Over 44 million individuals are enrolled in Medicare, and the number of enrollees is expected to rise to 79 million by 2030. With so many Americans receiving Medicare benefits, it’s surprising how little people know about the tax break they can get from deducting their premiums during tax season.
Shockingly, 91 percent of individuals don’t know Medicare premiums are tax-deductible, and even more Americans overlook taxes as a retirement expense.
Understanding your medical expense tax deductions and tax planning can save you money year after year when it comes to filing your taxes.
- 94 percent of Americans overlook taxes as a retirement expense.
- 9 out of 10 individuals don’t know that Medicare premiums are tax-deductible.
94% of Americans Overlook Taxes as a Retirement Expense
It’s essential to understand how your retirement income and savings will be taxed, so you know how much you will have leftover. This information can help you make a financial retirement plan.
When it comes to taxes, most Americans overlook taxes as a significant retirement expense. In fact, less than 6 percent of Americans reported that they consider taxes as an important factor when planning for retirement.
Although the current Medicare tax rate is only 1.45 percent of an employee’s salary, that will amount to thousands of dollars over someone’s lifetime. Travel, food and transportation will also add up to a large sum of money over time.
Tips on Saving for Retirement
The earlier you start saving for retirement, the better off you’ll be because of compounding interest rates. Consider the following tips to boost your savings for retirement:
- Meet your employer's match:
- Contribute enough of your income to take full advantage of your company’s match program.
- Automate your savings:
- Make your retirement contributions automatic each month to increase savings without thinking about it.
- Create a budget:
- Cutting back on your spending can help you save money to contribute more money to your retirement savings.
- Delay Social Security:
- Delay receiving a Social Security payment past the minimum age of 62 — this can increase the amount you receive in the future.
- Set a goal:
- Having and meeting saving benchmarks can help you gain satisfaction and encourage you to continue saving for retirement.
91% Don’t Know That Medicare Premiums Are Tax-Deductible
Medicare premiums can count toward tax-deductible medical expenses. However, our survey found that over nine out of 10 respondents mistakenly believe that Medicare expenses aren’t tax-deductible.
Medicare isn’t the only tax-deductible health insurance option. COBRA is a health insurance program that gives employees the option to continue using their insurance coverage for a period if an individual is fired or loses their current position. COBRA and Marketplace insurance premiums can be deducted from your taxes.
Surprisingly, over 17 percent of people inaccurately believe that employer-provided health insurance is deductible. This type of insurance is not tax-deductible because employers take out a premium from your payroll on a pre-tax basis. Our findings also showed that 59 percent of individuals incorrectly thought none of their health insurance options could be deducted from their taxes.
Medicare premiums are usually not considered a pre-tax deduction, or a deduction that’s held from your salary before it’s taxed. When you file your taxes, it’s important to deduct these premiums.
Medicare deductions are dependent upon your income, special circumstances and the status of your employment. Different Medicare plans have separate premium deductions you can make.
- Medicare Part A:
- If you are covered under Social Security, there is very little to deduct from your expenses. The premium can be deducted if you’re not receiving benefits from Social Security and are paying Part A premiums.
- Medicare Part B:
- If you meet income requirements, then you’re able to deduct the Part B monthly premium from your taxes.
- Medicare Part C:
- Medicare Part C is an alternative insurance option through private insurance agencies for people who are eligible for Medicare. Similar to Part B, you can only deduct this plan’s premiums when you fall within a specified income bracket.
- Medicare Part D:
- Medicare Part D is an insurance program for people with Medicare A or B that covers voluntary prescription drugs. You can include medical expense premiums you pay for this plan as tax deductions.
Out-of-pocket health care costs, such as copays and deductibles, also qualify as tax-deductible. As of 2021 and in previous years, the U.S. tax code states that you are able to deduct out-of-pocket medical expenses exceeding 7.5 percent of your gross adjusted income. It’s important to remember that only the fees you pay out-of-pocket are included in itemized deductions. The IRS tax tool is another excellent resource to help you figure out whether your medical and dental expenses are deductible.
Individuals enrolled in Medicare can also get reimbursements through their insurance provider. For Part A and B, Medicare providers and suppliers usually file for reimbursement. This is because they are the ones who send claims to Medicare. In most cases, you don’t have to pay for the entire medical service upfront and file for reimbursement.
In some instances, you might need to file the claim on your behalf. In this case, fill out the Patient Request for Medical Payment Form (CMS-1490S) and follow the instructions on the form carefully. If you need assistance, you can talk to a Medicare ombudsperson by calling Medicare or your State Health Insurance Assistance Program.
Managing your plan involves being aware of notice periods and keeping track of important documents. We’ve included some tips on keeping track of Medicare payments and premiums for tax deductions.
- Keep a medical folder: Keep a folder dedicated to only Medicare documents and keep track of what you’ve paid. Ensure you include the provider, check number, date of service and date you paid online.
- Track on your computer: If you’re nervous about keeping only paper documentation, having your information in an electronic document is another approach. Create an Excel or Google Sheets document to keep track of your essential data.
- Track your Medicare claim information online: Your MyMedicare.gov account is best used as an extra resource to stay organized and not as your sole plan for tracking expenses. This is because even though it’s a great resource, it doesn’t calculate how much money you’ve paid out of pocket toward the Medicare deductible.
Using these tools to stay organized with your Medicare documents during tax season will help make the process as seamless as possible.
How to Qualify for Medicare Tax Deductions
You may qualify for medical tax deductions depending on your expenses and income. Medical expenses can be deducted if the expense exceeds 7.5 percent of your adjusted gross income (AGI) on Schedule A (Form 1040). These medical and dental expenses can be for yourself, your spouse and your dependents.
To lower your AGI and lower expenses from your medical fees, deduct your premiums from your taxes. The IRS will let your spouse make these deductions to Medicare premiums pre-tax. Usually, deducting premiums means serious money savings, but you can also choose to itemize your deductions.
The following expenses may count toward your itemization deduction whether you’re someone who is self-employed or not.
Health care deductions work differently if you’re self-employed. You’re considered self-employed if you own a business that earns income. When you make your own income, you are responsible for the entire 2.9 percent share of your earned income for the Medicare tax. Self-employed beneficiaries can deduct their premiums before taxes, known as “above the line” deductions.
Thankfully, you can make your Medicare deductions in no time at all. Below is everything you need to deduct your health care costs.
- Find out what your AGI is for the calendar year you’re filing taxes in, and collect your SSA-1099, medical receipts and insurance documents.
- Calculate how much money you spend on health care that year and use it to fill out a 1040-SR or 1040 IRS Form.
- Fill out your medical costs in your 1040-SR to help you calculate 7.5 percent of your AGI, and then subtract this number from that year’s medical expenses.
- Deduct anything over 7.5 percent of the AGI in medical expenses.
You can find additional resources through the IRS service locator, Tax Counseling for the Elderly and Tax Payer Assistance Center.
Although many Americans forget to include taxes as a retirement expense, budgeting for this expense is critical to the creation of a successful savings plan. Thankfully, you can deduct some of these expenses from Medicare health care plans.
Begin your retirement planning by understanding your medical tax deduction options, creating a budget and starting to save as soon as possible. Visit RetireGuide for additional assistance and the most up-to-date and accurate information about financial decisions that affect your retirement.
RetireGuide surveyed 1,500 U.S. citizens in May 2021. The survey consisted of two questions regarding retirement expenses and tax-deductible health care. The first question asked what expenses people consider the most when planning for retirement. The second question asked participants what types of health care insurance they believe they can deduct on their tax returns.
5 Cited Research Articles
- Topic No. 502 Medical and Dental Expenses. (2021, June 26.). Internal Revenue Service. Retrieved from https://www.irs.gov/taxtopics/tc502
- Contact Your Local IRS Office. (2021, June 17). Internal Revenue Service. Retrieved from https://www.irs.gov/help/contact-your-local-irs-office
- Topic No. 158 Paying Your Taxes and Ensuring Proper Credit of Payments. (2021, March 12). Internal Revenue Service. Retrieved from https://www.irs.gov/taxtopics/tc158
- Publication 502 (2020), Medical and Dental Expenses. (2021, March 4.). Internal Revenue Service. Retrieved from https://www.irs.gov/publications/p502
- Can I Deduct My Medical and Dental Expenses? (2020, October 23.). Internal Revenue Service. Retrieved from https://www.irs.gov/help/ita/can-i-deduct-my-medical-and-dental-expenses
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