Taxation of Retiree Medical Premiums

Itemized deductions for medical expenses includes premiums.

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If you're retired, your healthcare taxes are handled much as they were before the Affordable Care Act rollout in 2013. The ACA's health exchanges don't offer Medicare plans. You've even been spared a hike in the itemized deduction for medical expenses. However, as of 2014, your premiums are subject to the impact of a brand new tax imposed on health plans.

Premiums Deductible as Medical Expenses

Your Medicare Part B and Part D premiums are deductible as medical expenses if you itemize them on your tax return. If you and your spouse are both age 65 or older, you may continue to deduct medical expenses exceeding 7.5 percent of your adjusted gross income. That 7.5 percent threshold will stand through fiscal 2016. If your spouse is younger than 65, the itemized deductions begin at 10 percent of your adjusted gross income.

Premium Deduction for Self-Employed Older Than 65

If you remain self-employed after retirement, you can deduct premium costs for all four sections of Medicare: hospital, medical, Medicare managed care and prescription drug plans. The premium is not part of the medical expense deduction. It comes right off the top. The deductible also applies to Medigap plans. This deduction had not been spelled out explicitly in Internal Revenue Service rules before 2013.

Additional Tax on Large Health Insurers

Premiums for Medicare beneficiaries are expected to rise because of one provision of the ACA -- a federal lump-sum surcharge on large health insurance companies. Section 9010 of the ACA imposes the surcharge on health insurers with premium income of more than $25 million per year. This excise tax is distributed proportionately among insurers so that the total tax revenue rises from $8 million in 2014 to $14.3 million in 2018. Exceptions and exemptions include Medigap premiums, long-term care premiums, nonprofit organizations, government entities and others.

Impact of Insurance Surcharge on Premiums

The trade organization AHIP, which stands for America's Health Insurance Plans, has been in full battle mode over Section 9010 for several years in an effort to delay or repeal the ACA surcharge. AHIP cites a 2011 study by the business consulting firm Oliver Wyman stating that premiums for Medicare Advantage plans will likely rise by $32 to $42 per month for individuals by 2023 and Medicare prescription drug plans will increase by about $20 by 2023.