As we age, one of our major concerns is access to affordable healthcare. That’s where Medicare comes in. Medicare is an affordable federal health insurance program for individuals aged 65 and older and certain younger individuals with disabilities or end-stage renal disease. Depending on the plan you select, it helps cover healthcare expenses such as doctor’s visits, hospital stays, and prescription drugs.
But if you're a senior eligible for Medicare, you might be grappling with the costs of health insurance premiums. You're probably wondering whether you can deduct your Medicare premiums on your taxes, hoping for some relief from the financial strain.
We’ll delve into this question and provide the information you need to make informed decisions about your healthcare expenses. So, whether you're approaching retirement age, already enrolled in Medicare, or simply curious about the tax implications of healthcare costs, read on to learn more about Medicare premiums and tax deductions.
Are Medicare premiums tax-deductible?
When it comes to tax deductibility, the Internal Revenue Service (IRS) sets the rules. Taxpayers can deduct healthcare expenses only if they exceed 7.5% of their adjusted gross income (AGI).
Your Adjusted Gross Income (AGI) is the total amount you earn in a year minus specific deductions, including alimony payments, pension contributions, or student loan interest.
To give you an example of what this might look like, if your AGI is $50,000, then based on the 7.5% figure, you can deduct healthcare expenses above $3,750. These healthcare expenses may include health insurance premiums and other out-of-pocket expenses like copayments, some medical costs, and Medigap premiums.
So, are Medicare premiums tax-deductible? The answer is yes, under certain circumstances.
If you pay for certain parts of Medicare, these costs may be tax deductible. However, your out-of-pocket medical expenses must exceed the 7.5% threshold to claim them as a tax deduction.
Original Medicare premiums are tax-deductible
Original Medicare is a health insurance program designed primarily for people over 65. It consists of two main parts - Medicare Part A and Part B. Part A is often called the “hospital” part and typically deals with in-patient cover. Part A covers things like your hospital stay, hospice care, and short-term nursing home care.
Medicare Part B premiums, on the other hand, may include “preventative services” and help diagnose and treat medical conditions early on. It’s the outpatient portion of Medicare.
Some seniors receiving social security benefits get Part A for free and may be eligible for automatic enrollment, which may not be tax deductible. But others may pay premiums for one or both parts.
The good news is that both premiums can be tax-deductible as long as they exceed the 7.5% threshold mentioned earlier and you itemize them on your return.
Medicare Advantage premiums may be tax-deductible
Medicare Advantage (Part C) is another way to supplement your Medicare coverage from private insurance companies. These plans can offer additional benefits like prescription drug coverage, vision, dental expenses, hearing aids, and more. The premiums for Medicare Advantage plans are also tax-deductible in general.
Medicare Part D, a supplemental plan that covers prescription drugs, can also be tax deductible. If you pay for prescription drugs and Part D doesn’t cover them, you can also get a tax break by claiming them on your income tax return. Typically, the only drugs that aren’t tax deductible are non-prescription drugs. So, your Part D premiums and any out-of-pocket prescription drug expenses should be tax deductible.
What medical expenses aren’t tax deductible?
While Medicare premiums are usually tax-deductible, certain medical expenses won’t be tax deductible even if you consider them out-of-pocket.
So, what expenses aren’t tax deductible? Let’s start with the most obvious: if you were reimbursed for a medical procedure by your insurer or employer, then this can’t be deducted as you got your money back. In this case, you can only claim for the out-of-pocket expenses and insurance premiums.
It’s also worth keeping in mind that you must incur your medical expenses in the year for which you’re completing your tax return.
Also, while prescription drugs are tax-deductible, typically, non-prescription drugs aren’t. The only exception here is insulin. Here are some other non-tax-deductible expenses to keep in mind:
- Cosmetic procedures.
- Diet food.
- Gym memberships.
- Vitamins.
- Toothpaste.
- Nicotine products (unless prescribed).
While things like the gym and vitamins might help keep you healthy, they aren’t treated as tax-deductible medical expenses, so you wouldn’t be able to treat them as itemized deductions.
How are medical expenses for long-term care insurance treated?
Typically, Medicare doesn’t provide long-term care insurance. However, if you meet your state’s eligibility requirements, you may qualify for Medicaid’s home and community-based service (HCBS) program, which could provide some long-term care in the form of respite care for dependents with medical needs or even adult day care. You may get this respite care for free or a very low fee if you’re on a low income.
Also, if you care for someone long-term, perhaps an elderly relative, and receive certain Medicaid payments under the HCBS program, you may be able to exclude these payments from your total income altogether.
When to deduct Medicare expenses
When you deduct your Medicare expenses, it largely depends on your type of employment. You generally won’t deduct your Medicare premiums pre-tax if you're employed or retired. Instead, you must include them in your IRS Schedule A for itemized deductions.
Your itemized deductions are expenses you can claim to reduce your taxable income, including charitable contributions, mortgage interest, and medical fees.
How itemized deductions work
You must forego the standard deduction if you opt for itemized deductions to claim Medicare expenses. The standard deduction for a single person in the 2023 tax year is $13,850. Many Americans prefer the standard deduction because they don’t need to itemize expenses and feel it “covers” their deductions anyway. The standard rate is flat, but you don’t need to answer lots of questions or provide evidence for expenses.
Some people choose to itemize their deductions, however. If you’ve done the math and it looks like your itemized deductions will be higher than the offered standard deduction, then it might make sense to do so for your purposes.
Remember to consider all your allowable deductions, not just your medical expenses, when deciding whether to use the standard deduction instead of the itemized deduction.
If you opt for the standard deduction, the deduction you get might still technically “cover” your Medicare expenses, but it may also not, particularly if they’re on the higher end.
Deducting Medicare if you’re self-employed
If you’re self-employed or a sole proprietor, things work a little differently for you when claiming Medicare expenses. You may still be able to deduct Medicare and Medicare Supplement Insurance plan premiums, also known as Medigap, on your tax return.
However, the deduction applies only to federal, state, and local taxes. As in, you can’t claim the deduction for your self-employment taxes. Also, you can only deduct as much as you earn from your business. You can't deduct anything if your company makes no profits in a given year or even suffers losses.
It’s also worth noting that if you have multiple businesses, you can only designate one as your official “health insurance plan sponsor.” You can’t bundle up your businesses to claim a bigger deduction.
When you’re self-employed, medical expenses are treated as an adjustment to income, so you won’t usually need to itemize them separately.
Are Medicare premiums tax deductible?
To sum up, Medicare premiums can be tax-deductible to a certain extent, particularly if they exceed the 7.5% AGI threshold set by the IRS. However, the rules for how you claim these deductions and how much you can claim differ depending on your income tax, your adjusted gross income (AGI), and whether you’re an employee or have a business.
Because you have to itemize Medicare deductions, it’s also worth considering whether it makes sense for you to do so. Sometimes, opting for a standard deduction rather than itemizing Medicare costs might make more sense.
However, you’ll usually be able to deduct your Medicare premiums and most out-of-pocket medical expenses. There are certain exceptions, including cosmetic procedures, for instance.
Speaking to a tax professional and getting tax advice is one way to decide what option makes sense.
Image Credit: SHVETS production at Pexels
