Understanding deductible expenses
Anyone who uses Schedule A, Form 1040 is eligible to deduct certain medical expenses that exceed the threshold. This includes insurance premiums. A change was made to the tax code in 2014 that limits the number of medical expenses you can deduct to over and above ten percent of your AGI or adjusted gross income for all filers. There’s an exception for individuals who were 65 or older that used the old threshold of 7.5 percent, but this expired in 2016. A major modification of the tax law changed this back to 7.5 percent for both 2017 and 2018. Take your time to determine if it’s worth it to deduct medical expenses or if you’d be better off by using the standard deduction when it comes time to file your yearly income taxes. Work out your taxes using both scenarios and choose the one that benefits you more financially.
Who can itemize
Not everyone is able to itemize all applicable deductions on their taxes. This is because there are income limits set by the IRS that regulate who can itemize all of their deductions. If your income exceeds $155,650 for those who are married and file separate or $259,400 for someone who chooses to file as single. The income limit for heads of household is $285,350 and $311,400 for married couples choosing to file their taxes together. People who make above these limits for their adjusted gross income are limited on how they can itemize for tax purposes.
What premiums are deductible
Different Medicare premiums pay for various portions of the program. Part A is the basic hospitalization insurance and is not deductible unless you aren’t qualified through Social Security and have to purchase the policy and enroll in the program on your own. You can also deduct expenses for Part C, which is an Advantage or HMO plan and Part B, the non-hospital supplemental coverage portion of your Medicare policy. Your premiums for Part D, the portion that covers prescriptions, are also deductible if you meet the requirements to deduct expenses.
Self-employment taxes and Social Security
The majority of beneficiaries pay for their premiums by having them withheld by the Social Security Administration. A retired person would pay the premium out of their monthly benefit check. The Social Security Administration keeps a record of how much you pay for your premiums and then sends a 1099-SSA in January. This form itemizes how much you paid for Medicare premiums throughout the year. If you work for yourself and file a Schedule C when you pay your taxes, you can deduct the premiums that you pay for your Medicare insurance policy as a write-off on line 29 of form 1040.
Funding your premiums for health insurance before taxes
Some things that you pay for, such as your health savings account or qualified medical account available through your employer, are done before taxes are applied to your earnings. This means that no taxes are taken from the money before it can be used for your health costs, including premiums for your health insurance. This saves you money at the time, but it also means that you can’t deduct the funds that you contribute to these accounts when you itemize your deductions when it’s time to file your taxes. Your W-2 statement that you receive every year in January can enlighten you more about what expenses are calculated pre-tax. Just look in box number one and any expenses you pay into that aren’t included in box one were calculated before taxes.
Taxes tend to be confusing at times, but it’s beneficial to take the time to ensure they’re calculated correctly, especially if you’ll benefit from taking these health-related deductions.