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Medicare premiums account for about 15% of Medicare's overall funding, with the highest proportions coming from Medicare Part B and D premiums.
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Many Medicare beneficiaries can deduct Medicare premium payments for tax purposes.
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Funds from a Health Saving Account (HSA) or Medicare Saving Account (MSA) might also help pay for some Medicare premiums.
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Prudent Medicare beneficiaries will seek advice from a qualified tax or financial professional for their unique situation.
Can Beneficiaries Deduct Medicare Premiums From Taxes?
Employees generally pay for job-based health insurance premiums with pre-tax dollars during their working years. Similarly, many self-employed people can use health insurance premiums as tax write-offs for themselves or their businesses.
Are Medicare premiums tax deductible too? People with Medicare can often deduct their premiums or find tax-advantaged ways to pay for them. Surprisingly, Medicare beneficiaries very often overlook these opportunities to reduce tax burdens.
How Much of Medicare Costs Do Medicare Premiums Fund?
Over 60 million Americans receive Medicare benefits, making Medicare one of the most extensive government programs. According to the Kaiser Family Foundation, funding for the entire Medicare program comes from these sources:
- General revenue: 43%
- Payroll taxes: 36%
- Premiums: 15%
- Other sources: 4%
Most people get Medicare Part A without paying a premium, so the revenue collected only accounts for about 1% of funding for this program. In contrast, Medicare Part B premiums fund over one-quarter of this part of Original Medicare. Medicare Part D premiums account for about 17% of its revenue. Besides general revenue and payroll taxes, transfers from states, interest income, and Social Security taxes account for a small portion of funding.
Are Medicare Premiums Tax Deductible?
Most Medicare recipients pay the following:
- A monthly Part B premium of $170.10.
- Part D premiums can vary by plan and geographic area.
- CNBC reported that Part D premiums average over $30 a month. Some beneficiaries who earn higher incomes may pay considerably more because of high-income adjustments for Part B and Part D.
For simplicity, figure that typical Medicare recipients pay over $2,400 a year for Medicare premiums. That figure does not include possible premiums for Medicare supplements, Medicare Advantage, or other health insurance or surtaxes.
Even though these premiums may add up to thousands of dollars a year, many taxpaying Medicare beneficiaries overlook these premiums as a potential tax deduction, probably because they don’t write a check but have the money automatically withdrawn from Social Security Income. However, many people can deduct their Medicare premiums and should take advantage of the opportunity.
How to Deduct Medicare Premiums
Medicare beneficiaries may find ways to deduct premiums along with copayments from their income taxes, depending upon their situation. In other cases, beneficiaries may have a chance to pay premiums with tax-free money.
Self-Employed Medicare Beneficiaries
According to the Bureau of Labor Statistics, seniors turn to self-employment more than other age groups. This group includes:
- independent contractors and people who run businesses as partners or sole proprietors.
- It may also include those who own a substantial share of a corporation.
- Specific tax rules apply, but the IRS says that they allow Medicare premiums as an above-the-line deduction on Schedule 1 of their 1040, which can help reduce adjusted gross income (AGI).
In some cases, companies can pay the owner’s Medicare premiums and take the deduction instead of the individual. A smaller AGI should translate into a lower tax bill.
Medicare Beneficiaries Who Are Not Self-Employed Workers
Medicare recipients who work for an employer or have retired still may have a chance to deduct Medicare premiums. Instead of reporting these on Schedule 1 of Form 1040, they can appear as itemized deductions on Schedule A.
Self-employed people could also choose to itemize instead of taking the above-the-line deduction, but the option to report premiums on Form 1040 typically works out better. That’s especially true because 2018’s Tax Cuts and Jobs Act increased the standard deduction but reduced the population who will exceed it.
Medicare Beneficiaries with HSAs
According to the Journal of Accountancy, people can’t keep contributing to a tax-advantaged health savings account after they begin taking Medicare benefits. At the same time, HSA holders can continue to make tax-free withdrawals from these accounts for qualified expenses, including Medicare premiums, except for Medigap premiums. Withdrawals from the HSA can continue until the fund no longer has balance.
Can MSA Funds Pay Medicare Premiums?
Medicare Savings Accounts work similarly to HSAs because they combine high-deductible health insurance and a tax-advantaged savings account. In this case, the high-deductible health insurance option will be a Medicare Advantage plan. Using the account’s funds to pay Medicare-covered expenses can count towards the plan’s deductible. The funds can also pay for other qualified expenses, like dental or vision care, but these might not count towards the deductible.
According to IRS.gov, premiums for Medicare, aside from Medigap premiums, could count as qualified medical expenses for tax purposes but may not count towards the Medicare Advantage plan’s deductible.
Why Seek Advice from a Tax Pro About Medicare Premium Deductions?
Consider this guide an overview of potential tax deductions for Medicare premiums. Still, the rules vary considerably for unique situations and are subject to changes. Medicare beneficiaries might save a considerable amount by taking advantage of legal tax deductions, but it’s essential to ensure compliance to avoid penalties and hassles. Prudent Medicare beneficiaries will seek advice from a qualified tax or financial professional to reduce their tax burdens.
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