Regarding the situation in which a client has to pay back part of the advance PTC, students have asked if that payback is a deduction in the year paid back (like, for example, state income tax) or in the year that the advance PTC was allowed. They also want to know how an additional amount of PTC is treated when the return is prepared: Does it affect the medical deduction on Schedule A or the above-the-line deduction for those who are self-employed? According to IRS Pub 502, advance PTC is netted in the year of the insurance.
Deductible Marketplace Insurance – For health insurance paid through the marketplace, the amount that is a medical deduction on Schedule A or that is treated as self-employed health insurance is the cost of the insurance minus the allowed PTC. Use the following worksheet to determine the deductible amount. (2015 IRS Pub 502, page 13).
Insurance Premiums $_______
Advance PTC <_______>
PTC Repaid _______
Additional PTC Received <_______>
Medical Insurance Deduction $_______
Example: A taxpayer paid $1,600 out of pocket in 2015 for health insurance through the marketplace. Her income was higher than the amount she estimated in the marketplace, and as result, she had to pay back $725 of the premium tax credit on her 2015 return (filed in 2016). Thus, the amount that she can use as a Schedule A medical expense or as a self-employed, above-the-line health insurance deduction is $2,325 ($1,600 + $725) for her 2015 return.