The New U.S. Tax Law for the Self-Employed (health care credit)
Thread poster: LegalTransform

LegalTransform  Identity Verified
United States
Local time: 12:41
Member (2002)
Spanish to English
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Nov 11, 2014

In the United States, self-employed persons may deduct the monthly premiums they pay for health insurance from their taxable income (the amount of income subject to tax). Under the new Affordable Care Act, those taxpayers who learn less than 400% of the poverty level (around $47,000 after taxes for a single person and $62,000 for a couple) may also qualify for an additional Premium Tax Credit (money returned to you because you paid too much for your health insurance based on your income) if they have a health insurance plan under the ACA.

However, calculating this credit requires a maze of circular math calculations that have even stumped some professional accountants because the amount of each figure is influenced by changes in the amount of the other figure. Easy right?

You can receive the tax credit in one of two ways: 1) the government will pay the insurance company directly each month (however, this method is dangerous for freelancers because if you make more money than you did last year - even as little as a few thousand dollars - you may have to repay thousands of dollars back at the end of the year). 2) You can opt to receive a tax credit back at the end of the year based on your income.

Suppose, for example, that you earned $40,000 in self-employment income and you paid $5,000 in monthly health insurance premiums. You deduct that amount, for a gross income of $35,000 (you will have other deductions of course). Now you proceed to calculate your Premium Tax Credit.

Let's suppose that you are eligible to receive a tax credit of $2,000 (there is a long form with lots of calculations to figure that out).

Here's where things get weird.

Because you received a tax credit of $2,000, the amount you really paid for your monthly premiums was not $5,000, but $3,000 ($5,000 - $2,000 = $3,000). So you need to go back and change the entry for your health insurance premium deduction to $3,000 and redo your taxes.

But wait. Because you now are only taking a $3,000 exemption instead of a $5,000 exemption, your gross income just went up from $35,000 to $37,000.

As a result, the amount of the Premium Tax Credit you are now entitled to receive will have to be reduced because you did not have to spend as much on your monthly premiums and your "income" was higher.

Suppose that now you only get a tax credit of $1700 instead of $2,000. Because your Tax Credit is now lower, the amount you paid for health insurance goes up and you have to recalculate your now lower gross income. However, since your income is once again lower, you would qualify for a higher tax credit.

You have to continue to do this calculation back and forth until the difference is within $1

Because of this circular problem, the government has created a complicated formula:

https://obamacareguide.wordpress.com/2014/07/25/self-employed-health-insurance-deduction-the-iterative-calculation/


[Edited at 2014-11-11 15:35 GMT]


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Preston Decker  Identity Verified
United States
Local time: 12:41
Member (2013)
Chinese to English
Par for the course Nov 11, 2014

The US has a great tax code...if you're an accountant and are looking for clients.

One of my favorites is the foreign income exception. As I understand it (and I'm pretty knowledgeable, as this has directly affected me) this basically says that US citizens living abroad for 330 or more days a year don't have to pay any federal taxes on income less than a certain number ( I think it's 92,000 USD). So 330 days abroad and you pay 0 federal taxes.

But what if you're abroad for 329 days? You pay full taxes! So, on an income of 50,000 USD this one day could be a 10,000 USD difference!

Unbelievable.

As I understand it most other countries do not do this; I'm pretty sure the UK's exception kicks in after 6 months abroad?


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The Misha
Local time: 12:41
Russian to English
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Can anything good come out of Nazareth? Nov 11, 2014

I wouldn't trust a single word in that abominable "legal" act the good Mr. You Know Who rammed down our throats, and neither should you. Nor should you make any meaningful tax decisions based on it - unless you are one of those upstanding citizens that now qualify for free coverage at my expense (and yours). Since I don't think you are one of those, simply let it go and find your tax savings elsewhere. A little creativity here goes a long way, if you know what I mean.

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Salam Alrawi  Identity Verified
United States
Local time: 11:41
English to Arabic
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What about vacation days? Nov 11, 2014

Preston Decker wrote:

The US has a great tax code...if you're an accountant and are looking for clients.

One of my favorites is the foreign income exception. As I understand it (and I'm pretty knowledgeable, as this has directly affected me) this basically says that US citizens living abroad for 330 or more days a year don't have to pay any federal taxes on income less than a certain number ( I think it's 92,000 USD). So 330 days abroad and you pay 0 federal taxes.

But what if you're abroad for 329 days? You pay full taxes! So, on an income of 50,000 USD this one day could be a 10,000 USD difference!

Unbelievable.

As I understand it most other countries do not do this; I'm pretty sure the UK's exception kicks in after 6 months abroad?


The 330 days is correct, I have read it myself and seen people taking advantage of it. For example, military and contractors who worked in Iraq or Afghanistan get this opportunity. However, from what I understood, about every 3 months a person (at least the contractor) had to take 2 or 3 weeks vacation. My question is: will these vacation days be deducted from the 365 days of the year? Example you take 3 weeks vacation 3 times a year, that is 63 days.
365 - 63 = 302 days. Will those employees still get the advantage? Or they will be taxed?


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Preston Decker  Identity Verified
United States
Local time: 12:41
Member (2013)
Chinese to English
Don't quite understand? Nov 11, 2014

Salam Alrawi wrote:

Preston Decker wrote:

The US has a great tax code...if you're an accountant and are looking for clients.

One of my favorites is the foreign income exception. As I understand it (and I'm pretty knowledgeable, as this has directly affected me) this basically says that US citizens living abroad for 330 or more days a year don't have to pay any federal taxes on income less than a certain number ( I think it's 92,000 USD). So 330 days abroad and you pay 0 federal taxes.

But what if you're abroad for 329 days? You pay full taxes! So, on an income of 50,000 USD this one day could be a 10,000 USD difference!

Unbelievable.

As I understand it most other countries do not do this; I'm pretty sure the UK's exception kicks in after 6 months abroad?


The 330 days is correct, I have read it myself and seen people taking advantage of it. For example, military and contractors who worked in Iraq or Afghanistan get this opportunity. However, from what I understood, about every 3 months a person (at least the contractor) had to take 2 or 3 weeks vacation. My question is: will these vacation days be deducted from the 365 days of the year? Example you take 3 weeks vacation 3 times a year, that is 63 days.
365 - 63 = 302 days. Will those employees still get the advantage? Or they will be taxed?


Do you mean that the contractor returns to the US for these vacation days, or spends them overseas? As far as I understand, and my tax accountant seems to be on board with this too, the US citizen has to be abroad for over 330 days in a year, but doesn't have to actually work for all of these days (obviously). I believe if you returned home to the US for more than 35 days of vacation time you would no longer qualify.

This year doesn't have to be Jan 1-December 31, for example I actually qualified for this for the time period between August 15, 2013, and October 15, 2014. So my earnings from August 15-December 31 2013 were not included in the income tax report I filed for 2013, and when I file my 2014 tax return next year, I'll be able to exclude my earnings from Jan 1-OCtober 15 2014.

There are also certain exemptions, for example natural disasters, and it's possible there are similar exemptions for military personnel/contractors.

Of course, Massachusetts (i.e. 'Taxachusetts') doesn't have a foreign income exclusion, so it looks like I'll still have to pay 7-12% of my 2014 earnings to Massachusetts.


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Salam Alrawi  Identity Verified
United States
Local time: 11:41
English to Arabic
+ ...
Back to United States vacation Nov 11, 2014

Preston Decker wrote:

Salam Alrawi wrote:

Preston Decker wrote:

The US has a great tax code...if you're an accountant and are looking for clients.

One of my favorites is the foreign income exception. As I understand it (and I'm pretty knowledgeable, as this has directly affected me) this basically says that US citizens living abroad for 330 or more days a year don't have to pay any federal taxes on income less than a certain number ( I think it's 92,000 USD). So 330 days abroad and you pay 0 federal taxes.

But what if you're abroad for 329 days? You pay full taxes! So, on an income of 50,000 USD this one day could be a 10,000 USD difference!

Unbelievable.

As I understand it most other countries do not do this; I'm pretty sure the UK's exception kicks in after 6 months abroad?


The 330 days is correct, I have read it myself and seen people taking advantage of it. For example, military and contractors who worked in Iraq or Afghanistan get this opportunity. However, from what I understood, about every 3 months a person (at least the contractor) had to take 2 or 3 weeks vacation. My question is: will these vacation days be deducted from the 365 days of the year? Example you take 3 weeks vacation 3 times a year, that is 63 days.
365 - 63 = 302 days. Will those employees still get the advantage? Or they will be taxed?


Do you mean that the contractor returns to the US for these vacation days, or spends them overseas? As far as I understand, and my tax accountant seems to be on board with this too, the US citizen has to be abroad for over 330 days in a year, but doesn't have to actually work for all of these days (obviously). I believe if you returned home to the US for more than 35 days of vacation time you would no longer qualify.

This year doesn't have to be Jan 1-December 31, for example I actually qualified for this for the time period between August 15, 2013, and October 15, 2014. So my earnings from August 15-December 31 2013 were not included in the income tax report I filed for 2013, and when I file my 2014 tax return next year, I'll be able to exclude my earnings from Jan 1-OCtober 15 2014.

There are also certain exemptions, for example natural disasters, and it's possible there are similar exemptions for military personnel/contractors.

Of course, Massachusetts (i.e. 'Taxachusetts') doesn't have a foreign income exclusion, so it looks like I'll still have to pay 7-12% of my 2014 earnings to Massachusetts.


They make them go home to United States during the vacation time. Unless there are exemptions or the person can refuse the vacation, then I guess those vacations would hurt them. However, may be on the second year they can take advantage of it.


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The New U.S. Tax Law for the Self-Employed (health care credit)

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