Monthly premiums and out-of-pocket costs of Medicare programs are tax-deductible. When a person has a high accumulation of medical expenses, they may wish to itemize them on their tax return.
The Internal Revenue Service (IRS) permits a person to deduct costs that exceed a certain percentage of their income.
However, an individual may wish to compare their deduction for itemized medical expenses with the standard deduction. Many people owe fewer taxes if they choose the standard option.
This article discusses Medicare premiums that are tax-deductible. Then, it examines which other medical expenses are deductible and which are not.
Next, it gives an example of calculating deductible costs, as well as comparing itemized and standard deductions, and how the IRS taxes Social Security benefits and provides a list of tax help resources.
We may use a few terms in this piece that can be helpful to understand when selecting the best insurance plan:
- Deductible: This is an annual amount that a person must spend out of pocket within a certain time period before an insurer starts to fund their treatments.
- Coinsurance: This is a percentage of a treatment cost that a person will need to self-fund. For Medicare Part B, this comes to 20%.
- Copayment: This is a fixed dollar amount that an insured person pays when receiving certain treatments. For Medicare, this usually applies to prescription drugs.
Original Medicare comprises of Part A, hospital insurance, and Part B, medical insurance. Most people who have Part A do not pay premiums, but a person may deduct from their taxes the Part B monthly premium of $148.50.
The alternative to original Medicare is Part C, also known as Medicare Advantage. A person with this program pays a monthly Part B premium, in addition to their monthly Medicare Advantage plan premium. They may deduct both monthly premiums from their taxes.
Some people who have original Medicare may have a Part D plan for prescription drug coverage. They may also have a Medigap plan, which is Medicare supplement insurance. These individuals may deduct the monthly premiums for Part D and Medigap plans.
Aside from monthly premiums, tax-deductible expenses associated with Medicare include copayments, coinsurance, and annual or benefit-period deductibles.
A person may also deduct medical expenses that Medicare does not cover. These include costs for items or services, such as the following:
- prescription medications
- transportation to doctor visits
- hearing aids
- dental care
- false teeth
- prescription eyeglasses
- admission to a medical conference that provides information about someone’s chronic illness
- insurance premiums for long-term care
Medical expenses that are not deductible
People may not deduct costs for items such as:
- over-the-counter medications
- medications from other countries
- nicotine patches and gum that do not require a prescription
- cosmetic surgery or hair transplants
- toothpaste and other toiletries
- programs for general health improvement
- funeral expenses
- nutritional supplements
- teeth whitening products
The IRS allows someone to deduct expenses that exceed 7.5% of their adjusted gross income (AGI), which is on line 7 of their 1040 tax form.
Here is an example of how to calculate an eligible deduction amount:
|A person’s AGI is $30,000.|
|7.5% of $30,000 is $2,250.|
|Healthcare costs above $2,250 are eligible for deduction.|
Here is an example of how medical expenses can add up and surpass this amount:
|Part B premiums are $148.50 per month.|
|$148.50 multiplied by 12 months is $1,782.|
|If a person has surgery, it would involve the Part A deductible of $1,484 for the hospital stay.|
|The total amount for the Part B premium and Part A deductible is $3,266 (not including any other healthcare costs).|
|A person must deduct the $2,250 limit from their total healthcare cost, leaving $1,016 eligible for deduction.|
To add up medical expenses, a person needs:
- SSA-1099 form, which shows Medicare premiums automatically deducted from monthly Social Security benefits
- insurance company statements
- receipts from healthcare costs
- Medicare Summary Notices (MSN), which are listings of healthcare costs beneficiaries receive every three months
When someone files their income tax return, they have a choice of itemizing deductions or taking the standard deduction.
Although it is helpful for a person to know that they may deduct medical expenses from their taxes, they may owe less if they take the standard deduction.
In 2021, the standard deduction is $12,550 for a person filing an individual return and $25,100 for a couple filing a joint return.
Because many people’s itemized deductions fall far under these amounts, they owe fewer taxes if they take the standard deduction. However, someone with high medical expenses may owe less if they itemize.
A person may have to pay income taxes on their Social Security benefits.
This usually only applies to people who have considerable additional sources of income, such as dividends from investments or earnings from self-employment.
A person who files taxes as an individual may have to pay income tax on up to 50% of their Social Security benefits if their total income is between $25,000 and $34,000.
They may have to pay income tax on up to 85% of their benefits if their total income is higher than $34,000.
Individuals who file a joint return with their spouse may have to pay income tax on up to 50% of their benefits if they have a combined income of $32,000 to $44,000.
If income is higher than $44,000, individuals completing a joint tax return may have to pay income tax on up to 85% of their benefits.
The federal government provides free services to help older adults with their taxes. These include the below options:
- Tax Counseling for the Elderly (TCE) is a program that helps people aged 60 and older with tax preparation. A person can call 800-906-9887 to find a TCE office in their area.
- Volunteer Income Tax Assistance (VITA) provides tax help for people with disabilities or those with an income of $56,000 or less per year. A person may call 800-906-9887 to locate VITA offices in their area.
- Individuals may find help through the state tax agency for preparing their state taxes.
The IRS permits someone to deduct many medical expenses from their income tax return. This includes the premiums, coinsurance, copays, and deductibles associated with Medicare programs.
A person may also deduct some healthcare expenses that Medicare does not cover.
People usually do not have to pay taxes on their Social Security benefits unless they have additional sources of income. Those with a higher income may have to pay taxes on up to 50–85% of their benefits.
Taxes can involve many factors and be quite complicated. If someone has questions about taxes, they may wish to consult one of the federal government programs that provide free help.