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.