August 28, 2017 10:23 pm

No Premium Tax Credit for Non-marketplace Coverage

In some states, insurance companies sell the same policies on and off of the government marketplace. The Tax Court recently confirmed that a taxpayer can claim the premium tax credit only with respect to coverage purchased through a government marketplace (David Lee Nelson, Tax Court Order, 4/19/17).

A self-employed individual in California enrolled directly in a Kaiser Permanente plan and claimed the premium tax credit. The IRS disallowed the credit on the grounds that the taxpayer was not “enrolled in health coverage through the Health Insurance Marketplace.” While the Tax Code references a marketplace, it is not defined there. The taxpayer argued that a plan purchased directly from an insurance company that is the same as one offered through a State Exchange should be treated as having been purchased through a marketplace.

Covered California is the state-run marketplace for health coverage in California. In the court’s view, the language of Code Sec. 36B requires coverage to be obtained through a government exchange. It does not encompass coverage purchased directly from an insurer, even though it may be identical coverage.

Because the taxpayer was self-employed she could deduct the premiums as an above-the-line adjustment to gross income (no itemizing required).

Note: Previously, the IRS provided guidance to self-employed individuals to coordinate the credit and the deduction in order to prevent double-dipping (Rev. Proc. 2014-41).

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Tax Glossary

Carryback

A tax technique for receiving a refund of back taxes by applying a deduction or credit from a current tax year to a prior tax year. For example, a business net operating loss may be carried back for two years.

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