Looking for a way to lessen your tax burden? Try itemizing your medical expenses on your taxes.
Many seniors just automatically use the standard deduction and don’t know all of the ways they can deduct medical expenses which could lead to a much lower tax bill.
Here are some things to look for from tax expert Bill Bischoff:
Identify deductible medical expenses
For 2016, you can only deduct medical expenses to the extent they exceed 10% of your adjusted gross income (AGI) or 7.5% if either your or your spouse was age 65 or older as of Dec. 31, 2016. AGI is the number on the last line of page 1 of Form 1040. It includes all taxable income items and certain write-offs such as the one for deductible IRA contributions. While surpassing the percent-of-AGI threshold seems daunting, many seniors will easily clear the hurdle if they include all the medical expenses listed below in the mix.
Premiums for medicare insurance
Medicare insurance premiums count as medical expenses for itemized deduction purposes. Premiums for all four Medicare Parts (A, B, C and D) qualify, and premiums for Medigap coverage do too.
• Medicare Part A is commonly called hospital insurance coverage. Most eligible individuals are automatically covered for Part A without paying any premiums because the premiums are considered paid from Medicare taxes on wages while you or your spouse were working. However, if you didn’t pay Medicare taxes, you may have to pay premiums to get Part A coverage. If so, Part A premiums for 2016 could have been as much as $411 a month per covered person (up to $4,932 for the year).
• Medicare Part B is commonly called medical insurance coverage. Part B coverage together with Part A coverage is often called “original” Medicare. Part B mainly covers doctors and outpatient services, and most people must pay monthly premiums for this coverage. For 2016, you probably paid the standard monthly premium of $104.90 ($1,259 per covered person for the year). Higher-income individuals paid more–up to a monthly maximum of $389.80 for 2016 (up to $4,678 per covered person). Part B premiums are usually withheld from your Social Security benefit payments. The amount withheld for last year will show up as an adjustment on Line 3 of Form SSA-1099 (Social Security Benefit Statement), which you should have received from the Social Security Administration (SSA).
• Medicare Part C is for private Medicare Advantage health plan coverage, which is supplemental to government-provided Part A and Part B coverage. Premiums vary depending on the plan. If you have Part C coverage, you don’t need Medigap coverage (described below).
• Medicare Part D is for private prescription drug coverage. Premiums vary depending on the plan. Higher-income folks pay a surcharge called the “adjustment amount” in addition to the basic premiums. For 2016, the adjustment amount could have been up to $69.10 a month (up to $829 per covered person). Adjustment amounts are withheld from your Social Security benefits and will show up as an adjustment on Line 3 of Form SSA-1099, which you should have received from the SSA.
• Medigap Insurance is private supplemental insurance that functions as an alternative to Part C coverage. Premiums vary depending on the plan.
Premiums for qualified long-term care insurance
These premiums also count as medical expenses for itemized deduction purposes, subject to the age-based limits shown below. For each covered person, count the lesser of premiums paid in 2016 or the applicable age-based limit.
Age as of Dec. 31, 2016 Maximum LTC premium amount 61 to 70 $3,900 Over 70 $4,870
Out-of-pocket medical expenses
Above and beyond insurance premiums, you almost certainly incurred some out-of-pocket medical costs due to insurance co-payments and deductibles and for dental and vision care. These expenditures also count as medical expenses for itemized deduction purposes.
Once you have completely identified your qualified medical expenses, it’s a simple matter of comparing your medical deductions (along with any other deductions like charitable contributions) against the standard deduction.
For many seniors, the costs of medical care make this a much closer call than they assume.