If you itemize deductions, you may be able to deduct healthcare costs such as Medicare premiums. If you’re on a fixed income, every dollar counts—including money spent on health care and Medicare premiums. According to a 2019 report by Fidelity, about 15% of a retiree’s annual expenses could go to healthcare-related expenses including Medicare premiums, deductibles, and copayments. If you’re on Medicare and looking for ways to minimize your tax burden, here’s what you need to know about Medicare premiums and income tax.
What Medicare premiums do I have to pay?
There are four parts to the Medicare program:
- Part A, which is your inpatient hospital, hospice, and skilled nursing facility insurance
- Part B, which covers doctor visits, diagnostic tests, durable medical equipment, and most outpatient services
- Part C, which is the Medicare Advantage program (you choose between the Original Medicare or Medicare Advantage track)
- Part D, which is Medicare’s prescription drug program
If you sign up for Original Medicare and want protection against out-of-pocket Medicare costs, you may also have Medicare premiums for a Medicare Supplement insurance plan.
Medicare premiums for Part A are based on your work history; most people qualify for premium-free Part A. Everyone generally pays the base Part B premium, even if you enroll in a Medicare Advantage plan, although some low-income individuals qualify for additional help with Medicare premiums for Part B. Those with higher incomes may pay a high-income adjustment along with the standard Part B Medicare premiums.
If you enroll in Part C, or Medicare Advantage, plan, you pay your Part B Medicare premium plus any additional premium charged by your plan. (Some Medicare Advantage plans have premiums as low as $0.)
Medicare Part D Prescription Drug Plans are technically optional; if you choose to enroll in one, you’ll typically pay your insurer a separate premium. However, if you get your Part D prescription drug coverage through your Medicare Advantage plan, you only pay your insurance company one premium for both your Medicare benefits and your prescription drug plan. Some people with higher incomes may also pay a premium adjustment to Medicare for their Part D prescription drug coverage.
Are my Medicare premiums and out-of-pocket costs tax-deductible?
Medicare costs can be lowered in numerous ways. Under the U.S. tax code, you may be able to deduct health care expenses beyond a certain percentage of your income if you itemize deductions. According to the Internal Revenue Service in 2022, “you may deduct only the amount of your total medical expenses that exceed 7.5% of your adjusted gross income.”
The tax code states the following expenses may count toward the itemized healthcare deduction:
- Health insurance premiums, such as Medicare premiums, paid with after-tax income
- Premiums for a qualified long-term care insurance
You may also itemize:
- hospital, hospice, or skilled nursing care
- outpatient services including doctor visits, ambulance rides, and diagnostic tests
- prescription medications
- dental and vision care
- preventive care
- home modifications necessary to keep you safe
Keep in mind that only the expenses you pay out-of-pocket count toward the itemized deductions. In other words, if you have a $20,000 hospital bill, and Medicare pays all but $1,500 of it, only the $1,500 you pay for your care can be itemized on your return, not the entire $20,000 bill.
The information in this article isn’t a substitute for advice from a tax professional, so be sure to talk to your tax preparer about your health care deductions. It’s always a good idea to keep receipts for all health care expenses, including Medicare premiums, copayments, and coinsurance amounts to help you and your tax professional when it’s time to file your taxes.
Only expenses that are considered allowable by the IRS, such as Medicare premiums and annual physical exams, can be deducted.
Keep your receipts and plan ahead to maximize your tax deductions.
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Tax season is just around the corner, and many Americans are eager to identify deductions that could potentially lower their tax bill. If you’re a Medicare enrollee who meets certain conditions, your tax savings opportunity is more within reach than you think. You may be eligible to deduct some of your expenses — including Medicare premiums — for the year.
Keep track of your medical receipts to increase your chances of claiming a tax deduction. You’ll need proof to verify every eligible expense that you report on your tax return.
To get a headstart on tax planning, here are tips to keep in mind about deducting Medicare expenses.
What Medicare tax deductions can you take each year?
Medicare costs can be more than what you’ve budgeted for every month. Fortunately, you may be eligible to claim your Medicare expenses as deductions. These deductions give you a tax break, allowing you to lower your tax liability for the year.
To qualify for a Medicare tax deduction, most people must itemize instead of taking the standard deduction. Qualified medical expenses that exceed 7.5% of your adjusted gross income (AGI) will be eligible for the tax deduction. If you’re self-employed, you may qualify to deduct Medicare insurance premiums even if you don’t itemize deductions.
Surprisingly, the IRS’ list of allowable expenses is fairly comprehensive. Many of the costs associated with the diagnosis or treatment of an illness or injury are considered “allowable.” This includes everything from preventative care and medical equipment to transportation to obtain healthcare services. That’s right: You can deduct your mileage, taxi fare or Uber ride to your healthcare appointments.
Any deductibles or copayments you pay to receive Medicare-covered services are considered allowable. Out-of-pocket costs you pay for prescription drugs while in the Part D donut hole are also eligible for deduction. Additionally, you may deduct any expenses that you pay out of pocket to get care not covered under Medicare. This includes the costs for routine checkups, dental care, nursing home treatment, and equipment deemed “medically necessary.”
You can find a long list of eligible expenses on the IRS website. Here are just a few popular services that are considered allowable expenses as a Medicare enrollee:
Acupuncture
Ambulance services
Annual physical exam
Artificial teeth
Chiropractic services
Contact lenses
Dental services
Eye exams & eyeglasses
Guide dogs and other service animals
Hearing aids
Home care & nursing services
Laboratory fees
Long-term care
Oxygen
Psychiatric care, psychoanalysis, and psychological care
Therapy
Vasectomy
Weight-loss programs
Wheelchairs
X-ray services
How do income limits work for Medicare tax deductions?
The IRS establishes guidelines to determine if you are eligible to deduct your Medicare expenses. First, your qualified medical expenses must exceed 7.5% of your adjusted gross income (AGI). Tally up the costs of all unreimbursed Medicare and other health or dental expenses to determine if you’ve spent enough money to qualify for the deduction.
For example: Let’s say your AGI is $40,000, and your total out-of-pocket Medicare expenses during the year are $4,500. Because of the 7.5% threshold, you’ll be able to deduct expenses beyond the first $3,000. Your total deduction on your tax return would be $1,500.
To claim the medical expense deduction, you have to itemize deductions on Schedule A of your tax return. It makes sense to itemize if your total expenses exceed the standard deduction amount you would claim for the year.
What expenses are not eligible for a Medicare tax deduction?
The IRS provides an exhaustive list of medical expenses that are considered tax deductible. However, you should be aware of costs that don't fit the bill. For example, Medicare expenses that are reimbursable are not eligible for a tax deduction.
Late penalties on Part B or Part D premiums are not eligible to be deducted. Generally, you can't deduct prescription drugs purchased abroad unless it's legal in the other country and the U.S. Nonprescription drugs — like supplements or vitamins — are not usually considered allowable unless specifically recommended to you by your doctor to treat a particular medical condition.
Other expenses that are not considered allowable for tax deduction:
Babysitting or childcare
Cosmetic surgery
Electrolysis, or hair removal
Funeral expenses
Hair transplants
Personal use items (toothbrushes, floss, toilet paper, etc.)
Teeth whitening
Veterinary fees
Does having supplemental insurance affect which Medicare tax deductions you can make?
Medicare supplemental insurance — also known as Medigap — comes in handy when you have high out-of-pocket costs. This extra coverage can fill in the gaps of deductibles, coinsurance, and copays left by original Medicare (Parts A and B). All eligible supplemental insurance deductions must exceed 7.5% of your AGI to qualify as a Medicare deduction on your tax return.
Are Medicare Part B premiums taken from Social Security tax deductible?
Typically, Medicare Part B premiums are automatically deducted from your monthly Social Security benefits. These premiums can cover outpatient hospital services, doctor visits, and certain types of medical equipment.
When you file your tax return, you may be eligible for a surprising perk: a tax deduction. Health insurance premiums are considered “allowable” expenses and can help you reduce your tax liability. To qualify for the Medicare Part B premium tax deduction, you must itemize your expenses on your tax return.
Are monthly Medicare premiums tax deductible?
Medicare has four major parts: Parts A, B, C (Medicare Advantage), and D. How many premiums you pay per month depends on what kind of additional coverage you choose, if any.
For example, many enrollees with original Medicare (Parts A and B) pay Part B and D premiums for added drug coverage. They may pay an additional premium if they add a Medigap plan to cover Part A and B out-of-pocket costs. Those who opt for a zero-premium Medicare Advantage plan instead may only pay a Medicare Part B premium every month.
Generally, premiums you pay for Medicare Part B, Part D, and Medicare supplement plans are considered “allowable.” Most Medicare enrollees do not pay a premium for Medicare Part A. This is the case if you’ve paid Medicare taxes for 40 qualifying quarters (10 years) during your working years. But for those who do pay Medicare Part A premiums, you can add these costs to your deduction amounts.
What records should you keep for your Medicare tax deductions?
Keep track of your receipts if you want to maximize your deductions. For every medical or dental expense, make note of what the expense is for to determine if it’s a qualified expense.
Also, maintain records for all of your Medicare premiums so you can identify the appropriate deductions to take. The more organized you are during the year, the easier it will be to calculate eligible expenses on your tax return. For further guidance, consult with a tax professional.
The bottom line
Deducting Medicare expenses on your tax return can help you save money. Make sure you keep track of your expenses and maintain your receipts throughout the year. This will help you determine if it makes sense to itemize deductions or take the standard deduction. Medicare expenses can rack up, so it’s important to plan ahead and maximize every savings opportunity that comes your way.
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