Material Participation 1.469-5(f)

Material Participation 1.469-5(f)

Rarely do you see such a broad statement in a Regulation.

(1)In general. Except as otherwise provided in this paragraph (f), any work done by an individual (without regard to the capacity in which the individual does the work) in connection with an activity in which the individual owns an interest at the time the work is done shall be treated for purposes of this section as participation of the individual in the activity.

Rental activity is different, so we need first to divide the world into rental activity and everything else.

All Rental activity is Passive is one mantra of the tax code.

But there is a different voice when it comes to rental activity being passive if a person can qualify as a Real Estate Professional (REP).

An individual who is qualified as a Real Estate Professional (REP) and meets the 2 tests below is able to qualify to show material participation in rental activities and take losses as non passive (losses that can reduce wages, dividends, etc.):

1. More than 50% of your time working is spent in the real estate business. 469(c)(7)(B)(i). The term “real property trade or business” is broadly defined as any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business Sec. 469(c)(7)(C).

2. You must work at least 750 hours in the real estate business. 469(c)(7)(B)(ii). Be mindful that no time will qualify if you are an employee without a 5% ownership interest in the Company. 469(c)(7)(D)(ii).

However, just meeting these 2 tests is not sufficient.

The next objective is to satisfy just one of seven tests for material participation in each activity. (1)

You would think that if you had 750 hours in the real estate industry that would be sufficient, but no. Further, the material participation requirement applies to both rental and non rental (everything else) activity.

For example: Fred is a realtor and also has an ownership interest in a construction corporation. Fred only spent 20 hours a year working at the construction company. Those 20 hours would not be sufficient to catagorize the loss from the construction company as non passive (active). However, even if Fred had 600 hours working at the construction corporation, these hours may not count, if they are not the right type of hours.

Further, even if Fred has material participation as a Realtor and/or as a shareholder in the construction corporation, this would not mean he has met the material participation requirement for the rental properties he owns. Rental Properties require Fred, even after qualifying as a REP, to show material participation in the rental properties separately from other non rental business activities, (for example his construction corporation).

So now we have two issues to face:

What types of hours are acceptable?

No Trivial hours spent watering the office plants and dusting the office furniture in order to meet the material participation requirement is allowed. 1.469-5T(f)(2)(i)

No hours count for time spent as an Investor reviewing financial statements, preparing summaries, monitoring the finances and operations, etc.
Sometimes no hours count for Management if another person has more hours than Fred in Management and that other person gets compensated.(2).

So what hours are left? Chores. Specific tasks that Fred performs for the Corporation. Brown v. Commissioner T.C. Memo 2019-69

Let’s focus in on Chores.

Types of Chores:

1. Handling financing
2. Product development
3. Customer Retention

The Court in Montgomery v. Commissioner T.C. Memo 213-151 adds to the Chores list:

4. Office functions
5. Managing Payroll
6. Preparing official documents
7. Attending business meetings
Can’t all of these items 1 through 7 be considered Management? Yes – So how do you win this argument that these Chores are not Management?

A. There is another person performing the day-to-day Operations.
B. If the IRS argues this other person is not performing Management hours, thenyou will agree that Fred performed more Management hours than any other person. Therefore, now you count the hours as Management hours instead of Chore hours.

When you are keeping records to meet the Material Participation Test you have to keep in mind how these hours are being categorized. Fred could have the most detailed records ever on plant watering, and it will do no good.
Now the next issue is,

What relationship does Fred have to the Construction Corporation?
Is Fred a shareholder, an employee, an agent, a subcontractor, or does it matter?

As Bill Murray proclaimed in Meatballs, “It just doesn’t matter.” Well almost. Fred only has to have an ownership interest. Fred could be the 1st basemen for the NY Yankees and as long as he meets on the 7 material participation tests and has an interest in the activity, he is allowed to take the loss.

If Fred is trying to qualify as a REP to deduct his rental property losses as a employee of a real estate trade or business, then Fred needs to have a 5% ownership interest. Otherwise, if Fred is trying to meet the material participation
test for the construction corporation (non rental), then he only has to show any interest. So, he could have 1% interest in the construction corporation, and he does not need to be an employee.
1.469-5(f) talks about individuals. How do the Courts look at the issue of the relationship of the various parties to a Non Grantor Trust and material participation?

There are 2 types of Trusts to discuss here.

Grantor Trusts. The person who creates the Trust retains one or more powers over the Trust and thus the trust income is taxable to the grantor.

With the Grantor Trust the rules discussed above apply.

Non Grantor Trusts. The grantor is not the trustee nor beneficiary.

The Courts in Mattie K Carter Trust ruled as to counting as material participation the hours spent by the following as counting:

Employees of the Trust – YES
Trustees – YES (this is the only catagory the IRS agrees to)
Trustees working as employees of the Trust – YES
Trustee working as employees for entities owned by the Trust – YES
Agents – YES
Beneficiary – NO

Grouper. A different kind of fish.

If Fred is having trouble meeting the material participation requirements for each of his activities, then he can group one or more activities as one to meet one of the 7 possible material participation test for the group as a whole. Twenty hours working at the construction company is not sufficient, so Fred may group the construction company with his real estate activity.

To refresh, this is all being done to get the losses to flow through to offset wages, dividends and other income.

Items to consider:

Rental Groupers and Non rental Groupers don’t swim in the same pool.
A taxpayer may not group a rental real estate activity with any other activity of the taxpayer. 1.469-9(e)(3)(i).
Also once an activity is in a Group, then it is swimming with the other fish and is part of the Group. It is helpful to qualify for material participation, but imposes limits when you sell one of the activities inside the Group.
What if Fred buys a new business, say, a title company. He can elect to add the title company to the Group or to keep it separate. But if he wants to group the two activities, he has to file a Declaration about an Appropriate Economic Unit.

Also, say 5 years from now Fred wants to take the title company and group it with the Construction company. He can do that but must file a Declaration.
1. A declaration that the regrouping (combining 2 or more existing groups) makes up an appropriate economic unit.

2. A statement on what the material change in the facts and circumstances were that made the original grouping inappropriate.

Even when Fred first acquires the title company and wants to group it with the construction corporation, he has this issue of its addition making an appropriate economic unit.
1. The similarities and differences in the types of trades or businesses,
2. The extent of common control,
3. The extent of common ownership,
4. The geographical location, and
5. The interdependencies between or among activities, which may include the extent to which the activities:
A. Buy or sell goods between or among themselves,
B. Involve products or services that are generally provided together,
C. Have the same customers,
D. Have the same employees, or
E. Use a single set of books and records to account for the activities.
This is a general discussion. See your tax advisor before using this information to make a decision in your specific situation.

1. Material Participation Test Under the Temporary Regulations
Temp. Regs. Sec. 1.469-5T(a) provides that a taxpayer can establish material participation in an activity by satisfying one of seven tests:

1. The individual participates in the activity for more than 500 hours during such year;

2. The individual’s participation in the activity for the taxable year constitutes substantially all of the participation in such activity of all individuals (including individuals who are not owners of interests in the activity) for such year;

3. The individual participates in the activity for more than 100 hours during the taxable year, and such individual’s participation in the activity for the taxable year is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity) for such year;

4. The activity is a significant participation activity (within the meaning of ) for the taxable year, and the individual’s aggregate participation in all significant participation activities during such year exceeds 500 hours;

5. The individual materially participated in the activity (determined without regard to this paragraph (a)(5)) for any five taxable years (whether or not consecutive) during the ten taxable years that immediately precede the taxable year;
6. The activity is a personal service activity (within the meaning of ), and the individual materially participated in the activity for any three taxable years (whether or not consecutive) preceding the taxable year; or
7. Based on all of the facts and circumstances (taking into account the rules in ), the individual participates in the activity on a regular, continuous, and substantial basis during such year.(ii)Certain management activities. An individual’s services performed in the management of an activity shall not be taken into account in determining whether such individual is treated as materially participating in such activity for the taxable year under paragraph (a)(7) of this section unless, for such taxable year –

2. (A) No person (other than such individual) who performs services in connection with the management of the activity receives compensation described in section 911(d)(2)(A) in consideration for such services; and

(B) No individual performs services in connection with the management of the activity that exceed (by hours) the amount of such services performed by such individual.

Tax Cuts and Job Act 199A Calculating the 20% deduction

The hurdles in obtaining  the deduction under the Tax Cut and Job Act.

If you pass all of the limits below you still have an umbrella limit of 20% of (taxable income- capital gains).

In addition to the umbrella limit there are three bucket tests.

I.   Everyone who has taxable income under 157,500 single and 315,000 married.   20% of the Qualified Business Income (net income from your business).

So for example in this bucket it is the lessor of 20% of TI or 20% of QBI.


II.  Specific Service and Trade Business.   Lawyers, Doctors, Consultants who make over the 157,500 single and 315,000 married.  Phase out until 207,500 for single and 415,000 for married.  After the phase out of 207,000 and 4150,000 no deduction.


III.  Non Specific Service and Trade Business over 157,500 single and 315,000 married.    Lessor of:

20% of QBI


the greater of 50% of wages vs 25% of wages + 2.5% of assets.

For example a roofer does not have that much in the way of equipment.  So I think 50% of wages is most likely to be the greater number.  Of course you should do the 25% + 2.5% of asset test.

So it comes down to the lessor of

20% of QBI

50% of wages.


IF you are an employee of a S corp you should consider taking a year end bonus to increase your 50% number. Or consider hiring your spouse if you are a Sole proprietor or and LLC.

For example  your QBI (net income ) is 100,000

So 20% of $100,000 is $20,000.  But what if you wages are only 5,000.  Then 20% of 5,000 is 1,000 and so you end end with just 1,000 as the 20% qualif

Now for example, you pay yourself  a bonus of 23,000.    Let’s see what happens.

100,000 -23,000 = 77,000 x .2 = 15,400.

compared to 23,000 + 5,000 = 28,000 X 5 =14,000  So now the QBD is 14,000( the lessor of 15,400  or 14,000)

Okay so the 14,000 X your tax rate (IRS and state) is for example .35 = 4,900.

What is the payroll cost of the additional salary ?   23,000 X .153 = 3,519

So you save roughly 1,400.

The use of the salary bonus works best when the employee is over the SS limit already.

So for example maybe  you have already paid yourself from the company over the social security limit, or your spouse works for the government and makes over 128,400 for 2018.  Then the business is only paying the employer side and the benefit of the bonus is improved.

Of course the IRS could ask what your spouse did for the company for 23,000 salary.

This is just a general discussion.  See your tax preparer for any questions.

Depreciation recapture on conversion of business asset to personal use

Recapture of deprecation for business property
converted to personal use.

Do you have to recapture the 179 depreciation and special depreciation allowance (bonus depreciation) on a simply conversion from business use to personal use? Let’s discuss the issue of recapture.

Here is an example. Bob, an airplane pilot, has an office in his home and buys a computer. He is self employed and is using the computer 100% for business in the first year and take 179 or special allowance depreciation in the first year. In year three he decides to change his focus, and gets a job with an airline as an employee and only flies for his own clients part time. Now he uses the computer 10% of the time for business. The other 90% he uses the computer to do emails with family and friends.

So we have a self employed individual who starts a company and takes full advantage of code section 179 and special depreciation allowance provisions of the tax code. The businessman is allowed to do this because the property is being used more than 50% for the business purpose vs. personal use.

What happens to all the bonus deprecation and 179 deduction when the property is converted back to personal use. Not sold, not disposed of, but simply now used for personal use.

The issue comes down to whether the property is “listed property”. If the property is listed property, then on the conversion there is a recapture of depreciation taken in prior years.

If the property is not listed property, then the mere conversion from business to personal use creates no recapture. But if after the conversion, the property now being used personally is sold, then there could be recapture of the 179 or bonus depreciation. There is a difference between how the computer is being used vs. the sale of the computer.

What is listed property?

26 US Code §280F(d)(4) defines it as:

(4) Listed property
(A) In general Except as provided in subparagraph (B), the term “listed property” means—
(i) any passenger automobile,
(ii) any other property used as a means of transportation,
(iii) any property of a type generally used for purposes of entertainment, recreation, or amusement, and
(iv) any other property of a type specified by the Secretary by regulations.

Here is an exception for companies transporting people or property:

(B) Exception for property used in business of transporting persons or property
Except to the extent provided in regulations, clause (ii) of subparagraph (A) shall not apply to any property substantially all of the use of which is in a trade or business of providing to unrelated persons services consisting of the transportation of persons or property for compensation or hire.

Not looking so good for Bob at this point is it? But hold on, see that provision under (iv) about regulations.

If you look at Regulation §1.280F-6(b), “listed property” is further defined as

(b)Listed property –

(1)In general. Except as otherwise provided in paragraph (b)(5) of this section, the term listed property means:

(i) Any passenger automobile (as defined in paragraph (c) of this section),

(ii) Any other property used as a means of transportation (as defined in paragraph (b)(2) of this section),

(iii) Any property of a type generally used for purposes of entertainment, recreation, or amusement, and

(iv) Any computer or peripheral equipment (as defined in section 168(i)(2)(B)), and

(v) Any other property specified in paragraph (b)(4) of this section.
(b)(5) there is another exception!!! Let’s take a look at (b)(5),

(5)Exception for computers. The term listed property shall not include any computer (including peripheral equipment) used exclusively at a regular business establishment. For purposes of the preceding sentence, a portion of a dwelling unit shall be treated as a regular business establishment if (and only if) the requirements of section 280A(c)(1) are met with respect to that portion.

Bob is using his computer at his regular business establishment. And he is also okay having used his home office as his regular business establishment.

So good news for Bob. His computer is not listed property and no recapture on the simple conversion. If however he sold the computer in year 3 at a gain, then yes he would have to get out his MACRS depreciation schedule and calculated the recapture. He would report the excess depreciation on his year 3 tax return as ordinary income on form 4797.

How much is the recapture when listed property is converted from business use to personal use?

IRC §280F(b)(2)(A) says it is the difference between the “excess depreciation”.

(2) Recapture
(A) Where business use percentage does not exceed 50 percent If-
(i) property is predominantly used in a qualified business use in a taxable year in which it is placed in service, and
(ii) such property is not predominantly used in a qualified business use for any subsequent taxable year,
then any excess depreciation shall be included in gross income for the taxable year referred to in clause (ii), and the depreciation deduction for the taxable year referred to in clause (ii) and any subsequent taxable years shall be determined under section 168(g) (relating to alternative depreciation system).
(B) Excess depreciation For purposes of subparagraph (A), the term “excess depreciation” means the excess (if any) of-
(i) the amount of the depreciation deductions allowable with respect to the property for taxable years before the 1st taxable year in which the property was not predominantly used in a qualified business use, over
(ii) the amount which would have been so allowable if the property had not been predominantly used in a qualified business use for the taxable year in which it was placed in service.

See you own tax preparer for your specific issue, as this is a generic discussion.

A final thought. Now that we have a better understanding of depreciation recapture, how did we capture it in the first place?

How the 20% deduction rule works

                                         How the 20% deduction rule works
Specific Service Industries                                          All other industries
(CPAs, attorneys, brokers, Drs, etc –
But not engineers nor architects)
LESSER of:                                                                       | LESSER of:
A. 20% of net business income                               A. 20% of net business income

B. 20% of taxable income                                          B. 20% of taxable income

                                                     UNDER TAXABLE INCOME

          ****TAXABLE INCOME   157,500 single 315,000 Married  ****

                                                            OVER TAXABLE INCOME

Then phase out of benefit over these levels
50,000 for single and 100,000 for Married

No 20% deduction over phase out                          LESSER of these 3 numbers:

                                                                                                                                                                                                  A. 20% of net business inc.

                                                                                                B. 20% of taxable income

                                                                                                   C.  Which is Greater?

                      1.  25% of wages + 2.5 % X cost basis  of assets

2.   50% of wages

                                                                       No 20% deduction over phase out
Taxable income greater than:
Single 207,500
Married 365,000

Converting your SEP or traditional IRA to a ROTH

Considering converting your SEP or traditional IRA to a ROTH?

Here is an example of why it may not make a difference?  It all depends on your tax rate when you retire.

  For example say your taxable income  is 170,000 for 2017.

    For 2018, if everything remains the same you will be in a 24% tax bracket (2018 24% bracket is 165,001 to 315,000).

     So  you convert 100,000 to a ROTH from your SEP.  If the tax is paid out of the converted funds (24% +6% VA), now there is 70,000 starting in the ROTH.  Notice that if you converted instead 200,000 to a ROTH,  this would put you in a 32% bracket.

      So the choice is leaving the 100,000 in the SEP and growing to be taxed at a later date,


paying the tax now and having 70,000 to invest tax free.  Assume the same rate of return of 6% for both options.   Assume you and spouse are 79 and will live another 12 years per the joint annuity IRS table.

70,000   in 12 year  is worth 140,854

Leaving in SEP the 100,000 is worth 201,220.  Pay the tax at 30% =  60,366. So after taxes the amount is 140,854 (201,220 – 60,366)..  If you or you beneficiary are still in a 30% (IRS and VA) bracket, then no difference.  If you or your beneficiary are in a lower bracket then leaving the money in the SEP is best. 


The $64 dollar questions is what will be you  tax bracket when your retire or for your beneficiaries when you die ( for 2018 the rates are  22% 77,401 – 165,000  and the 12% bracket is 19,051 – 77,400).

Why people recommend converting is they assuming that the cash to pay the immediate tax bill will come from another source of funds and the ROTH account will start out with the 100,000.

401K Plan Contribution Calculation for the Self-Employed with Employees

401K Plan Contribution Calculation for the Self-Employed with Employees

So how much can the self employed person contribute to a 401K plan with employees for elective, non elective (safe harbor), and profit sharing?

1. As an “employee” the self employed can contribute up to 18,000 for 2017 + an additional 6,000 if 50 or older. Of course there has to be “earned income” from the self employment.

2. What if the self employed person has employees? The plan is going to required a certain level of participation for the 401K plan to be a qualified plan. Often the employees are not interested in setting aside part of their paycheck for retirement. They need all of their pay check for rent and groceries.

So the company in order for the plan to qualify has to set aside some % of the employees salary. So for example 4% of compensation is used.

And in this example the regular employees’ wages is 100,000. So 4,000 would be contributed to the employees’ 401K plan on their behalf.

Well what about the self employed person. Let’s say the net profit from schedule C is $90,000 in 2017. And the self employed person is 54 years old.

Can we set aside 4% for the self employed person? Yes but there is a calculation. The 4% is applied after the 4% is taken into consideration. Yes, it is confusing.  Let’s take a look at the 401K plan contribution calculation.


The 401K plan contribution calculation: an example

Net Profit Schedule C                                    90,000

Less deductible portion on SE tax           (6,358)
Line 27 of the 1040                                        ——


4%/104% = .038462 X 83,642 = 3,217

3. So the third question is what if the business had a great year and the self employed person would like to make an elective contribution (a profit sharing)?

Yes that can be done. So for example the owner decides to make a 8% contribution to the regular employees’s 401K plan  in addition to the 4% safe harbor (non elective) contribution.

Can the owner also participate in the profit sharing and make a contribution to his 401K plan? Yes!

8%/108% = 7.41% is the equation for the percentage. The owners profit sharing amount would be 83,642 X .0741 = 6,198.

So in total the owner can contribute 18,000 + 6,000 + 3,217 + 6,198 = 33,415.

Please keep in mind there is a top limits that can be contributed. 54,000 + 6,000 for the over the age of 50 catch up.

Make sure to see your tax advisor regarding your particular situation.

Quickbooks Adjusting Accounts Receivable: Writing Off Over Payments and Bad Debts


Quickbooks  in Adjusting Accounts Receivable

If your business uses receivable accounts to track customer payments chances are you have a few customers that have over payed or refuse to pay for products or services. In either case these receivables will stay on the books unless they are cleared out.  Here is how to use Quickbooks in Adjusting Accounts Receivable.

Clearing out an over payment:

We will be using an invoice to zero out over an payment in a customer’s receivable account. The over payment will be written off into an expense account. It is recommended that you create an ‘Other Expense’ account specifically for this. This way if an adjustment needs to be changed or deleted it can found easily.

If you haven’t done so already create a new ‘Other Expense’ account:

1. Begin by opening the ‘Chart of Accounts’ window. On the top menu bar click on ‘Accountant’ and select ‘Chart of Accounts’ from the drop down.
2. Right click in the window and select ‘New’ to create a new account.
3. Select ‘Other Account Types’ at the bottom of the window. In the drop down next to this option select ‘Other Expense.’
4. Click ‘Continue’ in the bottom right corner of the window.
5. Name your new account. You will use to write off the overpayments. It is recommended to use a specific name like ‘A/R Adjustments.’
6. Finally click ‘Save & Close’ at the bottom of the window to finish creating the new account.

With your expense account created, make a new invoice item. This is the item that we will use to adjust customer accounts:

1. Begin by opening the ‘Item List’ window. On the top menu bar click on ‘Customers’ and select ‘Item List’ from the drop down.
2. Right click in the window and select on ‘New’ to create a new invoice item.
3. Select ‘Other Charge’ as the item type in the ‘Type’ drop down menu.
4. Give the item a descriptive name. Something like ‘Overpayment Adjustment’ is recommended.
5. Next choose the account this item will go against in the ‘Account’ drop down. Select the account created in the previous step or the account that you would like to use.
6. Finally click ‘OK’ in the top right corner of the window to finish creating the invoice item.

Now you are ready to zero out customer over payments:

1. Before you begin write down the information for the customer account you will be adjusting and the amount you will need to debit from their receivable account.
2. Begin by opening the ‘Create Invoices’ window. On the top menu bar click ‘Customers’ and select ‘Create Invoices’ from the drop down.
3. Select the customer’s account that you will be adjusting in the top left corner of the window with the ‘Customer Job’ drop down.
4. Next under the ‘Item’ field in the invoice select the invoice item you created to make accounts receivable adjustments.
5. It is recommended that you leave a detailed description of the adjustment in the ‘Description’ or ‘Memo’ fields to avoid confusion in the future.
6. Under the ‘Amount’ field enter the adjustment amount you wrote down earlier.
7. If you need to change the date the adjustment will take effect, change the ‘Date’ field to the required date.
8. Finally click the ‘Save & Close’ button in the bottom right corner of the window to finish creating the adjustment invoice.

The customer’s Accounts Receivable should now be zeroed. It is recommended that you check the customer’s receivable account to make sure the invoice was entered correctly and had the desired effect.

Clearing out a bad debt:

If your accounting is done on a cash basis or the uncollectible invoice amounts will not significantly affect your gross sales there are two simple ways to clear out bad debts. You can either issue a discount on the bad debt in question or mark as a bad debt.

Issuing a discount for an invoice:

1. Begin by opening the ‘Customers’ window. On the top menu bar click ‘Customers’ and select ‘Customer Center’ from the drop down.
2. Find and click on the customer’s name whose receivables account needs to be adjusted.
3. Find the invoice or invoices that are outstanding and double click on one to open the ‘Create Invoices’ window.
4. Insert a new item into the invoice and select ‘Discount’ for the item type.
5. Make sure to leave a specific description to avoid confusion in the futue.
6. Enter the amount being written off in the amount field.
7. Select ‘Save & close’ to finish editing the invoice.
8. Repeat these steps for any invoices that need to be written off.

Marking the Invoice as a bad debt:

1. Begin by opening the ‘Customers’ window. On the top menu bar click ‘Customers’ and select ‘Customer Center’ from the drop down.
2. Select the customer whose receivable account needs to be adjusted.
3. Find the invoice or invoices that are outstanding and double click on one to open the ‘Create Invoices’ window.
4. When the invoice opens, on the bottom left click on the ‘More’ button and select ‘Void’.
5. A window will pop up asking you to confirm voiding the invoice. Select ‘Yes’
6. Repeat steps 4 to 6 for each invoice you need to void.

Quickbooks in adjusting accounts receivable

It is recommended that you check the customers receivable account to make sure the adjustment had the intended effect.

If your business reports on an accrual basis voiding bad debts is a bit more complicated. The invoices have already been reported as income but are no not collectible. It is recommended that you talk to your accountant to find solution.

Form 8962 and Married Filing Separately

Form 8962 when filing Married Filing Separately (MFS)

If your health insurance was obtained through the government exchange and you estimated your household income was between 100% and 400% of the federal poverty line, then you got help in paying your insurance premium from the government. The Advance Payment of the Premium Tax Credit (APPTC) went right to the insurance company and you never saw that money, but you did get the benefit.

So now at the end of the year comes the time of settling up. For example if you said your were earning $XX dollars and the government advanced the health premiums based on that situation, and then it turns out your made $XXX + for the year, the IRS want some of the money back. Of course if you made more that the 400%, then the IRS wants all of it back. Or it can work the other way, if when you signed up for the Exchange you said $XXX was going to earned and you earned less, then the IRS is going to give you a credit.

You will be getting a 1095-A from the IRS. And in column C is the APPTC. This is the money the government sent to the insurance company to help pay your premium.

This is good except what happens if you decided to file a MFS tax return.

You don’t get the Premium Credit if you file MFS,  unless you meet the following exception.

1. You can file MFS if you were a victim of domestic abuse or

2.  your spouse abandoned you.
What happens when you were planing on filing Jointly and then events happen.

So let’s take an example.

When your family applied for the credit you were intending to file Married filing Jointly, but maybe circumstances change and your spouse wants a divorce, then one of the spouses may be able to filed Head of Household (HOH) living apart or Single living apart. The spouse filing HOH or Single is eligible for the premium tax credit.

So for example, maybe one spouse moved out of the house and took the child, and now qualifies for HOH. Then the remaining spouse is in the MFS category and barred from the Premium Tax Credit.

Let’s take another example. The family is living together, but the husband is a general contractor and his wife is concerned about the tax position taken on his Schedule C Sole Proprietorship. The wife does not want to be involved with a Joint tax return because of questionable deductions.

At then end of the year the 1095-A arrives, and it has your social security number and lists the covered individuals as you and your spouse and the 2 children. And in our example your spouse took both children as dependents.

You are filing MFS and are looking at the form 8962. You know you are not entitled to any credit and will have to repay your portion of the credit.

But how much and how to fill out the form?

You have to mark under Part II line 9 the YES box.

Next go to Part IV and the SS of the OTHER taxpayer – yes your spouse.

Now how much to included?
Going back to the instructions for Line 9, it talks about Your tax family and a Second tax family (your spouse and the 2 kids). In our example, we meet both conditions and so we would go to TABLE 3 of the instructions and follow the Allocation of Policy Amount.
TABLE 3 has 3 options

A. Divorced or legally separated.

B. Married at the end of the year and filing MFS

C. No Advanced payment was paid for the policy.

So our taxpayer is B.

Now we have to go to Allocation Situation 2.

If you find the Allocation Situation 2 it says 50% is to be reported on Part IV.
Then if you look at page 5 of the instructions, it tells you have to report 50% of the Advanced Premium Credit which confirms what the Allocation Situation 2 says also.

Then go part IV and put down 50%.

This is counter to what you might conclude that the husband filing MFS would report 25% and the wife with the 2 children would report 75%.

So for our example if the Advance Payment of Premium Credit reported on 1095-A- line 32 column C was 10,000, our MFS taxpayer would have to report 5,000 on line 46 of  the general contractor’s 1040.