Medical and Health Insurance Premiums: Finding Deductions

insurance_taxesAs we age and pay off our mortgages, it seems that baby boomers and retirees are less likely to itemize deductions. On the other hand, this stage in our lives can introduce new sources of deductions that we may not think of.
One cost category where we may overlook deductible expenses is in medical and health care. I have been reading about this and thought that a summary of what is available would help.

Deductible Health and Medical Insurance Premiums

Premiums for Medicare Part B coverage (which applies to medical costs other than hospital bills) are deductible. Typically, these premiums are deducted from Social Security benefits and for most folks total around $1150/yearly.

Premiums for Medicare Part C coverage ( Medicare Advantage insurance) are deductible. The amounts of these premiums vary quite a bit depending on the plan.

Premiums for Medicare Part D coverage (prescription drugs) are deductible. These premiums average around $300 yearly, per person covered.

Premiums for Supplemental Medicare Coverage (Medigap Insurance) are deductible. Medigap policies are usually expensive, often $1000-$2000 yearly per person. Not everyone buys these policies.

Deductible Long-Term-Care Insurance Premiums

Premiums that you pay for for qualified long-term care (LTC) insurance policies are also deductible medical expenses, subject to limits based on your age. If you are between 61 and 70 years old, you can deduct up to $3080 (for 2008).  If you are over 70, the deduction limit increases to $3850. Of course, you cannot deduct more than you actually pay.

Deduction of Medical Expenses for Relatives

Some boomers are paying health insurance premiums or medical expenses for family members. In some cases, you can deduct those costs.
First, that relative must be your child, son or daughter-in-law, grandchild, mother or father, stepfather or stepmother, father- or mother-in-law, sibling, stepbrother or stepsister, brother- or sister-in-law, aunt, uncle, niece, or nephew.   Second, you must have paid over 50% of that relatives support in 2008.
This deduction is available even if the relative did not live with you or had over $3,500 of gross income in 2008, which is the cut-off for a dependency exemption.

Adding Up the Deductions

To determine if it makes sense to itemize instead of using the standard deduction, add up all of these medical insurance costs. Then combine that total with your other routine out-of-pocket medical expenses, such as doctor bills and drug costs.

From that medical expense total, subtract 7.5% of your yearly Adjusted Gross Income (AGI). That is the amount that you can add to your other tax deductions, such as mortgage interest, property taxes, state and local income or sales taxes, etc.

If the grand total exceeds $6,800 (you are single and over-65) or $13,000 (you are filing jointly, and both spouses are over 65), then it’s time to switch back to itemizing.

I hope it works for you.

Image credit:  Rachael Voorhees

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