjusted gross income, modified adjusted gross income, and household income by taking a § 162(l) deduction for the amount of specified premiums after applying the limit in section 5.03;

(2) Step 2: Compute the premium tax credit using the adjusted gross income, modified adjusted gross income, and household income determined in Step 1;

(3) Step 3: Determine the § 162(l) deduction by subtracting the Step 2 premium tax credit amount from the specified premiums and then applying the limit in section 5.03;

(4) Step 4: Compute the premium tax credit using the adjusted gross income, modified adjusted gross income and household income determined by taking into account the § 162(l) deduction in Step 3;

(5) Step 5: Repeat Step 3 by substituting the Step 4 premium tax credit for the Step 2 premium tax credit.

(6) Step 6: If changes in both the § 162(l) deduction and the premium tax credit from Steps 2 and 3 to Steps 4 and 5 are less than $1, use the section 162(l) deduction and premium tax credit amounts for the specified premiums determined in Steps 4 and 5. If the change in either the § 162(l) deduction or the premium tax credit from Steps 2 and 3 to Steps 4 and 5 is not less than $1, repeat Steps 4 and 5 (using amounts determined in the immediately preceding iteration) until changes in both the § 162(l) deduction and the premium tax credit between iterations are less than $1.

The taxpayer may claim a premium tax credit and § 162(l) deduction for the specified premiums equal to the amounts determined under Step 6. If a taxpayer is unable to complete Step 6 because changes between iterations always exceed $1, the taxpayer should not use the iterative calculation method, but may use the alternative calculation method in section 5.03 or another method that produces amounts that satisfy applicable tax law.

.02 Alternative calculation

(1) Step 1: Determine adjusted gross income, modified adjusted gross income, and household income by taking a § 162(l) deduction for the amount of specified premiums after applying the limit in section 5.03;

(2) Step 2: Compute the initial premium tax credit using the adjusted gross income, modified adjusted gross income, and household income determined in Step 1;

(3) Step 3: Determine the § 162(l) deduction by subtracting the Step 2 premium tax credit amount from the specified premiums and then applying the limit in section 5.03;

(4) Step 4: Compute the final premium tax credit using the adjusted gross income, modified adjusted gross income and household income determined by taking into account the § 162(l) deduction in Step 3.

The taxpayer may claim the amount of the premium tax credit determined under Step 4 and the amount of § 162(l) deduction for the specified premiums determined under Step 3.

.03 Limits on § 162(l) deduction

(1) This section 5.03 applies to the iterative calculation in section 5.01 and the alternative calculation in section 5.02. See Example 1 of section 7 for an example illustrating this section 5.03.

(2) A taxpayer’s § 162(l) deduction may not exceed the lesser of:

(A) The taxpayer’s earned income (within the meaning of § 401(c)) derived by the taxpayer from the trade or business with respect to which the health insurance is established; and

(B) The sum of (1) the specified premiums not paid through advance credit payments, and (2) the limitation on additional tax determined under § 1.36B– 4T(a)(3)(iii).