Are FEHB Premiums Tax Deductible for Retirees? Navigating the Nuances

Yes, absolutely! FEHB (Federal Employees Health Benefits) premiums are often tax deductible for retirees, but understanding the specifics is crucial. This deduction falls under the umbrella of itemized medical expenses, which are subject to certain limitations. Let’s delve into the details to ensure you’re maximizing your tax benefits.

Understanding the FEHB Tax Deduction for Retirees

Retiring from federal service doesn’t automatically disqualify you from deducting your FEHB premiums. The key lies in whether you choose to itemize deductions on your tax return instead of taking the standard deduction. Itemizing allows you to list individual deductible expenses, including medical costs.

The 7.5% AGI Threshold

The most important factor to consider is the 7.5% Adjusted Gross Income (AGI) threshold. The IRS allows you to deduct only the amount of your total medical expenses that exceeds 7.5% of your AGI. This means you need to calculate your AGI, determine 7.5% of that amount, and then subtract that figure from your total medical expenses, including FEHB premiums. The remainder, if any, is the amount you can potentially deduct.

Itemizing vs. Standard Deduction

The decision to itemize versus taking the standard deduction depends on whether your total itemized deductions exceed the standard deduction for your filing status. For example, if the standard deduction for your filing status is $27,700 (for married filing jointly in 2023) and your total itemized deductions, including medical expenses (after applying the 7.5% AGI threshold), is less than $27,700, you’re generally better off taking the standard deduction. However, if your itemized deductions are higher, itemizing will result in a lower tax liability.

Documentation is Key

Regardless of whether you think your expenses will exceed the 7.5% AGI threshold, meticulous record-keeping is essential. Keep all documentation related to your FEHB premiums, including statements showing the amount you paid throughout the year. Also, retain records of all other medical expenses, such as doctor visits, prescriptions, and hospital stays.

Frequently Asked Questions (FAQs)

Here are some frequently asked questions to further clarify the deductibility of FEHB premiums for retirees:

1. What Exactly Qualifies as a “Medical Expense” Besides FEHB Premiums?

Beyond FEHB premiums, many other expenses can be included in your total medical expenses. These include payments for:

• Doctor visits and hospital stays
• Prescription medications
• Dental and vision care
• Medical equipment (e.g., wheelchairs, walkers)
• Transportation costs to and from medical appointments (within certain limitations)
• Long-term care insurance premiums (subject to age-based limitations)
• Mental health treatment
• Home improvements medically necessary with a doctor’s prescription (only the amount exceeding the increase in the home’s value)

2. Can I Deduct Premiums Paid for My Spouse or Dependents?

Yes, you can deduct FEHB premiums you pay for your spouse and dependents, even if they are not covered by your FEHB plan. The key requirement is that they must be considered your dependents under IRS rules.

3. What if I’m Receiving a Pension Deduction for My FEHB Premiums?

This is a critical point. If your FEHB premiums are being deducted from your pension payments before taxes, then you cannot deduct those same premiums again as a medical expense. This is because the premiums have already been excluded from your taxable income. Double-dipping is a no-no in the eyes of the IRS.

4. How Do I Calculate the Deductible Amount if I Have Other Medical Expenses?

The calculation involves several steps:

1. Calculate your Adjusted Gross Income (AGI). This is found on line 11 of Form 1040.
2. Calculate 7.5% of your AGI. Multiply your AGI by 0.075.
3. Determine your total medical expenses. Add up all qualifying medical expenses, including FEHB premiums.
4. Subtract 7.5% of your AGI from your total medical expenses. The result is the amount you can potentially deduct, provided it’s worthwhile to itemize.

Example: Your AGI is $60,000. 7.5% of your AGI is $4,500. Your total medical expenses, including FEHB premiums, are $8,000. You can potentially deduct $3,500 ($8,000 – $4,500).

5. What Form Do I Use to Claim the Medical Expense Deduction?

You’ll use Schedule A (Form 1040), Itemized Deductions, to claim the medical expense deduction. This form is where you list all your itemized deductions, including medical expenses, state and local taxes (SALT), home mortgage interest, and charitable contributions.

6. Are There Any Special Rules for Medicare Premiums?

Similar to FEHB premiums, Medicare premiums (Parts B and D) are also deductible as medical expenses, subject to the 7.5% AGI threshold. Keep records of your Medicare premiums paid throughout the year.

7. What if My FEHB Plan Reimburses Me for Some Medical Expenses?

If your FEHB plan reimburses you for any medical expenses, you cannot include the reimbursed amount in your deductible medical expenses. Only the out-of-pocket expenses that you actually paid are deductible.

8. Can I Deduct Premiums I Paid for COBRA Coverage After Retirement?

Yes, if you continued your health insurance coverage through COBRA after retiring, the premiums you paid for COBRA coverage are deductible as medical expenses, subject to the 7.5% AGI threshold.

9. What Happens if I Contribute to a Health Savings Account (HSA) While Retired?

If you contribute to a Health Savings Account (HSA), those contributions are deductible separately from your medical expenses. You report HSA contributions on Form 8889. However, distributions from your HSA used for qualified medical expenses are tax-free.

10. Can I Deduct the Cost of Over-the-Counter Medications?

Generally, you can only deduct the cost of over-the-counter (OTC) medications if you have a prescription from a doctor. Without a prescription, OTC medications are not considered deductible medical expenses.

11. What About Long-Term Care Insurance Premiums?

Long-term care insurance premiums are deductible as medical expenses, but there are limitations based on your age. The deductible amount varies based on your age at the end of the tax year. Check IRS Publication 502, Medical Expenses, for the specific limitations.

12. Where Can I Find More Information and Assistance?

For detailed information, consult IRS Publication 502, Medical Expenses, which is available on the IRS website. You can also consult a qualified tax professional for personalized advice based on your specific financial situation. Remember, tax laws are subject to change, so staying informed is crucial. Also, consulting with a Certified Financial Planner (CFP) can provide guidance on overall financial planning, including tax implications of retirement benefits.

Navigating the complexities of tax deductions can seem daunting, but understanding the rules surrounding FEHB premiums and other medical expenses is essential for maximizing your tax savings in retirement. Remember to keep meticulous records, understand the 7.5% AGI threshold, and seek professional advice when needed.