Medicare is a national health insurance program for qualified persons age 65 and up (or younger, if you have an eligible disability or meet certain other qualifications). Medicare is cheaper than a comparable standard health insurance policy, but it’s not free. Most people covered under Medicare pay monthly premiums. The good news is you may be able to get a tax break for paying those Medicare premiums.

That’s not the only good news! Did you know that you can use the Insurify Medicare comparison tool to save money on Medicare? Enter your ZIP code to compare options in your area. The tool is free and confidential, try now!

 

 

Medicare and Tax Deductions

Before Medicare, you likely had health insurance through an employer. Back then, your premiums were mostly likely deducted pre-tax. That means that they were taken out before your income was assessed for taxes. In other words, your premiums were automatically deducted from your taxable income (yay!)

Though Medicare premiums are tax-deductible, they’re not automatically deducted. That means you’ll have to deduct them come tax season. But, not everyone will find the deduction worth the trouble (more on this below).

The Medical Expense Tax Deduction

Qualifying medical expenses are tax-deductible on your income tax return. That includes health insurance premiums, such as Medicare premiums. The catch is that medical expenses are an “itemized deduction.”

When you file your 2020 tax return, you’ll have the option between a standard and an itemized deduction. The standard deduction is a predetermined amount that you can deduct from your income to reduce your taxes, and it is based on your filing status (single, married filing jointly, head of household, etc.).

The alternative is to decline the standard deduction in favor of itemizing. That means you add up all your qualified itemized deductions and claim that amount. Itemized deductions include:

    • Medical expenses
    • Mortgage interest
    • State income taxes

You total your itemized deductions on the Schedule A tax form.

To claim the medical expenses deduction, including Medicare premiums, you’ll need to itemize deductions. Don’t take the standard deduction.

This is appropriate for you if the total of your itemized deductions is greater than the standard deduction.

An Important Note on Itemized Deductions

Unlike most itemized deductions, the medical expense deduction has a threshold. You can only deduct medical expenses that are more than 7.5 percent of your adjusted gross income (AGI) for the year.

For example, if your AGI for 2020 was $50,000, your threshold would be at $3,750. So if your medical expenses were $5,000 for 2020, you’d actually deduct $5,000 minus $3,750, which comes to $1,250.

Are Co-pays Tax-deductible?

For most, premiums aren’t the only Medicare-related expense you’ll pay during the year. Many Medicare plans also require co-pays. This is an amount you pay for a healthcare service once you’ve reached your deductible for that service.

For example, let’s say that the co-pay for a doctor’s office appointment is $15. In that case, if you hit your related deductible for the year, you pay the doctor $15 out of pocket. Your insurance would cover the remainder of the basic charge for that visit.

As a rule of thumb, the higher your monthly insurance premium, the lower the co-pays tend to be (and vice versa).

Co-pays are qualify as medicare expenses because you pay for them out of pocket. So you can deduct them from your taxes as such. Note that you’ll still have to itemize your deductions and hit the 7.5 percent AGI threshold to claim your co-pays. Just as you would to deduct your Medicare premiums.

Please also note that these rules apply to your federal income tax return. Different states have different rules about deducting medical expenses on state tax returns.

Want to see if you can claim any additional medical expense deductions on your return? You can check with your state’s tax board or review the instructions for your state income tax return.

Are Prescriptions Tax-deductible?

Whether you get a Medicare Part D policy or not, you may have prescription expenses during the year. Any medication prescribed by your doctor is considered a qualified medical expense. It can be deducted as a medical expense in your itemized deductions.

Note that this is only the case for prescribed medications. Over-the-counter medications purchased without a prescription is not a qualified medical expense. The only exception is insulin.

Is Social Security Taxed Before Or After the Medicare Deduction?

You may not pay federal income taxes on Social Security benefits if you have low-income. But for most, your Social Security benefits are taxable. That means you’ll pay taxes before Medicare premiums are deducted.

Why does the system work this way? To prevent tax-deduction double-dipping.

Let’s say your Social Security benefits are taxed after deducting Medicare premiums. Then you also deduct your Medicare premiums as an itemized deduction. You’d be getting the tax deduction on your premiums twice.

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Understanding Medicare premiums

Medicare isn’t a single insurance program. It’s more like a bundle of different programs that each cover a separate aspect of your healthcare. Thus, the Medicare premiums you pay will vary depending on which parts of Medicare you choose to use.

Medicare Part A

You get premium-free Medicare Part A if you worked 40 quarters of qualified employment. That means you paid FICA taxes on your wages during that time (approximately 10 years). Medicare Part A provides coverage for:

    • Inpatient hospital services
    • Skilled nursing facilities (such as nursing homes)
    • Some aspects of home healthcare

If you don’t have 40 quarters in your work history, you can still get Medicare Part A, but you’ll need to pay a monthly premium.

In 2021, the Medicare Part A premium is $259 for people with at least 30 quarters of Medicare-covered employment. If you have fewer than 30 quarters, you’ll pay $471 a month.

Medicare Part B

The second half of Original Medicare, Medicare Part B covers:

    • Physician services
    • Outpatient hospital services
    • Other medically necessary services

You’ll need to pay a monthly premium for said coverage—the standard Medicare Part B premium for 2021 is $148.50. Some people pay a higher monthly premium for Part B if their income is above a certain amount on the prior year’s tax return.

If you receive Social Security benefits, you’ll pay premiums from your Social Security check. In other words, your premium will be deducted before you’re paid.

Medicare Part C

Most Medicare enrollees add extra coverage to Medicare Parts A and B.Medicare Part C, also known as Medicare Advantage, is one extra coverage option. Part C is a health insurance plan from a private insurer. It must cover everything covered under Original Medicare. A Part C plan can also offer additional coverage.

The exact coverage will vary from one provider and plan to another. Many Medicare Advantage plans also cover prescriptions. That means you won’t need a Medicare Part D plan (more on those below).

If you get a Medicare Part C policy, you still need to pay your Part B premium. That’s in addition to the premium for your Medicare Advantage policy. You can have your Medicare Part C premium deducted from your Social Security check.

Medigap

The alternative to a Medicare Advantage plan is Medicare Supplement Insurance, a.k.a. Medigap. Like Medicare Part C, Medigap policies come from private insurers. However, all Medigap policies are designed to fit a very specific template.

For example, any one Medigap Plan L policy offers virtually identical coverage to any other Medigap Plan L. No matter which insurer offers it.

And yet, different insurers will charge different monthly premiums for identical Medigap policies! That’s why it’s so important to compare Medigap plans to find the lowest monthly premium.

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Medicare Part D

Medicare Part D policies cover prescription drug costs. Part D policies are provided by private insurance companies, not the U.S. government. If you get a Medicare Part C policy that includes qualified drug coverage, you won’t need a Part D policy at all.

If you do choose to get a Part D policy, you’ll pay the insurer a monthly premium. As with Medicare Part C, you may have the Part D premiums paid out of your Social Security benefits.

 

 

FAQ: Medicare and Tax Deductions

Are insurance premiums tax-deductible?

Not all types of insurance premiums are tax-deductible on your federal tax return. Health insurance premiums are deductible, but only as an itemized deduction. In the past, mortgage insurance premiums were also eligible for an itemized deduction; however, that’s not the case as of this writing. If you own a rental property, you can deduct your landlord’s insurance premiums; however, as a homeowner, you cannot deduct the homeowner’s insurance premiums for your own residence. Income tax laws change from year to year, so it’s possible that other insurance premiums will become tax-deductible in the future.

Are Medicare premiums a qualified medical expense?

Health insurance premiums (including Medicare premiums) are considered a qualified medical expense, which means they can be deducted on Schedule A. Note that you will need to itemize your deductions rather than claim the standard deduction, and you can only deduct medical expenses in excess of 7.5 percent of your AGI for the year.

Are Medicare premiums deducted from Social Security?

If you are receiving Social Security benefits at the time you sign up for Medicare, your Medicare Part B premiums will automatically be deducted from your Social Security benefits. You can contact the Social Security Administration if you prefer to pay your Medicare Part B premiums directly. Medicare Part C and Part D premiums can be paid out of Social Security benefits, but only if you ask your insurer to set this up for you.

Conclusion: Compare Insurance Plans to Save Money

Comparing insurance plans is the only way to make sure you’re paying the right price. That’s whether you’re shopping for Medicare, car insurance, or another type of policy. Insurers often charge very different premiums for virtually identical policies. That’s because they use different factors to determine those premiums.

Luckily, you can use Insurify’s quote comparison tool to even the playing field. It’s quick and easy to compare policies and find the best insurer. Plus, you can repeat this process whenever you qualify for an enrollment period. So you’ll always be sure you’ve got the best policy at the best price.

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Updated April 9, 2021

Wendy Connick is the founder and owner of Connick Financial Solutions, a provider of tax and bookkeeping services and a QuickBooks Online Certified ProAdvisor. A long-time freelance writer, she specializes in business and finance articles on subjects including taxes, investing, and retirement. Wendy is an Enrolled Agent (EA), the only federally licensed tax practitioners who specialize in taxation and have unlimited rights to represent taxpayers before the IRS. She is a member of the National Association of Enrolled Agents and a certified volunteer for VITA (Volunteer Income Tax Assistance), an IRS-sponsored program to provide free tax help for low-income individuals and families.