The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
Health Care Credit Limits Posted by IRS
Jul 16, 2010
The large health care act passed earlier this year had an up to 35% credit available to farmers who paid for health insurance for their employees. The credit is based upon the percentage amount of health insurance that a farmer pays times 35%. As long as you pay at least 50% of the premiums for your employees, the credit is based upon the amount paid times 35%.
However, there is a cap on how much premium you can use. This cap is based upon the average premium for small group markets for each state. The IRS just published revenue ruling 2010-13, which outlines what this cap amount is for each state. The cap is based either on employee-only coverage or family coverage. I will give you an example of how this cap might work for you as a farmer:
Suppose you have two employees. One is single and one is married with kids. Assume that you pay 80% of the medical insurance for each employee. Also, assume you are a farmer in Iowa.
Let's calculate the maximum amount of the credit by assumimg that the cost of this premium is $500 per month for the employee and $950 per month for the family. The credit that you could take is 80% of the premium times 35% for the year. This would equal $500 times 12 times 0.8 times 0.35, or $1,680 for the single employee, and $950 times 12 times 0.8 times 0.35, or $3,192 for the family employee, for a total credit of $4,872.
Now we need to determine how much of this credit is allowed by comparing it to the small group market tables from the IRS. For the single employee, the maximum credit allowed for Iowa for a year is $4,652. Since the farmer paid only 80% of the premium, this would equal a total allowed amount of $3,721.60 times 35%, or $1,302.56 maximum credit allowed for a single employee. For the family employee, the state of Iowa maximum annual amount is $10,503 times 80% times 35%, or $2,940.84. These two amounts added together result in a maximum credit allowed of $4,243.40.
Our original calculation resulted in a credit of $4,872. The IRS allows only $4,243.40 based upon the small group market tables, so the actual credit you would use on your tax return is $4,243.40.
A quick way of determining whether you need to worry about this is to look at your premium on a monthly basis and compare it to the table amount (after dividing by 12 to make a monthly comparison). If your premium is less than the table amount, you can ignore it on the tax return. However, if your premium is greater than the table amount, you will need to limit your credit based on this calculation.