The A, B, C and Ds of Medicare

Here’s your big disclaimer upfront: I’m not a Medicare guru. I don’t work for Medicare. I don’t receive Medicare. But I do know enough to see that there’s some pretty awful information floating around which has lead to some confusion on the tax side. Let me see if I can help sort some of it out.

When you work, you pay into the Medicare system as part of your federal payroll taxes. You pay 1.45% and your employer pays in 1.45% of your pay. Unlike Social Security, there is no cap, so all of your wages are subject to the tax.

You pay in so that you can benefit from Medicare later. Generally, you are eligible for Medicare if you or your spouse worked for at least 10 years in Medicare-covered employment; you are 65 years or older; and you are a citizen or permanent resident of the U.S. If you aren’t yet 65, you might also qualify for coverage if you have a disability or with End-Stage Renal disease.

There are several parts to Medicare:

  • Medicare Part A helps cover inpatient care in hospitals, skilled nursing facility, hospice, and home health care. For most taxpayers, Medicare Part A is considered “premium free” – that’s because you (or your spouse) paid in while you (or your spouse) were working. If you aren’t one of those “premium free” folks, you can opt to buy Part A coverage – the rate depends on how many quarters you (or your spouse) paid into the system. If you pay out of pocket for Part A, the premiums would be considered medical expenses for purposes of the medical deduction. If you receive Part A because of your age or disability without paying out of pocket, you may not claim the premiums as medical expenses.
  • Medicare Part B is considered medical insurance. It’s optional coverage and you have to pay for it if you want it. For 2011, the monthly premium is $115.40. In most cases, this amount is deducted from your Social Security, RRB or Civil Service Retirement check. If you don’t get one of those checks, you’ll be billed for coverage every 3 months. If you pay for Part B, the premiums would be considered medical expenses for purposes of the medical deduction. It doesn’t matter whether the premiums are paid out of your checks or if you pay every three months.
  • Medicare Part C (sometimes called a Medicare Advantage Plan) is basically a private insurance plan approved by Medicare. Most plans cover Parts A and B, and often Part D. The plan might also offer extra benefits such as vision and dental. Most also include Medicare prescription drug coverage (Part D). Medicare pays the insurer directly for some of the costs and you are responsible for paying the additional costs (the costs and benefits under the plans are heavily regulated). If you pay for Part C, your costs would be considered medical expenses for purposes of the medical deduction. Costs paid by Medicare for your plan are not deductible.
  • Medicare Part D is prescription drug coverage. The costs and benefits of the plan vary according to a number of factors, including the amount of your modified adjusted income (MAGI). If you pay for Part D, your costs would be considered medical expenses for purposes of the medical deduction. Costs paid by your employer or other third party for your plan are not deductible.

That’s the quick and dirty summary. There are lots of specific facts and circumstances that might affect what kind of coverage you receive or are eligible to receive. If you have questions, call the nice folks at Medicare (1.800.MEDICARE) and ask them directly. I’m sure they’ll be happy to help.

But since the point of this blog is to talk about tax, here’s what I want you to take away from this article: if you pay for coverage, no matter what part/plan, AND if you itemize, then you may include your costs for coverage as part of your medical expenses for purposes of the medical deduction.

That said, remember this: seniors and the blind receive an additional amount as a standard deduction, making that threshold fairly high. There’s no need to add up your coverages if you’re not near that amount. Additionally, there is a “floor” for medical deductions which means those expenses are only deductible to the extent that they exceed 7.5% of your adjusted gross income.

If you have questions about whether you should itemize or whether other medical expenses would qualify for medical deduction, check with your tax professional.

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Comments

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  2. Merle Nice

    Excellent explanation. Can Medicare Part B premiums be used for the Self-employed Health Insurance deduction? Keep up the great work.

  3. Frank

    This might be a dumb question, but are you saying the 1.45% that the employee pays in Medicare out of his or her paycheck can then be itemized? Or are you referring only to premiums paid for supplemental Medicare insurance above and beyond the 1.45%?

    Great summary by the way.

  4. Author
    Kelly

    Thanks Frank!
    Sorry I wasn’t clear. You can’t deduct your payroll taxes (that 1.45%) as medical expenses. With respect to medical expenses, I was referring to the premiums and out of pocket costs that folks pay above that (monthly premiums, for example).

  5. Rainer null von Saleski

    I am covered by Medicare parts A and B, and I think you got the premium for Part B wrong. In 2010, I paid 1,156.80 for 12 months of coverage … which works out to $96.40 per month. My 2011 monthly check is exactly the same as my 2010 monthly check, and the monthly benefit did not change, so I believe that the Medicare Part B premium did not change either.

    I read every one of your columns; you are my favorite source of tax information. In fact, yours is the only blog I read regularly. Thanks for all you do!

  6. Author
    Kelly

    Rainer, thanks for the kind words about the blog!

    And good eye. Medicare rates for Part B have gone up for some recipients but not all – most Part B recipients who paid in 2010 will pay the same rate in 2011. New recipients will generally pay a higher rate. Rates are also dependent on your income level. If you are an individual taxpayer with a modified adjusted gross income (MAGI) of $85,000 or more, or a married taxpayer filing jointly with a MAGI of $170,000 or more, you can see your rates here: http://www.medicare.gov/find-a-plan/staticpages/partb-premium.aspx

  7. Melody

    I was just approved for Medicare starting in Jan, 2011. I went right away and procured a Medicare Advantage plan, with the additional premium being deducted from my Social Security check. Needless to say, I’m going to have to revisit this next year, when I have all of the necessary info from Social Security; but it sounds like I can add my Medicare Part B premium – probably $115.40 plus the additional premium for my Advantage plan as medical deductions for TY 2011.

    Needless to say, I’m copying this to a Word doc to save.

    Thanks!

  8. Mary Kay Foss

    Kelly:
    I don’t think you responded to the first post here. If a Social Security recipient is self-employed and has Medicare withheld from monthly payments is that deductilble on page 1 of the return as self-employed medical insurance?

  9. Author
    Kelly

    Thanks for the bump, Mary Kay, I somehow missed Merle’s question.
    The answer is no. You cannot use the cost of Medicare Part B premiums for purposes of the self-employed health insurance deduction.

  10. Merle Nice

    Kelly, i disagree. Look at 2010 Form 1040 instructions, page 29, first column, near the bottom. The wording has been changed from cannot to CAN. I am a member of a tax forum that received verification from the IRS tax law email help service. Until further notice, I believe it is a SEHI deduction.

  11. Author
    Kelly

    Merle, If you have guidance from IRS, I’d defer to that. But Pub 535 still says no (Section 6, Deductible Premiums – it’s on p.18 of the hard copy). Again, this is not my area of focus so I am relying on IRS Pubs and the kindness and expertise of others…

  12. Rainer von Saleski

    Thanks for the clarification, Kelly. Just one question: What is “MAGI (Modified Adjusted Gross Income)” in this context? I’m only familiar with “MAGI for Roth IRA purposes”, which excludes Roth IRA conversions and adds back in certain (uncommon) income types. A Google search leads me to think that MAGI does not usually exclude Roth IRA conversions … but that seems unreasonable, since it isn’t really income (money you get this year) (it’s just something to pay income tax on). Please shed some light here. Thanks.

  13. Mary Kay Foss

    Hello Merle:
    I just checked out your reference in the 2010 instructions and it does specifically say that you can use the Medicare Part B premiums.
    I didn’t check IRS Pub 535 (is that out for the 2010 returns)?
    At a meeting I went to with IRS they said that COBRA payments would qualify for the SEHI deduction because COBRA is not an employer-subsidized plan. The COBRA premiums are usually 102% of what an employee would pay.

  14. Merle Nice

    Pub 535 is NOT yet published for 2010 so no guidance there.

  15. jim Abernathy

    kelly

    one simple question. are medical disability payments from theVA taxable. (70% disab. agent orange ) thanks

  16. mercy

    Why is the IRS allowing Medicare Part B premiums to be included in the Self-Employed Health Insurance deduction for 2010 when it was not allowed in 2009? Is this a result of new legislation. I can not find any reason for the change. Does anyone know?

  17. Merle

    So far, no one has discovered why the change, but is pretty conclusively agreed (even acknowledged by the IRS) that Medicare Part B is deductible as a Self Employed Health Insurance premium.

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  20. Cara

    Just wanted to say that your blog is extremely helpful and, dare I say, fun to read. I’m a CPA who “doesn’t do taxes” (aka, auditor). In other words, my CPA license is useless, according to my father.

    On a whim, my father asked me to run his numbers through Turbo Tax and see how they compare to what his local CPA prepared. Turns out, his tax preparer didn’t include the Medicare Part C premiums in his medical expenses (unfortunately, his medical expenses are well above the floor). The Part C premiums pushed him over the threshold such that he should have itemized instead of using the standard deduction (including factoring in the extra deduction for being over 65).

    My research on the IRS website yielded the all-too-typical ambiguity, so I used trusty Google to confirm my answer. I landed on your site and got my confirmation. My dad is owed a whopping $15, but the redemption I’ve received is priceless. Thanks for posting this info.

  21. Author
    Kelly

    Yaay! Glad I could help, Cara. And thanks so much for the kind words about the blog!

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