Surprise: Medicare B Premiums Now Deductible

By Marcia Richards Suelzer, Toolkit Staff Writer

If you are self-employed and have Medicare Part B, you can deduct the premiums as health insurance, rather than as medical expenses, on your 2010 tax return. This unheralded change by the IRS should lower your tax bill in 2010.

Prior to 2010, Medicare B premiums could be deducted as medical expenses. Medical expenses can be deducted only if you itemize, and then only to the extent that the total amount of expenses exceeds 7.5 percent of the adjusted gross income. So, if your AGI gross income is $100,000 in 2010, the first $7,500 of medical expenses are non-deductible. In contrast, the deduction for insurance premiums paid by self-employed individuals is an "above the line" deduction. "Above the line" means that the amount you spend on health insurance is deducted dollar-for-dollar from your gross income.

Tip. "Medicare" is actually a composite of several different insurance programs. Medicare Part A is hospital insurance that helps cover inpatient care in hospitals, skilled nursing facilities and hospice programs, as well as some home health care services. Medicare Part B is medical insurance that is designed to help cover doctors' services and outpatient care, and to cover some preventive services to help maintain your health. Unlike Medicare A, Medicare B coverage is optional and is paid for via premiums. (In most cases, Medicare B is automatic, so if you don't want it, you must opt out of the system.)

The amount you pay for Medicare B premiums is based upon your filing status and annual income. In 2011, the premium is $155.40 per month for individuals who are new to the system and whose modified adjusted gross income is $85,000 or less ($170,000 or less for married, filing jointly). The premium amounts for higher income amounts is available at Medicare.gov.

Surprisingly, there was no IRS announcement of this significant change in the treatment of Medicare Part B premiums. Rather, the only indication that the change had occurred was a change in the Form 1040 Instructions. However, in several emails and articles, such as this one on SFGate.com, the IRS has confirmed that this statement is accurate and not a typo. The revised rule is expected to be reflected in the 2010 IRS Publication 535, Business Expenses, which should be released later this month.

Take Action. If you are on Medicare and are self-employed, make sure you (or your return preparer) include your premium costs on Line 29 of your Form 1040 as a self-employed health insurance cost, rather than as a Schedule A Medical Expense.

Posted March 3, 2011.