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Michael T Braden March 1, 2023 MEDICARE & TAXES
MEDICARE & YOUR TAXES
Believe it or not, this is actually an article that should make everyone feel good. It is one of the perks we get for working and achieving the milestone of 65 years of Life.
This is an important question to answer during tax season. Each year US citizens have the option to deduct personal expenses from their taxable income. Deductions decrease the amount of taxable income, reducing one’s tax burden.
From this article, you’ll learn about what Medicare costs you can deduct from your taxes. We will talk in-depth about Medicare expenses that are and are not deductible, about if and when self-employed can deduct their health insurance premiums, and whether or not you can pay for your Medicare premiums with your HSA funds.
YOU HAVE TO CHOOSE TO ITEMIZE YOUR DEDUCTIONS TO DEDUCT YOUR MEDICARE PREMIUMS
An individual can deduct Medicare premiums, including Medicare supplement premiums from their taxes as a medical expense. That means only to the extent that total medical expenses exceed 7.50% of your Adjusted Gross Income.
Self-employed individuals can deduct Medicare premiums on Schedule A of the 1040 as an “above the line” deduction.
You can use HSA funds to reimburse yourself for Part B premiums, but not for Medicare supplement premiums.
While this article is intended for general informational use, please consult a tax professional for detailed guidance. It’s best to use a professional to stay off the Internal Revenue Service radar.
ARE YOUR MEDICARE PREMIUMS TAX DEDUCTIBLE?
We are often asked, are Medicare premiums tax deductible? To that, we would say yes, generally speaking, your Medicare premiums are tax deductible, however, certain limitations apply.
The main rule says that Medicare beneficiaries are allowed to deduct their Medicare health insurance premiums from their federal taxes so long as their total medical and dental expenses exceed 7.5% of their adjusted gross income. This is referred to as the medical expense deductions.
If that is the case for you, you can deduct the premiums and they will reduce your adjusted gross income. Your taxes will be calculated based on your taxable income minus the deduction.
The important note here is that this threshold applies to your federal income tax return. States can have different rules regarding calculating medical expenses deductibles. Please check your state rules.
How are Medicare premiums tax deductible? To properly deduct medical expenses in the federal income tax return, you will need to file Schedule A of Form 1040, Itemized Deductions.
So, we’ve established that Medigap premiums are, in fact, deductible. How do you go about deducting them?
Very easy to do – you include them on Schedule A, Itemized Deductions for Form 1040, as itemized medical expenses. Again, you must be itemizing deductions to get a benefit from this deduction.
In an example, let’s say your AGI is $30,000. From that number, 7.5% is $2,250. If your itemized deductions are $4,000, then you have deductible expenses of $1,750. Using these number, if your medical expenses did not exceed $2,250, you would not be able to itemize and deduct medical expenses.
ARE MEDIGAP PLAN PREMIUMS CONSIDERED TO BE TAX DEDUCTIBLE?
It’s also crucial to emphasize that Medicare premiums are tax deductible for a few Medicare plans. Medicare Part A (if you pay a premium), Part B and Part D, as well as Medicare Advantage Plan and Medicare Supplement premiums can all be used as itemize deductions.
Part A premiums are tax deductible from your tax return as long as you meet certain criteria. Most Part A insurance beneficiaries don’t pay any premiums for this coverage, this won’t apply to them.
Deducting Medicare related premiums for Medicare Part A is possible for those who pay premiums for this plan and at the same time do not collect Social Security benefits.
WHAT ARE ITEMIZED DEDUCTIONS?
Itemized deductions are expenses that can be subtracted from your adjusted gross income (Adjusted Gross Income). As noted above, insurance premiums and medical expenses can be itemized deductions.
STANDARD DEDUCTIONS MAY BE HIGHER THAN ITEMIZED DEDUCTIONS IN SOME CASES
When filling out your tax return, you will have the option to choose a Standard Deduction or Itemized Deduction. A standard deduction is a specific dollar amount that reduces the amount of income on which you’re taxed without itemization.
The standard deduction for 2022 is $12,950 for a single filer or married filing separately. The standard deduction for head of household is $19,400 and $25,900 for married filing jointly. In many years, the standard deduction significantly reduces your taxes over and above the effort to itemize.
Itemized Deductions, in contrast, allow you to add up all your qualified itemized deductions and then claim that amount. They can consist of various expenses, including medical costs, mortgage interest, personal property taxes, or disaster losses.
To deduct medical expenses from your taxes, you need to choose the Itemized Deductions. Of course, this route will make sense ONLY if your itemized deductions are greater than the standard deduction. If that is not the case, it will be more profitable for you to claim a standard deduction.
WHAT MEDICARE EXPENSES ARE TAX DEDUCTIBLE ACCORDING TO THE IRS?
Okay, so we’ve covered the fact that Medicare premiums are tax deductible, but what about the other medical expenses that may not be included in your health insurance plan? Are medical costs that are paid out of pocket tax deductible as well?
Again, the answer is yes, but just like with Medicare premiums, there are some thresholds in place for some of these expenses, in particular, long-term medical care.
HERE IS A LIST OF SOME OF THE ITEMS THE IRS DETERMINES TO BE TAX-DEDUCTIBLE MEDICAL DEDUCTIONS
Hearing Aids/Hearing Aid Batteries
Bandages, Band-Aids, Compression Sleeves, Braces
Vision Care (Eye Exam Cost and Cost of Eyeglasses and Contact Lenses)
Home Remodeling costs necessary to meet Medical/Healthcare Requirements
All Costs to train and acquire Service Animals
Psychological and/or Psychiatric Care
Critical Care, Long-term Care Insurance Premiums
Hospital Indemnity Insurance Premiums
Nursing home expenses for those whose primary cause of stay was medical care;
Medical Transportation Expenses
Personal Protective Equipment
Any/All DME
Dentures
Wig(s) If Recommended By a Medical Professional
WHO IS ELIGIBLE TO QUALIFY FOR A LONG-TERM CARE POLICY TAX DEDUCTION PREMIUM? FOR THE 2022 TAX YEAR, THESE PREMIUMS ARE TAX DEDUCTIBLE FOR EACH OF THE FOLLOWING:
Anyone 40 or younger, for whom the deductible limit is $450.
Anyone 41 to 50, with a deductible limit of $850.
Anyone 51 to 60, with a deductible limit of $1,690.
Anyone 61 to 70, with deductible limits of $4,510.
Those over 71 with a Deductible Limit of $5,640.
WHAT EXPENSES WOULD NOT BE CONSIDERED TO BE TAX DEDUCTIBLE?
Unfortunately, not every expense is considered to be Tax Deductible by the Internal Revenue Service.
INCLUDED IN THIS LIST:
Cosmetic Procedures and/or Improvements (unless they regard deformations caused by accident);
Non-Prescription Medications
Fitness Club Memberships
Any Services Paid from using HSA funds
ARE ALL MEDICARE CO-PAYS & CO-INSURANCE TAX DEDUCTIBLE?
Yes, you may deduct co-payments and co-insurance amounts from your taxes, you just need to itemize your deductions in order and make sure your Co-Payments are fixed payments made by the insured for various medical services. Often, patients are obligated to pay co-pays for services after they’ve reached their insurance deductibles for said services for that year.
Is it possible to deduct these expenses when you pay taxes? Essentially, co-pays are viewed as a qualified medical expense you pay out of your pocket, so the answer is yes, you can deduct them on your tax return.
The same rules apply here as mentioned earlier; your Medicare premiums are tax deductible, and your healthcare costs can be deducted from income taxes. However, tax deductions for Medicare costs and deducting Medicare premiums require that you itemize your deductions from your income taxes.
Only if itemized deductions are greater than standard deductions will this effort help you save money. You are encouraged to consult a tax professional when itemizing deductions.
ARE MEDICARE PREMIUMS FOR SELF-EMPLOYED INDIVIDUALS TAX DEDUCTIBLE?
Freelancers and self-employed professionals also can benefit from deducting Medicare premiums, but there are some significant differences from the individual. Primarily, self-employed have the option to apply this tax deduction without meeting the 7.5% adjusted gross income threshold.
They are also not obligated to itemize their deductible medical expenses. However, there are some criteria they need to meet. To benefit from this solution:
You are obligated to report a net profit from your business
You and your spouse cannot be eligible for an employer’s health coverage other than your own
The tax-deductible premiums from Medicare cannot amount to more than the profits you earned from your operation
As a self-employed individual, you can deduct your Medicare premiums to a similar degree as those who are retired. You can deduct premiums from Original Medicare, as well as Part D, Medicare Advantage plans, and Medigap plans premiums. The same goes for long-term health care expenses.
ARE MEDICARE PREMIUMS BASED ON TAXABLE INCOME?
For the self employed, your health insurance premiums are 100% tax deductible premiums. Tax deductible premiums can reduce your adjusted gross income AGI. This includes monthly premiums for Original Medicare, along with other insurance plans like Medigap plans, Part D prescription drug plans, and so on.
CAN I DEDUCT MY MEDICARE PREMIUMS IF I DO NOT ITEMIZE MY DEDUCTIONS?
Yes, but only if you meet the requirements as a self-employed individual. You might be allowed to deduct your premiums without itemizing them. In other cases, itemized deductions are required to claim tax reduction based on your Medicare and other Health Care Expenses. I am not a CPA, but I have been informed by various accounting professionals that it is easier/best to itemize to avoid tax-related issues.
CAN I USE MY HSA ACCOUNT TO PAY MY MEDICARE PREMIUMS?
Technically, with an HSA you are reimbursing yourself for certain health-related expenses.
Yes, you can use an HSA account to reimburse yourself for your Medicare premiums. Funds accumulated in a health savings account can be used to cover the costs of premiums, insurance deductibles, and co-payments in addition to the costs of most medical procedures and services that qualify as tax deductible.
While withdrawing these funds before or after enrolling in Medicare is possible, "you cannot use your tax-free HSA savings to pay for your medical expenses and benefit from a tax deduction on the same expenses".
This means that you have to decide whether you want to, for example, pay for your out-of-pocket medical costs using HSA funds or deduct those expenses later in your federal tax return.
If you’re 65 or older, you can use your HSA savings to pay for Medicare Part A, Part B, Part D, and Medicare Advantage. However, you may not use these funds to pay for your Medicare Supplement premiums.
Money accumulated on your HSA account is tax-free if you’re withdrawing it at the age of 65 or older.
IS MEDICARE A TAX DEDUCTION?
Yes, you can deduct your Medicare premiums and other medical expenses on your federal tax return. Certain conditions need to be met to qualify for such a deduction. To deduct Medicare expenses, they need to amount to more than 7.5% of your Adjusted Gross Income. Those who are not self-employed must itemize these deductions in order to benefit from this tax benefit.
DO MY MEDICARE PREMIUMS REDUCE MY TOTAL TAXABLE INCOME?
Since you may have the option to deduct medical expenses, including Medicare premiums, from your taxable income, Medicare premiums can reduce your taxable income.
CAN RETIREES DEDUCT THEIR MEDICARE PREMIUMS?
Yes, if you’re retired, you can deduct your Medicare premiums. If you or your spouse are still working and eligible for employer-subsidized healthcare, you may not qualify for Medicare premiums tax deductions.
ARE THE MEDICARE PREMIUMS I HAVE TAKEN DIRECTLY OUT OF MY SOCIAL SECURITY PAYMENTS TAXABLE?
Yes. If you’re signed up for Medicare Part B and Social Security, the Social Security Administration will automatically deduct the insurance premium from your monthly benefit.
Medicare Part A is free for those who benefit from Social Security benefits. If you have Medicare Part C and Part D, you can deduct those premiums as well.
HOW MUCH WILL THE MEDICARE PART B DEDUCTIBLE BE NEXT YEAR?
The Medicare Part B deductible for 2023 is $226. Medicare beneficiaries pay a standard monthly premium of $164.90 for this coverage. They will announce the Part B Deductibles for the upcoming year in September or October. Our estimate is they will increase the Part B Deductible because they increased the COLA for Social Security in 2022 and 2023. I would plan on an amount of around $233.00 for 2024.
IS IT NECESSARY TO SHOW PROOF OF HEALTH INSURANCE AFTER AGE 65?
No, the IRS does not require taxpayers to provide proof of health insurance. However, it is recommended to keep those records. This documentation may include statements from your insurance company, Form 1095 information forms, insurance cards, or W-2 or payroll statements reflecting health insurance deductions. More information on the subject can be found at this link. Always keep a record of premiums paid.
REMEMBER................
Those who want to save money when filling out their tax return will be glad to know that Medicare premiums, as well as many other medical expenses, are tax deductible. There are certain terms that one must meet to deduct premiums from taxable income.
Deducting medical expenses is possible once these costs make up more than 7.5% of your Adjusted Gross Income. Those who are self-employed can deduct premiums and other medical costs without meeting this requirement, though their income cannot exceed the deductibles.
If you are over 65, you can use your HSA tax-free savings to pay premiums and cover the costs of medical services, but you are not allowed to deduct reimbursed expenses on your tax return.
Hopefully, this guide shone some light on the topic of medical expense deductibles, giving you a better understanding of who and when can benefit from this tax break.
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