With Additional Premium Tax Credit, Iowa and Federal Treatment Differs

January 31, 2017

We acknowledge and thank a preparer from Dubuque for graciously sharing this helpful information with us.

For Federal tax purposes additional Premium Tax Credits received or repaid are reported on the year they relate to, not the year in which they are paid. Essentially for this one item, the taxpayer is on accrual basis.

In IA this is NOT the case, taxpayers remain cash basis and deduct or report based on the year they receive the additional credit or repay the amount.

Thus there WILL be a disconnect between the Federal Schedule A insurance premiums reported on Federal and the amount deducted on Line 18 of Iowa and credit received reported on Line 14 of Iowa, unless the estimated income was exactly correct.

Let's look at 2 examples:

1. Assume that John is single and estimated HH income to be $28,725. He used the market place. He received $2,888 of premium tax credit assistance, paid directly to the insurance company and he had to pay $2,312. When John files his 2016 tax return his actual income is $30,000. Line 46 of the Federal 1040 shows he must repay $199.

     1. On the Federal Schedule A he will show Medical Insurance premiums paid of $2,511 (2,312 + 199). I would use a detail statement.

     2. On IA he will deduct on Line 18 on $2,312 as that is all he paid in 2016. In 2017 he will deduct an additional $199 for his medical insurance on line 18. You must enter preparer notes to ensure you add this amount in 2017!

2. Assume that John is single and estimated HH income to be $28,725. He used the market place. He received $2,888 of premium tax credit assistance, paid directly to the insurance company and he had to pay $2,312. When John files his 2016 tax return his actual income is only $26,000. Line 69 of the Federal 1040 shows he will receive an additional $437. This amount should be noted for next year's IA return in preparer notes.

    1. On the Federal Schedule A he will show Medical Insurance premiums paid of $1875 (2,312 -437). I would use a detail statement.

    2. On IA he will deduct on Line 18 on $2,312 as that is what he paid in 2016. In 2017 he will report as “Other Income” on IA line 14 $437. You must enter preparer notes to ensure you add this amount in 2017!

Line 28, on the IA return is “Self-employment/household employment/other federal taxes.

Remember, IA allows the deduction for all Federal taxes paid through withholding or through estimated payments. But, certain taxes have to be added back, as they are not INCOME taxes, per se. From the IA expanded instructions:

“Taxpayers can deduct their entire withholding, estimated payment, and additional federal tax paid amounts on lines 31, 32, and 33. However, certain amounts must be added back on line 28, including the following:...

• Excess advance premium tax credit repayment reported on line 46 of the federal 1040...

• ...It is acceptable to report on line 28 either the current year’s self-employment / household employment tax / other federal taxes or the prior year’s, as long as the reporting method is consistent from one year to the next.

So, the adjustment for the additional tax John must now pay ($199), can occur in either 2016 or 2017 according to the IA expanded instructions. (Whoo hoo – cash or accrual). Our software makes this adjustment automatically in year 2016. This is fine – let it be! Our software did the same adjustment in 2015. The adjustment on line 28 made automatically by the software does not affect the 2016 and 2017 entries you must make on lines 14 & 18 as described above. Don't forget your great preparer notes!

Want to view entire articles or watch the videos?