Medical expenses are among the greatest retirement costs. But they may be tax deductible if you itemize deductions rather than taking the standard deduction, according to Claire Hunsaker, founder of AskFlossie a financial community for women.
Long-term care insurance premiums are an expense. But are they fully tax deductible?
Tax Deductions
Retirees can take advantage of tax deductions available for medical costs not covered by health insurance premiums, including prescription drug costs and mental health expenses. Out-of-pocket expenses related to receiving care as well as travel costs related to treatment are deductible – in order to qualify, however, itemize your tax return and exceed 7.5% of adjusted gross income (AGI).
As premiums withheld from your paycheck for employer-sponsored retiree health insurance are pre-tax, they cannot be deducted when filing taxes. If, however, you pay premiums out-of-pocket through individual marketplace plans such as COBRA insurance premiums they could potentially qualify as medical expenses if total payments exceed 7.5% of AGI and can itemized your taxes.
Long-term care insurance premiums can also be deducted on your taxes in a similar fashion to health and life insurance premiums; they must be paid out-of-pocket, and combined with qualified long-term care expenses they must exceed 7.5% of your AGI to qualify.
Retirees who participate in government retirement plans may also qualify to exclude from their income distributions used to pay for accident and health or long-term care insurance from income. Payment must be made directly to the insurer; amounts excluded cannot exceed either $3,000 or the premiums paid.
Make a special election not to include in your taxable income distributions from either a government retirement plan or individual retirement account that are used to pay for health and long-term care insurance for you, your spouse, and/or dependents. This option is only available to retirees of certain public safety services such as law enforcement officers, firefighters, and chaplains.
Other medical expenses you can write off when filing your taxes include dental treatment expenses, hearing aids/eyeglasses/audiology equipment purchases as well as some medical equipment costs. Charitable contributions and fees related to rolling over an old IRA asset into a new IRA after age 55 can also be written off as tax deductions.
Deductible Medical Expenses
As retirees face out-of-pocket medical expenses, many are tax deductible. This includes premiums for Medicare and supplementary health insurance plans as well as long-term care and prescription drug coverage, dental and vision costs not covered by insurance can also be deducted; but their total deduction is limited to 7.5% of adjusted gross income (AGI). To claim their expenses on their federal tax returns.
In 2024, the AGI limit for qualifying medical expense tax deduction was raised from 7.5% to 10% for people employed full-time or who pay premiums directly for private health insurance plans instead of through employer sponsored group plans. Out-of-pocket spending on nonprescription drugs and most cosmetic procedures no longer qualify as tax deductible expenses while items like toothpaste, health club dues and vitamins that were previously eligible are no longer deductible – along with nicotine gum/patches not requiring a valid prescription from being taken into consideration by the IRS.
Retired public safety officers who receive excess reimbursement from their insurance provider can use the worksheet contained within IRS Publication 502 to calculate how much of that excess reimbursement should be included as taxable income. By comparing her total medical expenses against what excess reimbursement was received, this worksheet allows her to find an appropriate dollar figure which should be included as part of her taxable income.
Retirees looking to decrease their tax bill have another option at their disposal to lower taxable income: Medicare Advantage plans. Similar to regular Medicare, but provided by private companies rather than by the federal government, these plans offer reduced taxable income for retirees who qualify – though not available to all retirees.
Notably, Medicare Part A premiums cannot be deducted as qualified medical expenses because they are paid with Social Security payroll taxes; however, Medicare Part B payroll taxes and any premiums for additional coverage that may accompany it can be deducted as qualified expenses.
Premium Tax Credits
Retirees may qualify for a premium tax credit to reduce healthcare costs, with its amount dependent upon household income, filing status and family size. To claim their share of this subsidy they should submit IRS Form 8962 directly to Marketplace which can be found here – this form’s first section determines eligibility for premium tax credits.
The second part of the form allows retirees to calculate a premium tax credit based on information entered in the first section. Once calculated, any leftover credits may be applied toward health insurance premium payments or used toward qualified expenses such as dental, Medicare supplement policies, long-term care insurance or prescription drug coverage.
Contrary to self-employed health insurance premium deduction and Health Savings Account deduction, a premium tax credit may be claimed regardless of whether a taxpayer itemizes their deductions; however, its combined amount must not surpass that paid in eligible health insurance premiums.
Retirees who pay their health insurance premiums with pretax dollars typically can’t claim it as a medical expense on their taxes; an exception might be if they receive an advance premium tax credit (APTC) from the Marketplace to reduce their health plan’s costs.
To qualify for a prepaid premium, retirees must have been offered health insurance through their employer and it must meet both affordable and minimum value standards.
Retirees cannot take advantage of an open enrollment period to drop their employer-sponsored coverage in order to access premium tax credits; instead, they must wait for the next open enrollment period in order to enroll in an Marketplace plan and start receiving them.
Retirees who live with an employed spouse can claim family health coverage provided by their employer as an exclusion from gross income, especially if their combined income exceeds the threshold limit for itemizing deductions.
Health Insurance Marketplace
Retirees who are not yet eligible for Medicare have various health insurance options to consider for health coverage, such as purchasing private health coverage through the Affordable Care Act marketplace, signing up for Medicare or accessing Medicaid. When exploring these options it is important to carefully consider both their health care needs and budget to find what’s right.
Retirees may qualify for premium subsidies or advance premium tax credits to assist with covering the costs of their plans purchased via the Affordable Care Act Marketplace. It should be noted, however, that any subsidy money received for such plans cannot be claimed as a tax deduction due to being deducted prior to taxing being applied – thus already becoming income-tax free!
Retirees need to understand their current retiree health coverage in relation to Medicare and other available health insurance options, like the state health insurance marketplaces or navigators/brokers in their local area. It’s best if they contact their former employer’s human resources department in order to gain information on what their specific retiree plan includes and will change upon leaving employment; additionally they should seek guidance from navigators/brokers/marketplaces on options and costs available in their region.
Retirees looking to enroll in Medicare must do so during the initial open enrollment period or face penalties. They should also determine if their health plan provides creditable drug coverage – the Medicare website offers an online tool to assist in this task. Lastly, retirees should speak to their benefits administrator to see if current coverage will continue after initial open enrollment and what benefits come with that policy.
Extended coverage refers to plans that provide continued medical expenses after an open enrollment period has ended; it usually only pays for 60 days of coverage per year before retirees must bear responsibility for paying Medicare Part A and Part B premiums, along with any other uninsured costs that arise after this coverage lapses.
