Why this is circular (the loop, in plain English)
Two rules point at each other:
- Your deduction = the premiums you paid minus your premium tax credit. (You can't deduct what the government already paid for you.)
- Your credit depends on your income — and the deduction lowers your income.
So a bigger deduction → lower income → bigger credit → which makes the allowed deduction smaller → higher income → smaller credit → bigger deduction… The two values circle until they meet. IRS Publication 974 calls the meeting point the answer, and the iterative method is how you find it: keep recomputing until the deduction and the credit each move by less than a dollar. That's exactly what the table above shows.
The limits on your deduction (Form 7206 order)
The deduction is the smallest of these:
- Premiums minus your premium tax credit — you can't deduct subsidized dollars.
- Your business's earned income — net profit minus the deductible half of self-employment tax minus self-employed retirement contributions for that business.
The deduction flows to Schedule 1, line 17, and reduces your income tax — but note it does not reduce your self-employment tax.
Three situations this handles
You get a subsidy (the circular case)
The iterative loop runs and converges; your deduction settles at premiums minus the final credit.
Your income is above the 400% cliff (no subsidy)
With no credit, there's nothing to subtract — your full premium is deductible, up to your business's earned income. The loop ends immediately.
Your deduction is capped by business income
If premiums minus the credit is more than your business earned, the deduction stops at your earned income, and the rest of the premium isn't deductible (though it may be deductible elsewhere as a medical expense if you itemize).
Frequently asked questions
- Why is this deduction circular?
- The deduction lowers your income, which raises your premium tax credit, but the allowed deduction is premiums minus that credit — so the two depend on each other. Pub 974's iterative method loops them until both stop changing.
- What is the Pub 974 iterative method?
- Compute MAGI with a starting deduction, find the credit, set the new deduction to premiums minus credit (capped by business income), recompute, and repeat until both move less than $1. This tool shows every loop.
- Can I deduct my whole premium if I'm subsidized?
- No — only premiums minus the credit. Deducting subsidized dollars would be double-dipping. Above the cliff (no credit), the full premium is deductible up to your business income.
- How much can I deduct?
- The smaller of (premiums − credit) and your business's earned income (net profit − half SE tax − SE retirement contributions).
- What is Form 7206?
- The IRS form (since 2023) for figuring this deduction; it flows to Schedule 1, line 17 and points to Pub 974 when you also claim a premium tax credit.
- Do I have to use the iterative method?
- Pub 974 also has a simpler "alternative calculation" that works in many cases. The iterative method always works and is the most accurate. Either way, verify before filing.
Glossary
Plain-English definitions for the terms on this page.
Sources
- IRS Publication 974 — Premium Tax Credit (iterative & alternative calculation methods). irs.gov
- IRS Form 7206 & instructions — Self-Employed Health Insurance Deduction. irs.gov
- IRS Form 8962 & instructions — Premium Tax Credit reconciliation & repayment limitation. irs.gov
- Premium tax credit figures — IRS Rev. Proc. 2025-25; HHS/ASPE 2025 poverty guidelines (see our methodology).