All Social Security Benefits Are Includible in MAGI in Determining Premium Tax Credit

(Parker Tax Publishing March 2019)

The Tax Court held that, for purposes of determining a taxpayer's eligibility for the premium tax credit (PTC) under Code Sec. 36B, a taxpayer's modified adjusted gross income (MAGI) includes all social security benefits received during the tax year irrespective of a Code Sec. 86(e) election. As a result of including all of the taxpayer's social security benefits in MAGI, the taxpayer was not eligible for the PTC. Johnson v. Comm'r, 152 T.C. No. 6 (2019).

Background

In 2014, Levon Johnson received $4,460 in monthly advance payments of the premium tax credit (PTC) under the Affordable Care Act (ACA). Johnson's reported modified adjusted gross income (MAGI) was within the amount needed to qualify him for the PTC. In calculating his MAGI, Johnson did not include all social security benefits received during 2014. Part of his social security benefits included a lump sum attributable to 2013. On an amended 2014 federal income tax return, Johnson made a Code Sec. 86(e) election to exclude a portion of the 2013 social security benefits received during 2014 from his gross income. On the 2014 amended return, Johnson showed $1,250 of excess advance payments of the PTC.

Code Sec. 36B, a provision enacted by the ACA, allows certain specified taxpayers to receive a subsidy, reducing the cost of health insurance purchased through a health insurance exchange, in the form of a federal income tax credit equal to the PTC amount for the tax year. The PTC is generally available to taxpayers with a household income of at least 100 percent but not more than 400 percent of the federal poverty line. Household income is the sum of the taxpayer's MAGI plus the MAGI of family members (1) for whom the taxpayer properly claims deductions for personal exemptions, and (2) who were required to file a federal income tax return.

Advance PTCs (APTCs) are paid directly to an insurance provider during the year, and taxpayers are required to reconcile any APTCs received with the eligible credit amount on Form 8962, Premium Tax Credit, which is filed with their federal income tax returns.

The IRS determined that Johnson's excess PTC was the entire $4,460 of advance payments because, under Code Sec. 36B, all of Johnson's social security benefits received during 2014 (including those relating to 2013) must be included in computing whether or not he was entitled to the PTC. After including all social security benefits in Johnson's MAGI, the IRS determined that he was not entitled to the PTC. Johnson petitioned the Tax Court.

Johnson argued, relying primarily on the intended purpose of the ACA, its legislative history, and public policy arguments, that his Code Sec. 86(e) election should result in the exclusion from his 2014 MAGI of all the social security benefits attributable to 2013 or, alternatively, the social security benefits attributable to 2013 except the portion of his 2013 benefits included in his 2014 gross income. Johnson contended that denying him the PTC because of income attributable to a prior year leads to an absurd result, which is contrary to the intended purpose of the ACA. According to Johnson, he is within the class of persons that the statute was intended to assist.

The issue before the Tax Court was whether, for purposes of determining Johnson's eligibility for the PTC, Code Sec. 36B requires the inclusion of social security benefits in the computation of MAGI in spite of a Code Sec. 86(e) election.

Tax Court's Analysis

The Tax Court, noting that the issue before it was one of first impression, held that the text of the statute is not ambiguous and that Johnson must include in his MAGI all of the social security benefits received in 2014, irrespective of the Code Sec. 86(e) election. As a result, the court said, Johnson's adjusted gross income must be increased by the amount of social security benefits not included in his gross income. After adjusting Johnson's MAGI to include the additional social security amount, the court found that Johnson's MAGI exceeded the established threshold for PTC eligibility by a relatively small amount.

With respect to Johnson's argument, the court said it did not find that the interpretation of the statute leads to an absurd result. While the court was sympathetic to Johnson's situation, it found that his MAGI exceeded eligible levels and it could not ignore the law to achieve an equitable end.

For a discussion of the PTC, see Parker Tax ¶102,610.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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