How does the IRS calculate premium tax credits for self-employed people when their AGI depends on their health insurance premium amount?

Q. Under the ACA, my insurance premium subsidy is dependent on adjusted gross income (AGI). But, for a self-employed person, AGI is dependent on the insurance premium, since premiums are deductible for the self-employed. How does this work, given how circular it is?

Here's the example scenario:

My husband and I are both 55 and have an AGI of $70,000 before accounting for health insurance. Where we live in Houston (77001 zip code), that results in a 2026 premium subsidy of $1,485 per month, and an after-subsidy premium of $265 per month for the lowest-cost Gold plan, which is the plan we selected for 2026.

Since we're self-employed, we can deduct that $265 per month (the amount we pay after the subsidy) using the self-employed health insurance deduction (line 17 on Schedule 1 of Form 1040). But that brings our ACA-specific MAGI down to $66,820 ($70,000 minus the $3,180 that we pay in after-subsidy premiums for the year). But that lower MAGI increases our premium subsidy to $1,511 per month, which reduces the after subsidy amount that we pay and thus reduces our deduction. So the calculation becomes circular — how do we determine how much our premium tax credit is and how much we can actually deduct using the self-employed health insurance deduction?

A.  This can be a complex situation, and our answer is intended to serve as an overview of how the subsidy calculation works; always seek help from a qualified tax professional if you have questions about your specific situation.

First, it has to be noted that a Marketplace enrollee's total out-of-pocket health insurance premiums (and thus the maximum amount that can be deducted using the self-employed health insurance deduction) is determined after final premium tax credit calculations are completed. In other words, it doesn't matter how much you pay each month after your advance premium tax credit (APTC) is applied. What matters is how much you actually paid for your coverage after your APTC has been reconciled on your tax return. This is clarified in Publication 502, in the section about premium tax credits.¹

So for example, if your total premiums for the year were $10,000 and your APTC was $4,000, you paid $6,000 for your plan throughout the year. But if you ultimately have to repay $2,000 in excess APTC to the IRS, you actually paid $8,000 for your health insurance and that's the amount you can deduct in self-employed health insurance premiums. Conversely, if your APTC was underpaid and the IRS gives you an additional $2,000 in premium tax credit when you file your taxes, your maximum self-employed health insurance deduction will only be $4,000.

Now let's take a look at the circular relationship between self-employed health insurance premium deductions, AGI, and premium tax credits. In July 2014, the IRS released Revenue Procedure 2014-41, addressing this issue:²

"... the amount of the [self-employed health insurance premium] deduction is based on the amount of the ... premium tax credit, and the amount of the credit is based on the amount of the deduction – a circular relationship.  Consequently, a taxpayer eligible for both a ... deduction for premiums paid for qualified health plans and a ... premium tax credit may have difficulty determining the amounts of those items."

In the guidance, the IRS provides two methods that self-employed taxpayers can use to calculate their deduction and their subsidy.  The iterative calculation will result in a more exact answer, but it is a little more time-consuming to compute.  The alternative calculation is less exact (and appears to favor the IRS just slightly, as in some cases, it "will not produce a result as favorable as the Iterative Calculation Method"),³ but less time-consuming and easier to calculate. You have your choice of which one you want to use, and tax software should have the calculations built-in, making them simple to use.

In a nutshell, both methods have you do the calculations repeatedly, getting ever closer to the correct answer (that's what iteration means). But while the iterative calculation has you keep going until the difference between successive answers is less than $1, the alternative calculation lets you stop sooner.

The easiest way to understand how the two calculations work is to start on page 9 of Revenue Procedure 2014-41 and work through the examples the IRS provided.

Note that when they mention the "limitation on additional tax," they're referencing the caps on how much you have to pay back when you file your taxes if it turns out that your APTC (the amount sent to your health insurance company each month) was overpaid because your income ended up being higher than projected. But those caps are no longer applicable as of the 2026 plan year. Starting with 2026 coverage (tax returns filed in 2027), all excess APTC must be repaid when you file your taxes.

So in example 1 on page 9 of Revenue Procedure 2014-41,² the IRS uses $2,500 as the limitation on additional tax, because the family’s household income was between 300% and 400% of poverty, and that was the applicable limit that year (between 2014 and 2025, the repayment limits were adjusted annually by the IRS). But again, as of the 2026 plan year, there's no limit on how much excess APTC must be repaid. This makes it particularly important to project income as accurately as possible, and to keep your Marketplace account updated during the year if it appears that your income isn't on track to match the projection you made.

In addressing the question of the circular relationship between AGI and premium subsidies for self-employed people, the examples the IRS provides cover scenarios where the filers took advance premium tax credits as well as scenarios where they did not, since you can pay your premiums in full each month and then claim your total credit for the year when you file your taxes. The examples make the calculations relatively straightforward, although the standard advice applies: If in doubt at all, contact a tax professional for assistance.

Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written hundreds of opinions and educational pieces about the Affordable Care Act for healthinsurance.org.