Have you ever wondered if Medicare premiums are tax deductible when you’re self-employed? Unlike regular individuals, business owners can potentially deduct their Medicare premiums from pre-tax dollars to save money on their tax bills.
This is good news for any self-employed Medicare beneficiary paying Medicare premiums. There are some rules and restrictions, however, and we’ll review them in this article.
When Are Medicare Premiums Tax Deductible?
If you’re interested in deducting Medicare premiums from your individual income tax return, there are a few things you should know to ensure you follow the rules and get maximum credit.
First, you don’t have to worry about itemizing deductions or meet the burden of having more than 7.5% of your Adjusted Gross Income (AGI) go toward medical expenses. Second, you can also deduct the Medicare insurance premiums you pay on behalf of your spouse, too. If you pay both Part B premiums and have a Medigap policy with an insurance company, this amount could easily total thousands of dollars.
This deduction can be significant if you are running your business part-time only and profits are only modest. You could end up with a drastically reduced tax bill just by paying your Medicare insurance premiums!
That being said, if you do not have your own business, then that 7.5% threshold is still the letter of the law. To deduct premiums for Medicare coverage, your total unreimbursed medical expenses would have to exceed 7.5% of your income.
Further, individuals who are not self-employed and wish to deduct medical expenses cannot claim the standard deduction on their tax returns.
As a result, someone who is not self-employed must incur a mountain of medical expenses before it makes sense to file a tax return with an itemized deduction structure. At the same time, self-employed individuals can typically enjoy tax-deductible premiums for their Medicare expenses.
The rules may differ if you’re mostly retired but still do some work on the side, but you could still be eligible to deduct some or all of your Medicare premiums. Before claiming this tax benefit, however, we recommend you seek advice from a tax professional.
When Medicare Premiums Are Not Tax Deductible
Even though many self-employed people who pay Medicare premiums can deduct this health coverage expense, there are some situations that will prevent you from getting this tax break.
For example, if you or your spouse are eligible for health insurance through an employer-subsidized health plan, you won’t be able to claim this tax deduction.
Small business owners are also barred from deducting Medicare or Medigap premiums as a business expense if the sum of these medical expenses exceeds the profit from your business.
There’s a final note to be aware of before you begin trying to write off every medical expense you pay during the course of the year. Only Medicare premiums are eligible for this standard deduction. You cannot write off expenses like co-pays, medical equipment, or out-of-pocket costs.
If you are in a situation where you incur significant medical expenses each year, you may want to calculate whether your costs exceed 7.5% of your income. If they do, consider itemizing your personal return. You can calculate your tax burden using both scenarios to see which version results in the lowest tax bill.
Which Medicare Premiums Are Tax Deductible?
Assuming all other eligibility requirements are met, Medicare beneficiaries can deduct the following premiums:
- Original Medicare (Medicare Part A and Medicare Part B) if you are currently required to pay these premiums
- Medicare Part D
- Medicare Advantage
- Medigap
- Some long-term care health insurance plans
When Did Medicare Insurance Premiums Become Tax Deductible?
If it seems like health insurance premiums for Medicare beneficiaries were not something that qualified for a tax deduction, it’s not your imagination. The laws have changed significantly over the past decade or so.
Prior to 2010, the self-employed health insurance deduction did not apply to Medicare premiums. However, this rule was amended slightly in 2010. That year, the self-employed health insurance deduction became available for Medicare Part B premiums only. Given that the standard premium for Part B is $164.90 (as of 2023), this amount could potentially add up significantly.
Today, however, some additional tax cuts for the self-employed allow business owners to take additional tax deductions for Medicare costs and other medical expenses when filing taxes. All Medicare insurance premiums are currently tax-deductible, though there are restrictions in situations like those discussed above.
Which Self-Employed Persons Are Eligible to Deduct Medicare Supplement Premiums from Taxes?
Eligible business owners include the following persons:
- Sole proprietor
- Partnership member
- Limited liability company member
- S corporation shareholder
When filing your taxes, you can deduct Medicare Supplement premiums from your federal, state, and local taxes. However, you cannot take this deduction from your self-employment taxes.
Further, to claim this deduction, your business must be profitable, meaning your net profit must be above $0.
If your business is profitable, but your health insurance premiums are more than your business income, then you can deduct part of the premiums from your Form 1040. Then you would claim a tax deduction for the remainder under the portion of your tax return designated for medical expenses. Keep in mind that the limit of this deduction is 10% of your Adjusted Gross Income.
How to Claim a Medicare Premium Deduction Retroactively
If you’ve paid Medicare insurance premiums in the past without taking any tax deductions, you can still get credit for premiums paid by filing an amended income tax return. You are allowed to claim these tax credits for three years from the filing date of that year’s return, so these amounts can really add up.
Assuming you are a sole proprietor, you would file Form 1040X to amend your return and claim the refund.
Conclusion
If you’re self-employed, you have several options when it comes to Medicare and taxes, including withdrawing money from your health savings account (HSA). To learn more about answers to questions such as “Are Medicare premiums tax deductible?” and important dates for Medicare Supplement open enrollment, contact an experienced Medicare advisor.