Are Medicare Premiums Deductible? Why the Answer Might Surprise You

Tax Strategies | Articles

Let’s be honest. Figuring out your insurance premiums can feel chaotically complicated. Tax laws are cryptic, options depend heavily on individual circumstances, and the whole system can all feel far too complex to navigate. I can feel your eyes glazing over already. It’s a wonder we don’t all rip up the papers and walk away… many do! 

But before you cast your metaphorical documents into the wind, consider that some Medicare premiums are tax-deductible, which could potentially save you some money. That’s always worth looking into! Of course, as appealing as extra cash in your pocket sounds, this is still not an easy ecosystem to navigate alone. So, if you’re asking yourself ‘are medicare premiums tax-deductible?’ Don’t worry— we’ve got the answers you need. 

What Are Medicare Premiums Anyway?

We’re not going to mince words. Medicare premiums can be headache-inducing, especially since they can be different for everyone. What’s more, these aren’t singular, holistic plans we’re talking about here— a miniature alphabet of plans, from A to D, lends added difficulty in keeping track of where each overlapping umbrella of coverage begins and ends. Some portions cover hospital care, other portions cover preventative visits, and the complexity only increases from there!

Although the Medicare site is remarkably helpful in explaining the differences in detail, here we’ll break down the broad strokes of the various Medicare offerings:

Part A

The first entry in our Medicare alphabet is Part A. Medicare Part A is half of the pair known together as “Original Medicare,” and generally focuses on covering a retiree’s inpatient hospital expenses. Part A also covers services like skilled nursing facility (SNF) care, home health care, and hospice care. 

Although a handful of services will require extra contributions on your end, most people don’t have to pay a monthly premium for Part A, so long as they’ve paid Medicare taxes for a certain length of time over the span of their professional life (typically around 10 years).

Part B

Part B— the other half of the “Original Medicare” dynamic duo— provides a wide variety of routine outpatient coverage. The list includes coverage for the following:

• Preventative checkups
• Durable medical equipment (wheelchairs, walkers, oxygen tanks)
• Home health services
• Ambulance services
• Therapy and mental health coverage
• Chiropractic care
• Select outpatient prescription drugs 
• X-rays

For most of your retirement, as long as you don’t end up in the ER, Part B usually has you covered.

Part A vs Part B

Whereas Part A coverage generally depends on the period of time you paid Medicare taxes, Part B more closely tracks your taxable income— but there’s a catch:

The dollar figure you pay is actually based on the size of your income two years prior. 

Let that sink in for a minute. This leads to a big mismatch in Medicare premiums over this two-year horizon. For someone who is retired and eligible to start Medicare at 65, their premiums will be based on their income from when they were 63 (an age at which they were likely still working and earning a higher income). Unfortunately, if two years ago they were making a lot of money (and today they aren’t), this coverage could end up becoming quite expensive. 

Part B premiums can add up quickly, and the cost of some plans can range well over $500 per month. In short, Part B tends to be one of the biggest drivers of variance between individuals’ Medicare expenses.

Part D

Wait! What about C? Don’t worry, we’re getting there. Medicare Part D provides the prescription drug coverage elements of your health plan and falls squarely outside of the “Original Medicare” umbrella. 

When it comes to prescription benefits, you won’t be receiving these directly from the government— Part D is outsourced to private providers, contracted by Medicare to handle patient prescription needs. Drug coverage varies by plan, and is typically organized in a tiered list called a “formulary.” If you’re enrolling in a standalone Part D program, it’s crucial to select a plan that matches your own prescription needs.

Part C

Medicare Part C goes by many names— the Medicare Advantage plan, the Medicare private health plan, or simply MA. Part C integrates the components of Parts A, B, and D, combining premiums into a 3-tiered contract with a private health provider. 

This unified offering presents a number of discrepancies when compared to Original Medicare, and may have different premiums, coverage rules, cost-sharing systems, and networks of providers. Just like Original Medicare, a portion of a patient’s premiums may be driven by the size of their income. It’s notable, however, that many of these plans still have a cap on costs, ensuring your finances are relatively shielded from the threat of a serious illness.

The big takeaway here? Whether you choose Original Medicare or a private plan, your current income will continue to drive your healthcare premiums as long as 2 years later. Be sure to plan accordingly (especially when it comes to your deduction strategy).

Could Tax-Deductible Premiums Apply To You?

Drumroll, please. The big question: are you eligible to deduct your Medicare premiums? 

The answer: Yes! If you itemize deductions. 

The caveat is that eligibility is based on whether your premiums exceeded the 7.5% threshold of your Adjusted Gross Income (AGI), which is essentially just gross income minus adjustments to income. According to the IRS, “Gross income includes your wages, dividends, capital gains, business income, retirement distributions as well as other income.” Taking your AGI into account, say you’re earning  $100k, but your premiums only amount to $5,000. In this case, you’re not exceeding the threshold required to deduct premiums from your taxes.

In addition to deducting premiums, there’s also a number of other medical expenses an individual can use to minimize their taxes. Deductibles, copays, coinsurance, and a variety of other non-covered services can offset your tax burden, so it’s worthwhile to keep records and receipts and consult with your tax advisor.

The Best Bet For Your Bottom Line

Assuming you have enough expenses to exceed the standard deduction (which lands at a little over $27k in 2023), leveraging the tax benefits of your Medicare premiums is clearly a winning strategy. If your expenses exceed this threshold, then your premiums can, in fact, be itemized. In this case, the best strategy is to itemize and claim the deduction, every time.

Making The Complicated… Uncomplicated

When it comes to your financial future, you want to work with someone you can trust. Medicare premium deductions can feel like tricky terrain to navigate, but you don’t have to venture off into the unknown alone. By evaluating the entire financial situation, Monument Wealth Management can help you better assess what kinds of things are driving your taxable income— especially for clients that have a variety of levers for lowering their tax burden. 

From optimizing your taxable income to evaluating your deduction strategy options, a partner like Monument can help you see the big picture, allowing you to seize wealth design opportunities across the entire spectrum of healthcare planning. By providing tailored plans and specific advice, we’ll help you create a blueprint that represents the life you want to live. Don’t tear up your insurance policy just yet. We’re here to help.