Deducting self-employed ACA health insurance premiums paid for next year

Question

I'm self-employed and paid my January 2019 ACA health insurance premium at the end of 2018. I assume I can deduct this on my 2018 taxes since I use the cash accounting basis. But what if my 2019 income ends up low enough that I get a subsidy? You're only supposed to deduct your premium amount after subsidy, but I won't know what that is until the end of 2019.

This article discusses the circular dependence between the deduction and your MAGI for ACA subsidies, and gives two solutions. But I'm taking it to another level because it's a premium for next year, so I don't think those help.

Should I just take the deduction in the year the health insurance is for to simplify? Am I allowed to do that since I technically paid the premium in the previous year?

Answer 1

Here's what the instructions for the relevant line on form 1040 say:

Enter the total amount paid in 2018 for health insurance coverage established under your business (or the S corporation in which you were a more-than-2% shareholder) for 2018 [...]

Oddly, this says both "paid in 2018" and "coverage for 2018". This would seem to indicate that payments made in December 2018 for coverage in January 2019 would actually not be deductible in either year! (They wouldn't be deductible in 2019 because they were paid in 2018, but they wouldn't be deductible in 2018 because they were paying for coverage for 2019.)

That is probably not right, but I think it'd take someone with deeper knowledge than me to fully explain the right answer.

The common-sense approach would be to claim 2018 deductions based on what is shown for the 1095-A you received for 2018. At the very least, if someone comes after you, you have a form you can point to that purports to tally up your premiums for 2018 and you can plausibly argue that you acted in good faith based on that document. That means you would only take the deduction for the payment you made in November 2018 (coverage for December 2018). You will have to hope that when you receive your 1095-A next year, it correctly shows what you paid for that January 2019 coverage. If it doesn't, perhaps at that time you can claim the deduction for your January 2020 coverage.

I'm assuming here that the premium amount for this one month is not large enough to really swing things hugely either way. Also, of course, I'm not a tax expert and this is only my common-sense layperson's reading of the instructions.

Answer 2

Stumbled upon the answer a year and a half later, in Pub. 535, Business Expenses:

When To Deduct Premiums

You can usually deduct insurance premiums in the tax year to which they apply.

Cash method. If you use the cash method of accounting, you generally deduct insurance premiums in the tax year you actually paid them, even if you incurred them in an earlier year. However, see Prepayment, later.

...

Prepayment. You can't deduct expenses in advance, even if you pay them in advance. This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Expenses such as insurance are generally allocable to a period of time. You can deduct insurance expenses for the year to which they are allocable.

So premiums paid in advance should be deducted in the year for which they apply.