SECTION 7. EXAMPLES

Example 1 : In 2014, A, A’s spouse, and their two dependent children enroll in the second-lowest-cost silver plan, with an annual premium of $14,000. A is engaged in a trade or business as a sole proprietor and has household income (before taking into account the § 162(l) deduction) of $82,425, which includes $75,000 of 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. A received $10,500 in advance credit payments for the year. Because A received advance credit payments, A determines which limitation on additional tax applies under § 1.36B– 4T(a)(3)(iii) and determines that A’s limitation on additional tax is $2,500. A performs the alternative calculation as follows:

(1) Step 1. A determines the § 162(l) deduction after application of the limit in section 5.03. Under section 5.03, A’s § 162(l) deduction is $6,000, the sum of (1) the specified premiums not paid through advance credit payments, $3,500 ($14,000 premiums

• $10,500 of advance credit payments); and (2) the limitation on additional tax determined under § 1.36B–4T(a)(3)(iii), $2,500. A’s Step 1 household income is $76,425 ($82,425 � $6,000), which is 325 percent of the Federal poverty line for a family of 4 (applicable percentage of 9.5).

(2) Step 2. A’s initial premium tax credit based on household income of $76,425 is $6,740 ($76,425

• .095 - $7,260; $14,000 � $7,260 - $6,740). (3) Step 3. A computes the specified premiums minus the premium tax credit as $7,260 ($14,000 � $6,740). However, as in Step 1, the limit in section 5.03 applies so that A’s § 162(l) deduction may not exceed $6,000.

(4) Step 4. A’s household income based on a § 162(l) deduction of $6,000 is $76,425. A’s premium tax credit based on household income of $76,425 is $6,740 ($76,425 - .095 - $7,260; $14,000 � $7,260 - $6,740).

A’s allowable § 162(l) deduction is the amount determined under Step 3, $6,000,

August 11, 2014 366 Bulletin No. 2014–33

Step 1 household income is $78,425 ($82,425 � $4,000), which is 333 percent of the Federal poverty line for a family of 4 (applicable percentage of 9.5). C’s § 162(l) deduction is not limited under section 5.03 because C has more than $4,000 of earned income from the trade or business and does not have advance credit payments.

(2) Step 2. C’s initial premium tax credit based on household income of $78,425 is $4,550 ($78,425

• .095 � $7,450; $12,000 � $7,450 � $4,550). (3) Step 3. Under section 6, C completes Step 3 using “premium tax credit determined in Step 2 but only with respect to months in which specified premiums were paid.” C’s Step 2 premium tax credit with respect to months for which specified premiums were paid is $1,517 ($4,550 - 4/12 - $1,517). Thus, C’s § 162(l) deduction is $2,483 ($4,000 � $1,517). C’s § 162(l) deduction is not limited because C has more than $2,483 of earned income from the trade or business and has no advance credit payments.

(4) Step 4. C’s household income is $79,942 ($82,425 � $2,483), which is 339 percent of the Federal poverty line for C’s family size (applicable percentage of 9.5). C’s premium tax credit based on household income of $79,942 is $4,406 ($79,942 .095 - $7,594; $12,000 � $7,594 - $4,406).

C’s allowable § 162(l) deduction for specified premiums is the amount determined under Step 3, $2,483, and C’s premium tax credit is the amount determined under Step 4, $4,406.

If C chose to use the iterative calculation, C’s allowable § 162(l) deduction for specified premiums would be $2,530 and C’s premium tax credit would be $4,410.