Are you age 65 and older and have basic Medicare insurance? If you don’t have the level of coverage that you need, you may end up having to pay additional premiums. These premiums can get expensive, especially if you are married and both spouses are paying them. But there may be a silver lining – a tax break – if you qualify.
Medicare premiums are qualifying medical expenses
You can combine Medicare premiums with other qualifying medical expenses for purposes of claiming an itemized deduction for medical expenses on your Federal tax return. This includes amounts for “Medigap” insurance and Medicare Advantage plans. Some people buy Medigap policies because Medicare Parts A (Hospital Insurance) and B (Medical Insurance) don’t cover all their health care expenses. Medigap is private supplemental insurance that is intended to cover some or all gaps, such as co-payments, coinsurance, deductibles, and other costs.
In addition to Medicare premiums, you can deduct various medical expenses, including those for dental treatment, ambulance services, dentures, eyeglasses and contacts, hospital services, lab tests, qualified long-term care services, prescription medicines, and others.
There are also many items that Medicare does not cover that can be deducted for tax purposes. In addition, you can deduct travel costs to get to and from medical appointments or prescriptions. If you go by car, you can deduct a flat 16-cents-per-mile rate for 2021 (down from 17 cents for 2020), or you can keep track of your actual out-of-pocket expenses for gas, oil, and repairs.
Itemizing deductions versus the standard deduction
Qualifying for a medical expense deduction can be hard for many people for a couple of reasons. First, you can only deduct medical expenses if you itemize deductions and only to the extent that your total qualifying medical expenses exceed a percentage of your adjusted gross income (AGI). For 2021, these expenses must exceed 7.5% of your AGI. As an example, if your AGI is $50,000, only the excess over $3,750 ($50,000 x 7.5%) of costs are eligible to use as itemized deductions.
Second, you must have enough “other” itemized deductions (e.g., home mortgage interest, charitable donations, state income, and real estate taxes, and allowable gambling losses) compared to taking the standard deduction. The Tax Cuts and Jobs Act nearly doubled the standard deduction amounts so this often becomes a larger tax deduction than using itemized deductions. For 2021, the standard deduction amounts are $12,550 for single filers, $25,100 for married couples filing jointly (for seniors, these amounts are $14,250 and $27,800, respectively.)
Despite these hurdles, if you do have significant medical expenses, including Medicare health insurance premiums, you may be able to itemize and collect some tax savings. Even if you are unable to itemize (because the federal standard deduction is larger than itemized deductions) some states (like Wisconsin) allow you to take a full state tax deduction for medical insurance premiums and long-term care premiums.
What if you are self-employed?
Medical deductions work differently for self-employed people and shareholder-employees of S corporations. They can generally claim an above-the-line deduction for their health insurance premiums, including Medicare premiums. An above-the-line deduction reduces AGI which may allow for other qualifying medical expenses do be used toward itemizing.
Have questions on how you can claim all eligible deductions?
Contact us if you have additional questions about claiming medical expense deductions on your tax returns.