If you're a freelancer buying health insurance through the ACA Marketplace, you've probably heard about two important tax benefits: the Premium Tax Credit (PTC) and the Self-Employed Health Insurance Deduction (SEHID).

What most freelancers don't realize is that these two benefits interact with each other in a complex, circular way that can dramatically change your final tax bill. And here's the kicker: most tax software doesn't calculate this correctly.

The Problem: Your health insurance deduction (SEHID) reduces your income, which changes how much subsidy (PTC) you're eligible for, which then changes how much you can deduct, which changes your income again... and the cycle continues.

What is the Premium Tax Credit (PTC)?

The Premium Tax Credit is a federal subsidy that helps lower your monthly health insurance premiums if you buy coverage through the ACA Marketplace (Healthcare.gov or your state exchange).

How it works:

The PTC is based on your Modified Adjusted Gross Income (MAGI), which includes your self-employment income minus your business expenses.

What is the Self-Employed Health Insurance Deduction (SEHID)?

If you're self-employed, you can deduct your health insurance premiums as an "above-the-line" deduction on Form 1040. This reduces your Adjusted Gross Income (AGI), resulting in significant tax savings.

The catch: You can only deduct the premiums you actually paid out-of-pocket. You cannot deduct the portion covered by the Premium Tax Credit.

Simple Example (Without the Interaction)

Monthly premium: $500

APTC you received: $300

You paid out-of-pocket: $200

Annual SEHID: $200 × 12 = $2,400

Seems straightforward, right? But there's a problem...

The Circular Dependency Problem

Here's where it gets tricky. Let's say your initial income is $50,000. Here's what happens:

  1. Step 1: Based on $50,000 MAGI, you're eligible for $3,600/year in PTC
  2. Step 2: You paid $6,000 in premiums, minus $3,600 PTC = $2,400 SEHID
  3. Step 3: But wait! That $2,400 deduction reduces your MAGI to $47,600
  4. Step 4: At $47,600 MAGI, you're now eligible for MORE PTC (let's say $3,900)
  5. Step 5: But if your PTC is $3,900, your SEHID is only $2,100 ($6,000 - $3,900)
  6. Step 6: If your SEHID is $2,100, your MAGI is $47,900...
  7. Step 7: Which changes your PTC again...

And the cycle continues.

This is why it's called a "circular dependency": Each value depends on the other, creating an endless loop. You can't calculate one without knowing the other, but you can't know the other without calculating the first.

The IRS Iterative Calculation Method

The IRS knows about this problem. In Publication 974, they describe the official solution: the Iterative Calculation Method.

Here's how it works:

  1. Start with your initial MAGI (income before SEHID)
  2. Calculate your PTC based on that MAGI
  3. Calculate your SEHID based on that PTC
  4. Recalculate your MAGI using the new SEHID
  5. Recalculate your PTC based on the new MAGI
  6. Repeat steps 3-5 until the numbers stop changing

Typically, this converges after 5-10 iterations.

Real Example: Sarah's Tax Calculation

Initial gross income: $50,000

Annual premium: $6,000

Age: 34, single, no dependents

State: Colorado

❌ What TurboTax calculated (incorrectly):

  • SEHID: $6,000
  • MAGI: $44,000
  • PTC: $4,200
  • Repayment owed: $600

✅ Correct iterative calculation:

  • SEHID: $2,847
  • MAGI: $47,153
  • PTC: $3,153
  • Repayment owed: -$153 (refund!)

Difference: $753 — Sarah would have overpaid by this amount using standard tax software!

Why Most Tax Software Gets This Wrong

The problem? Most tax software (including TurboTax, H&R Block, and even many CPAs) don't implement the iterative method. They make simplifying assumptions like:

The result? Freelancers often:

Action Steps for Freelancers

✓ Do this before tax season:
  1. Calculate your real MAGI using the iterative method
  2. Compare to what you estimated when enrolling
  3. If your income went up significantly, prepare for APTC repayment
  4. If your income went down, you might get a refund
  5. Consider adjusting your APTC for next year to avoid surprises

Want to Know Your Real Cost?

Use our calculator to run the full IRS iterative calculation and see exactly what you'll owe (or get back) at tax time.

Calculate My Real Cost

Frequently Asked Questions

Can I use TurboTax?

TurboTax will calculate your taxes, but it may not optimize the SEHID/PTC interaction correctly. Many users report receiving APTC repayments because of this.

Do I need to do this calculation myself?

No! The IRS provides worksheets in Publication 974, or you can use our automated calculator which implements the exact IRS method.

What if I already filed and didn't use the iterative method?

If you believe you overpaid, you can consult with a tax professional for guidance before filing an amended return (Form 1040-X).

Does this apply to everyone with ACA coverage?

Only if you're self-employed AND receiving Premium Tax Credits. If you're an employee or don't get APTC, this doesn't apply to you.