If you’re 65 or older, you may have fallen into the habit of automatically claiming the standard deduction instead of itemizing. The standard deduction is often the right way to go for seniors, but not always. Specifically, if you paid Medicare insurance premiums or had other significant health-care costs last year, itemizing could result in a lower federal income tax bill. Here’s how to figure out if you should itemize or claim the standard deduction on your 2016 return.
Step 1: 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
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.
Step 2: Add up all those medical expenses and subtract the percent-of-AGI deduction threshold
Do the math. It’s easy. As explained earlier, the deduction threshold for 2016 is 10% of AGI, or 7.5% of AGI if either you or your spouse was age 65 or older as of Dec. 31, 2016.
Step 3: Add up your other itemized deductions and compare the total to the standard deduction
Once you’ve discovered you had enough medical expenses to exceed the 7.5%-of-AGI threshold, it’s time to consider other categories of itemizable expenses that you might have incurred last year. These can include:
- State and local income and property taxes — including taxes on cars, boats and other personal property.
- State and local general sales taxes if you choose to claim them instead of claiming state and local income taxes.
- Qualified residence interest on a first or second home.
- Charitable contributions.
- Casualty and theft losses (generally subject to a 10%-of-AGI threshold).
- Miscellaneous deductions (generally subject to a 2%-of-AGI threshold).
Add these other itemizable expenses to your medical expense deduction, and see if the total exceeds your 2016 standard deduction amount of:
- $7,850 if you were unmarried and 65 or older at the end of last year ($6,300 if you were younger).
- $15,100 if you file jointly and both you and your spouse were 65 or older at the end of last year ($13,850 if only one of you was; $12,600 if neither of you was).
- $10,850 if you use head-of-household filing status and were 65 or older at the end of last year ($9,300 if you were younger).
The bottom line
If your total itemized deductions exceed your standard deduction, you should itemize. Don’t be shocked if you find this is your situation. On the other hand, if your standard deduction is bigger, claim it instead. Done!
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