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Are Medicare Premiums Classified as Health Insurance Payments?

Paying Medicare premiums is a significant expense for many seniors. The standard Part B premium in 2023 is $164.90 per month. Meanwhile, the average Medicare Advantage Plan premium is $18 per month, and Part D prescription drug plan premiums average $31 per month. These costs really add up, especially for beneficiaries enrolled in multiple parts of Medicare.

This leads many seniors to wonder – can I deduct my Medicare premium payments on my taxes to lower my taxable income and save money? Are Medicare premiums classified as deductible health insurance payments by the IRS?

Unfortunately, the rules around deducting Medicare premiums can be complex. Whether you can take a tax deduction for your Medicare premium costs depends on several factors.

In this in-depth blog post, we’ll examine if Medicare premiums qualify as deductible medical expenses and health insurance payments on your federal tax return. We’ll look at how the rules have changed in recent years, who can still deduct their premiums, and how much you can potentially deduct.

The Basics: Medicare Part B and Part D Premiums

Let’s start with some background on Medicare premiums. Original Medicare consists of Part A, which covers hospital care, and Part B, which covers doctor visits and outpatient services.

Most beneficiaries don’t pay a premium for Medicare Part A. However, all enrollees in Medicare Part B must pay a monthly premium. In 2023, the standard Part B premium is $164.90/month, although higher-income enrollees pay more.

In addition, if you want prescription drug coverage under Medicare Part D, you’ll pay a separate premium for a Part D drug plan. Part D premiums average around $31 per month in 2023 but can range from $5 – $100+ depending on the plan.

Medicare Advantage Plans that include Part D drug coverage may have premiums as low as $0 or up to $200 or more per month.

Tax Treatment of Medicare Premiums Before 2020

Prior to 2020, individuals enrolled in Medicare Part B and/or Part D could treat their Medicare premium payments as deductible self-employed health insurance.

Here were the key rules before 2020:

  • For self-employed individuals, Medicare premiums qualified as deductible health insurance expenses.
  • For those not self-employed but who itemized deductions, Medicare premiums could often be deducted as qualified medical expenses.
  • Premiums could be deducted regardless of whether you had other medical expenses to itemize.
  • There were no income limits on the deduction.

Under these past rules, many Medicare enrollees deducted their Part B, Part D and Medicare Advantage premiums to reduce their taxable income and save money at tax time. However, changes under the Tax Cuts and Jobs Act now restrict this.

How the Tax Cuts and Jobs Act Changed the Rules

The Tax Cuts and Jobs Act, passed in 2017, eliminated the ability for most taxpayers to deduct Medicare B and D premiums starting in the 2020 tax year.

Here are the major changes:

  • For self-employed individuals, Medicare premiums can no longer be deducted as a self-employed health insurance expense.
  • Itemizers must have qualified medical expenses exceeding 7.5% of their adjusted gross income to take any medical expense deduction. For most, this eliminates Medicare premiums as a deductible expense.
  • There is now an income limit on the medical expense deduction. Taxpayers earning over $87,000 ($174,000 if married filing jointly) can no longer claim a deduction.

These changes mean most Medicare enrollees can no longer deduct Medicare premium costs. However, there are some exceptions.

Who Can Still Deduct Medicare Premiums?

While deductions for Medicare premiums are now extremely limited thanks to the Tax Cuts and Jobs Act, there are still certain situations where you may be able to deduct your premiums:

  • Self-employed individuals enrolled in Medicare prior to 2020 – Self-employed people who already had Medicare can still deduct Part B and Part D premiums as a self-employed health insurance expense. This is because they were “grandfathered” in under the old rules.
  • Self-employed people with high medical expenses – For self-employed individuals with total medical expenses exceeding 7.5% of their adjusted gross income, Medicare premiums can potentially still be included in reaching the threshold for deducting overall medical expenses.
  • Non-self-employed people with high medical expenses – Similarly, for non-self-employed filers who itemize and have enough total medical expenses to exceed the 7.5% adjusted gross income threshold, Medicare premiums can still potentially factor into the medical expense deduction.
  • Self-employed on Medicare with HSA – For self-employed individuals with a Health Savings Account (HSA), Medicare premiums can be paid from the HSA which serves as a deduction.

Outside of these limited situations, most Medicare beneficiaries can no longer deduct Medicare premiums directly on their tax return following the 2020 tax year changes.

Claiming the Deduction for Eligible Filers

For self-employed individuals and filers that meet the criteria to deduct their Medicare premiums, here are some tips on properly claiming the deduction:

  • Premium payments must be allocated to the correct tax year and backed up by documentation.
  • Part B premiums are claimed on Schedule C if self-employed. Others claim it as a medical expense deduction on Schedule A.
  • Part D and Medicare Advantage Plan premiums get claimed on Schedule A.
  • Make sure total medical expenses exceed the required 7.5% AGI threshold to claim any deduction.
  • Be aware of the income limits on medical expense deductions.

To determine the optimal way to claim any eligible Medicare premium deductions, it can help to work with a tax professional or CPA that understands the rules.

The Tax Treatment of Medigap Plan Premiums

Aside from Original Medicare premiums, what about the tax treatment of Medigap Plan premiums?

Medigap, also called Medicare Supplement Insurance, is private supplemental coverage that pays certain Original Medicare out-of-pocket costs.

Unfortunately, Medigap premiums also face restrictions when it comes to tax deductions after the Tax Cuts and Jobs Act. The same limits and qualifying criteria apply to Medigap premiums as Medicare Part B and Part D premiums.

Very few Medigap policyholders will qualify to deduct any portion of their premiums. An exception could be those with high medical expenses exceeding the AGI threshold.

Strategies to Reduce Medicare Costs

Although most Medicare enrollees will no longer benefit from deducting their Medicare premium payments, there are other strategies to reduce costs:

  • Compare Medicare Advantage Plans each year and switch to lower premium options when available.
  • Compare Part D prescription plans annually and switch to plans with lower premiums.
  • If income-adjusted, appeal for a lower Part B/Part D income-related monthly adjustment amount (IRMAA)
  • If low income, apply for the Medicare Savings Programs to have the state pay your Medicare premiums.
  • Apply for Extra Help to get Part D premium subsidies if eligible.

While the loss of the tax deduction for premiums was impactful for many, focusing on the strategies above can still help lower Medicare out-of-pocket expenses.

The Bottom Line: Are Medicare Premiums Tax Deductible?

In summary, due to changes made by the Tax Cuts and Jobs Act, most Medicare beneficiaries are no longer able to deduct Medicare Part B, Part D or Medicare Advantage Plan premiums on their federal tax return.

The ability to deduct premiums is now largely limited to those who were self-employed and enrolled in Medicare prior to 2020. Outside of this grandfathered group, very few enrollees will have enough total medical expenses to qualify for deduction.

It’s always a good idea to consult with a tax advisor or CPA to understand if you fall into one of the limited situations where Medicare premiums remain deductible. However, for the majority of Medicare enrollees, premium costs can no longer directly reduce taxable income.

We’re Here to Help

You do not have to spend hours reading articles on the internet to get answers to your Medicare questions. Give Scott Sims at Sims Insurance Medicare Plans a Call at (541) 915-0939. You will get the answers you seek in a matter of minutes, with no pressure and no sales pitch. We are truly here to help.

FAQs

Are Medicare Premiums Classified as Health Insurance Payments?

Yes, Medicare premiums are classified as health insurance payments.

Can self-employed individuals deduct their Medicare premiums?

Yes, self-employed individuals can deduct their Medicare premiums as a business expense.

Can I deduct my Medicare premiums on my tax return?

Yes, you may be able to deduct your Medicare premiums on your tax return.

What medical expenses can I deduct?

You can deduct your Medicare premiums along with other qualified medical expenses.

Do I need to itemize to deduct my Medicare premiums?

Yes, you need to itemize your deductions to deduct your Medicare premiums.

Can I deduct my Medicare premiums in 2023?

Yes, you can deduct your Medicare premiums in 2023 as long as you meet the eligibility criteria.

Does deducting Medicare premiums affect my Medicare coverage?

No, deducting Medicare premiums does not affect your Medicare coverage.

Can I deduct my Medicare premiums if I have another health insurance plan?

Yes, you can deduct your Medicare premiums even if you have another health insurance plan.

How can deducting my Medicare premiums help me save money?

Deducting your Medicare premiums can reduce your tax liability and help you save money on your income tax bill.

What should I do to deduct my Medicare premiums?

To deduct your Medicare premiums, you should include them as part of your itemized deductions on your income tax return.