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Physician Retirement Planning

Here Is How To Make Your Medicare Premiums Tax-Deductible

Health insurance in the United States is expensive and Medicare premiums are no exception. If you are a physician or in another high-income profession, you are going to pay even higher Medicare premiums. Fortunately, there are three ways that you can make those premiums tax-deductible.

The vast majority of Americans enroll in Medicare when they turn 65-years-old, regardless of whether or not they are still working. For most Americans, Medicare Part A (inpatient care) is free. But there are monthly premiums for Medicare Part B (outpatient care). There are additional premiums for Medicare Part C (Medicare Advantage plans) and Medicare Part D (Medicare drug coverage). For those who do not enroll in a Medicare Part C plan, purchase of a Medicare supplemental policy (Medigap) is advisable to pay for those charges not covered by Medicare Parts A & B. All of these additional coverage plans have their own premiums and consequently, most seniors pay far more for health insurance than just their monthly Medicare Part B premiums.

But amount that you pay for Medicare Part B and Medicare Part D premiums is based on your income. As a result, if you are still working after age 65 or if you have a lot of retirement income from a traditional IRA, 401(k), 403(b), or 457, then you are going to pay more for your Medicare premiums than other seniors. Medicare will check your most recent federal income tax return to determine your income-based premiums. For example, to determine your 2024 premiums, Medicare will look at the tax return you filed in 2023 which would cover your income during the 2022 tax year. Here is how your 2022 modified adjusted gross income will affect your annual Medicare premiums in 2024:

In the table above, the annual Medicare Part B premiums are listed. Part D premiums vary depending on which specific policy is purchased but for any policy, there is an annual add-on amount based on your income that is listed in the table. Your income does not affect premiums paid for Medicare Part C (Medicare Advantage plans) or supplemental Medicare insurance (Medigap plans).

Options to make your Medicare premiums tax-deductible

Many Americans will find themselves paying more for health insurance premiums after they go on Medicare than they did before going on Medicare. This is because during your working years, employers will generally pay for part of the cost of health insurance as an employment benefit. The employee will usually pay a share of the cost of the premiums but for most employer-sponsored group health insurance plans, those premiums are paid out of your pre-tax income, which is equivalent to making these premiums tax-deductible. Once you go on Medicare, you have to pay for the entire cost of premiums yourself. Unlike employer-sponsored group health insurance, what you pay for Medicare premiums is not automatically tax-deductible However, there are three situations that will allow you to take a tax deduction for your Medicare premiums: (1) using health savings accounts, (2) itemizing deductions, and (3) having self-employment income.

Use a health savings account (HSA)

As an investment, HSAs are a true triple threat when it comes to tax advantages. When you put money into an HSA, those contributions are tax-deductible. You don’t pay any annual taxes as the HSA accrues in value. And then when you eventually take money out to pay for health expenses, you don’t pay any taxes on the withdrawals.

However, not all Americans are eligible to have an HSA. First, you cannot make contributions to an HSA after you enroll in Medicare at age 65. For those people younger than 65, only those who purchase an “HSA-eligible health plan” can contribute to an HSA. These health plans are also called high-deductible health insurance plans – they come with lower annual premiums but have higher out-of-pocket costs compare to other plans. Unfortunately, most employer-sponsored HMO or PPO health insurance plans do not qualify. But, if you are self-employed and purchasing health insurance through the Health Insurance Marketplace or if your employer offers high-deductible health insurance plans, then you may elect to enroll in an HSA-eligible health plan. High-deductible health plans are defined by the IRS. For example, for 2023, the IRS defined these plans as having a deductible of at least $3,850 for individual HSAs with maximum out-of-pocket spending of no more than $7,500. If married, both spouses can have their own HSA. There is a limit to the how much you can contribute to an HSA each year – for 2024, that limit was $4,150 for an individual HSA ($5,150 if over age 55). 

For those people who are eligible to contribute to an HSA, they are truly a great deal. Even if you never get sick or injured a day in your entire life, you will still have to pay Medicare premiums after age 65 and you can use HSA withdrawals to pay for those premiums. Note, however, you cannot use HSA withdrawals to pay for Medigap premiums.

Itemize deductions

Most Americans do not itemize deductions. The income tax cuts resulting from the 2016 tax law increased the standard deduction (currently at $14,600 if filing single and $29,200 if filing jointly for the 2024 tax year). The standard deduction increases after age 65 by an additional $1,950 if filing single or $3,100 if filing jointly. You can only itemize your deductions if the total deduction amount exceeds the standard deduction amount. Things that can be itemized include charitable deductions, certain taxes (local, state, and property taxes up to a maximum of $10,000 in total), business expenses, and mortgage interest. Healthcare expenses can be itemized only to the extent these expenses exceed 7.5% of your adjusted gross income for the year.

If you have a lot of out-of-pocket healthcare expenses, then it may make sense to itemize those expenses, including the expense of your Medicare premiums. One strategy to increase your deductions over the standard deduction amount is to make charitable deductions every other year. By contributing twice as much to charities in one year, those charitable deductions can push your total deductions above the standard deduction amount, thus allowing you to deduct healthcare expenses (to the extent that they exceed 7.5% of your income that year). Then the next year, you do not make any charitable deductions and instead take the standard deduction. If you really want to be able to contribute to a charity every year, then consider opening a donor-advised fund. You can contribute a large amount to the donor-advised fund one year and and take a tax deduction on the amount contributed as an itemized deduction. Then, you can make contributions to individual charities each year from the donor-advised fund and on those years, just take the standard deduction.

The current tax cuts expire on December 31, 2025 and unless there is new Congressional legislation to extend those cuts, income tax rates will increase and the standard deduction amount will fall in 2026. At that time, more Americans may be eligible to itemize deductions, including their Medicare premiums.

Have self-employment income

If you have income that is reported on Schedule C, then you have self-employment income. This could be from consulting, from honoraria, or any other employment income that is reported on a 1099 form. This does not include Social Security income, pension income reported on a 1099-R form, or investment income reported on a 1099-DIV or 1099-INT form. You can deduct your Medicare premiums from your Schedule C self-employment income. However, you cannot deduct more than you earn so your Medicare premium deductions cannot exceed the amount of your Schedule C income. If you have any Schedule C income then you should definitely deduct your Medicare premiums.

If you are self-employed, you can deduct Medicare Part B premiums, Medicare part D premiums, Medicare Advantage plan premiums, and Medigap premiums. There is an important caveat, however. You cannot deduct your Medicare premiums from self-employment income if either you or your spouse is eligible for an employer-subsided health plan.

Healthcare is expensive

It is unavoidable – healthcare is expensive. And the older you get, the more you are going to end up paying. CMS reports that the average male child (under age 18) generates $4,415 per year in healthcare costs; female children are slightly lower at $4,009. A man during his working years generates $8,3,13 of healthcare costs per year. Women in their working years generate $9,989, considerably more largely due to reproductive expenses. After age 65, annual healthcare costs increase to $22,597 for men and $22,162 for women. After age 85, per capita healthcare costs increase further to $35,995 per year. Because of this, commercial health insurance during one’s working years has to cover a much lower healthcare cost per person than Medicare has to cover after age 65. We pre-pay a portion of our Medicare premiums via payroll taxes during our working years, otherwise, the annual Medicare premiums we pay after age 65 would be exorbitant. But even so, Medicare premiums for seniors are very costly and can account for a significant amount of one’s disposable income after age 65.

Before age 65, everyone pays the same for health insurance premiums but after age 65, your Medicare premiums are based on your income. So, if you have saved diligently into tax-deferred retirement accounts, or if you have a pension, or if you continue working after 65, then you are likely going to have a relatively high income in retirement. That’s a good thing overall but it does mean that you are going to pay more for Medicare. But careful planning can allow you to make your Medicare premiums tax-deductible and thus take some of the bite out of those premiums.

January 3, 2024

By James Allen, MD

I am a Professor Emeritus of Internal Medicine at the Ohio State University and former Medical Director of Ohio State University East Hospital