If your itemized deductions are higher than the standard, you should talk to your tax accountant about deducting your Medicare expenses.
Although Medicare is a good deal financially for most seniors, many can still end up paying a lot out-of-pocket. When you factor in health insurance premiums, copayments, deductibles, and supplemental insurance, the costs can add up. In some cases, you may be able to deduct these costs on your taxes, allowing you to save some money at the end of each year.
Most people aren’t aware that these deductions are possible, and if you use a tax preparation service, you should mention it to them explicitly, as they may not think to consider these deductions. Medicare tax deduction is fairly simple, so we’ll run through what the options are, as well as what types of expenses you can deduct.
Out-of-pocket costs and other fees: What is tax deductible?
Medicare comes with a variety of out-of-pocket costs. We’ll go over which costs most people who have Medicare will pay, as these will be referenced later on and are generally important to know.
First, you have to pay your premiums. Most people receive premium-free Part A, but if you pay premiums for Part A, these will be tax-deductible under certain circumstances. Medicare Part B premiums, along with optional Part D prescription drug plan premiums, or Medicare Advantage (Part C) premiums all apply for tax deduction under certain circumstances as well.
Copayments and coinsurance fees are also going to be a part of any insurance plan you have. Part A has a fixed coinsurance fee if you exceed 60 days as an inpatient in a benefit period, and Part B has a 20% coinsurance on most healthcare costs after you’ve met your yearly deductible.
Part D plans will usually have a coinsurance or copayment that you pay when you fill your prescription, and Medicare Advantage plans will also have some form of cost-sharing, although the details can vary widely.
Deductibles can also count towards a tax deduction. Each plan will have different deductible amounts, but anything you pay that counts towards your deductible will be relevant for considering tax deduction.
What if I have a Medigap plan?
Medigap plans, also known as Medicare Supplement plans, are additional insurance plans that help pay for your out-of-pocket costs. With these plans, you pay a monthly premium, and they pay some of your out-of-pocket costs for you, rather than covering medical expenses. Each Medigap plan pays for a different collection of out-of-pocket costs, including the Part A coinsurance, Part B excess charges, and so on.
If you have a Medigap plan, then the out-of-pocket costs that your plan pays for will not be tax-deductible, since you did not pay them. For example, if you have a Medigap plan with a $100 monthly premium, and it paid $4,000 towards your Part A coinsurance in a given year, then you will not have $4,000 towards your tax deduction. Instead, your yearly premium amount, in this case, $1,200, will be tax-deductible.
The basic idea is that only what you actually pay is tax-deductible, not what you are charged.
When can I deduct these costs?
Not everyone will be able to deduct these costs from their taxes. There are two main situations that we can consider. Let’s look at them one by one.
If you are self-employed
If you are self-employed, then you can deduct all Medicare premiums from your taxes. This includes premiums for Part A, Part B, Part C, and Part D prescription drug plans. It also includes Medigap plan premiums.
You are considered self-employed by the IRS if you own a business as a sole proprietor (Schedule C), operate a limited liability corporation, operate as a partner (Schedule E), or if you are a shareholder of an S corporation with at least 2% stock.
There is only one condition that can limit your deduction if you are self-employed: you must report a profit from your self-employment income in order to deduct your Medicare premiums. If you are employed by a company and have a self-employment operation on the side that operates at a loss for that tax period, then you won’t be able to deduct your premiums.
If your healthcare costs are more than 10% of your AGI
The other situation in which you can deduct some of your Medicare costs is if they amount to more than 10% of your AGI (adjusted gross income). In this case, you can deduct all types of healthcare costs, not just premiums. This will apply to all health insurance costs, not just Medicare. This also includes other types of non-medical fees that are related to your healthcare, such as transportation to and from your healthcare appointments.
In this situation, you don’t actually deduct all of your healthcare costs. Instead, you deduct any healthcare costs that go over 10% of your AGI. For example, if your AGI comes out to $50,000, and you spent $5,200 on healthcare that year, then you can only deduct $200 from your taxes since this is the amount over 10% that you paid.
What if both of these things are true?
Some people may find themselves both self-employed and with healthcare costs exceeding 10% of their AGI. In this case, you will have to choose one way to deduct your costs from your taxes; you cannot do both.
You should try to get a sense of your tax return under both circumstances in order to see which version results in a better outcome. You can only do one, period, and cannot split the costs or “double-dip” to deduct both ways. Both ways of deducting can provide an advantage, but it really depends on your situation.
If you had especially high healthcare costs this year, or if you are self-employed, it won't hurt to talk to your accountant about deducting Medicare costs from your taxes.
And if you've got questions about your Medicare coverage, it won't hurt to talk to one our licensed agents. In fact, you might be surprised by how much you can save on healthcare costs. The call is free - whether you join a plan or not. So what have you got to lose? Call to schedule your FREE Medicare consultation today.
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