Did You Know: The Consolidated Appropriations Act of 2021, also known as the CARES Act, permanently lowered the eligibility for taking medical deductions from unreimbursed medical expenses to 7.5 percent.
Medicare premiums are tax deductible; however, they are not typically considered pretax, so they’re taken out of your paycheck based on the amount you make before the money is taxed.
For example, let’s say your employer-sponsored health insurance costs $250 each month, and you earn $4,500 each month; that $250 would be pulled for your insurance payment, and you’d pay taxes only on the remaining $4,250.
Medicare doesn’t work the same way as company insurance. Premiums aren’t removed from your income source before taxes, even if you choose to pay your premium by having the government remove it from your Social Security check. As such, you’ll want to deduct them when you file your annual taxes.
Did You Know: The Consolidated Appropriations Act of 2021, also known as the CARES Act, permanently lowered the eligibility for taking medical deductions from unreimbursed medical expenses to 7.5 percent.
Whether or not you can deduct your Medicare premiums — and which ones you can deduct — depend on a couple of factors: your income and employment status.
Those who pay Part A premiums and don’t receive Social Security benefits can deduct their Part A premiums. With that said, most people don’t pay a Part A premium because, generally speaking, they paid Medicare taxes while working, so there’s usually nothing to deduct.
If you don’t receive premium-free Part A, you might pay up to $471 each month, which is the standard deduction for anyone who paid Medicare taxes for less than 30 quarters. If you paid Medicare taxes for 30-39 quarters, the standard Part A premium is $259.
The IRS lets you deduct medical costs that exceed 7.5 percent of your adjusted gross income (AGI), which is your yearly income after taxes. The standard monthly premium for 2023 is $164.90.
Premiums with Medicare Part C, also known as Medicare Advantage, follow the same rules as Part B. If your medical expenses for the year total more than 7.5 percent of your AGI, you can deduct them.
FYI: Curious about the ins and outs of Medicare Part C? Then read my guide, Medicare Advantage vs. Medigap, to learn more about these types of coverages.
As with Parts B and C, you can deduct your Part D prescription coverage premiums if your annual medical costs surpass 7.5 percent of your AGI.
Premiums for Medigap may also be tax deductible. Medigap premium costs depend on your state, provider, and the plan you select. Plan G (the most comprehensive plan available to seniors eligible for Medicare before and after 2020) has a national average premium of about $145 per month. High-deductible plans can have much lower premiums. For example, the average premium for a high-deductible version of Plan G is $65 per month.
Pro Tip: To learn more about Medicare supplemental insurance, read my guide, What Is Medigap?
You’ll want to keep copies of the following each year in preparation for making your deductions:
These documents will provide you with the information you need to calculate your total medical expenses and the amount you can deduct during tax season. Then, if you opt to do so, you can file an itemized Schedule A deduction.
Did You Know: Interested in Medicare coverage for hearing and dental care? Then check out my guides to Medicare coverage of hearing aids and Medicare coverage of dental.
Premium deduction for Medicare looks different for the self-employed, which the IRS defines as anyone who owns a business that earns income, including sole proprietors.
Since 2010, self-employed individuals have been allowed to deduct their healthcare premiums before taxes. This is called an “above-the-line” deduction and lowers your adjusted gross income (AGI). In addition, deducting Medicare premiums pretax is an option regardless of whether you itemize; you are also permitted to deduct your spouse’s Medicare premiums and qualifying dependents under 27.
Still, there are a few caveats to this deduction:
To deduct your self-employment Medicare premiums pretax, use Schedule 1 on your 1040 form. For S corps, you could alternatively have your corporation directly pay your Medicare premiums and include them as a business expense, or you can have it reimburse you for the premiums.
Health savings account funds are taken out of your income before taxes. You can use them to pay Medicare premiums for Parts A, B, C, and D. This tax workaround allows you to use your before-tax income to pay for premiums for which you’d typically have to use after-tax funds. Please note that you cannot use an HSA to pay for Medigap premiums.
Unfortunately, you are not allowed to add money to an HSA once you join Medicare. But you’re certainly welcome to do so before joining.You can then continue to use the tax-free money already in the account to pay for qualified medical expenses, including your Medicare premiums.
Deducting Medicare premiums can save you a boatload on your taxes. Just how much? That will depend on your total healthcare expenses for the year, but it can certainly add up. Follow these simple steps to find out how much you can save:
To illustrate, imagine your AGI is $60,000 and your total qualified medical (TMC) costs for the year total $10,000.
You’ll use this equation to determine what you can deduct:
TMC – (.075 x AGI) = Your Permitted Deduction
So, flash back to middle school math; you always start with parentheses. Thus, you find the answer to (.075 x AGI) first:
(.075 x $60,000) = $4,500
Next, you subtract the number from the parentheses (.075x AGI) from your total medical expenses, $10,000. So that’s:
$10,000 – ($4,500) = $5,500
The solution, $5,500, is the amount you can deduct for medical expenses: 7.5% of $60.000 is $4,500, and $10,000 minus $4,500 is $5,500.
In short, there’s a variety of ways you can save money on the cost of your Medicare premiums, including the following scenarios:
To learn more about Medicare and the ways to make the most of your coverage, check out the helpful guides:
Your monthly Medicare premiums are tax deductible. When you add them as an itemized healthcare deduction, you reduce your taxable income.
If you are itemizing your taxes because your annual medical costs exceeded 7.5% of your adjusted gross income, you can add your Medicare premiums as itemized, or below-the-line, deductions.
If you are enrolled in both Social Security and Part B Medicare, the Social Security Administration automatically deducts your Medicare premium from monthly benefits.
Yes, you can deduct your Medicare Part B premiums. However, it typically requires you to itemize your deductions instead of opting for the standard deduction.
Premiums for health insurance purchased through Medicare, Marketplace or COBRA are all
tax deductible because they are all paid on an after-tax basis. On the other hand, premiums for employer-sponsored healthcare are already taken out pretax. Since you receive these tax savings in your paycheck, deducting premiums during the annual tax season is not allowed.