As tax season approaches, Medicare beneficiaries often think about how their health care costs will affect their tax returns.
Sarah and Tony are examples of Medicare beneficiaries who have two fairly common situations.
Sarah is a beneficiary over 65 who has stopped working for pay and has diabetes.
Tony, Sarah’s neighbor, is a beneficiary over 65 who’s self-employed as a graphic designer.
The Question
Can older, self-employed Medicare beneficiaries like Sarah and Tony deduct the Medicare premiums from their taxable income, and, if so, how does that work?”
The Answer
Yes, Medicare premiums can be tax-deductible under certain conditions.
To do that, most clients must itemize their deductions. Only medical expenses exceeding 7.5% of a client’s adjusted gross income, or AGI, will be deductible.
For example, if Sarah’s AGI is $50,000, she can deduct the total amount of Medicare premiums and other medical expenses over the $3,750 threshold.
Of course, consult with your compliance advisors before discussing topics related to taxes with clients. Encourage your clients to talk to their tax professionals about ways to maximize deductions while complying fully with current tax laws.
More to consider:
1. Deductible Medicare Expenses
Addressing Sarah’s concerns leads to a list of the kinds of Medicare-related expenses she might be able to deduct.
If she has enough medical expenses to deduct the Medicare-related spending, the Medicare-related total could include:
- Medicare Part A inpatient hospitalization premiums.
- Medicare Part B outpatient hospital services and physician services premiums.
- Medicare Advantage premiums.
- Medicare supplement insurance premiums.
- Medicare Part D prescription drug coverage premiums.
Additionally, Sarah can deduct any long-term care insurance premiums. The amount of LTCI premiums she can deduct will be based on her age.
She can also deduct spending on nonprescription insulin.
Other out-of-pocket costs, such as deductibles, copayments, and specific medical services and equipment, may also qualify for deductions.
2. Exceptions and Special Considerations
Not all expenses associated with health care are deductible.
Non-qualifying items include:
- Cosmetic surgery for appearance enhancement.
- Late enrollment penalties for the Medicare Part B and Medicare Part D programs.
- Nonprescription medications, excluding insulin.
3. Self-Employed Medicare Beneficiaries
Self-employed clients like Tony have a unique advantage; They may be able to deduct premiums for Medicare Part A, Medicare Part B, Medicare Advantage plans, Medigap policies and Medicare Part D coverage directly from their income, without itemizing deductions or having medical expenses that exceed the 7.5% of AGI threshold.
Self-employed clients like Tony can use this privilege only if they were ineligible for an employer-sponsored health plan and if their health insurance premiums do not exceed their business income.
4. Nuances
The Inflation Reduction Act has limited Medicare Part D premium increases to 6% per year from 2024 to 2029. That may affect clients’ budgeting and tax planning.
Provider payment cuts might impact the availability of Medicare providers, potentially affecting beneficiaries’ access to care and medical expense deductions.
New special enrollment periods, or SEPs, have been introduced to help clients who missed their initial signup window. The SEPs will help clients avoid late enrollment penalties and coverage gaps.
Additionally, Medicare’s lower reimbursement rates compared to commercial insurance might discourage providers from accepting new Medicare patients. That could influence some beneficiaries’ access to care and medical expense totals.
5. More Tips
For those over 65, health savings accounts, or HSAs, provide a vehicle for paying Medicare premiums, other than Medigap premiums, tax-free.
While HSA contributions stop when clients enroll in Medicare, tax-free withdrawals for qualified medical expenses continue.
Understanding the deductibility of Medicare premiums and the nuances of recent legislative changes is crucial for effective tax planning.
For reference, see IRS Publication 502, Medical and Dental Expenses.
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Credit: CMS