Medicare Premiums and Medical Costs on IRS Financial Statements

Every serious IRS collection alternative starts with a financial statement. A payment plan for a large balance, a hardship closure, an offer in compromise: each requires you to list your income and expenses, and the IRS compares those expenses to its Collection Financial Standards.

Health care is where retirees most often leave money on the table. They underreport it, report it in the wrong place, or forget that the IRS allows more for it once you turn 65.

Two separate health care lines

The Collection Financial Standards treat health care in two pieces:

1. Health insurance premiums, allowed separately at the amount you actually pay.
2. Out-of-pocket health care costs, allowed at a national standard per person without proof, or at a higher amount if you document it.

The IRS says the out-of-pocket standard is allowed in addition to what you pay for health insurance. These are two lines, not one.

The out-of-pocket standard for 2026

The IRS publishes the standards on its website and in IRM 5.15.1. According to the IRS, the out-of-pocket health care standard effective June 29, 2026, is $90 per person per month for people under 65 and $163 per person per month for people 65 and older.

You get the standard amount without having to prove what you spent. If your actual out-of-pocket costs are higher, you can claim more, but you must provide documentation showing the expenses are necessary living expenses. For a retiree with several prescriptions, regular visits to cardiologists and other doctors, or a chronic condition, $163 a month rarely covers it. Document the real number.

What counts as health insurance

For a typical Pinellas retiree, the premium line includes:

• Medicare Part B, usually deducted from your Social Security payment.
• Medicare Part D prescription drug coverage, or the premium for a Medicare Advantage plan that includes drug coverage.
• Medigap (Medicare Supplement) premiums.
• Income-related monthly adjustment amounts (IRMAA), if your income is high enough that Medicare charges extra for Part B or Part D.
• Dental and vision coverage, if you buy it.
• Retiree health coverage from a former employer.

Bring the premium notices. Medicare sends an annual statement of your Part B premium, and SSA's benefit letter shows the deduction.

The gross-versus-net problem

This is the error I see most. Your Social Security deposit is net of the Medicare Part B premium. If you report that net deposit as your income, then also list the Part B premium as an expense, you have double-counted the premium against yourself. The IRS sees less income and more expense than reality, and the numbers stop matching your SSA-1099.

Do it the clean way. Report gross Social Security, the amount before deductions, as income. Then list the Part B premium as a health insurance expense. Your SSA benefit letter shows both numbers.

IRMAA and the two-year look-back

Medicare's income-related surcharges are based on the income shown on your tax return from two years earlier. That creates a trap for retirees who took a large IRA distribution or did a Roth conversion. The tax bill arrives one year, and the higher Medicare premiums arrive two years later, often when the money is gone.

If you are dealing with IRS debt during an IRMAA year, the surcharge is a real health insurance expense and belongs on the financial statement. If your income dropped because of a life-changing event such as retirement or the death of a spouse, SSA has its own process to request a reduction. Ask SSA about it. It is separate from anything you do with the IRS.

Long-term care and caregiving costs

Assisted living, in-home care, and nursing costs can dwarf every other expense. The IRS standards do not set a figure for them. Instead, they are evaluated as necessary expenses based on your actual situation. Document them with contracts, invoices, and a physician's statement of need. The hardship regulation, Treas. Reg. 301.6343-1(b)(4), specifically lists medical expenses and extraordinary circumstances such as a medical catastrophe as factors the IRS must consider.

How it plays out by option

For how those options work for someone living on Social Security, see living on Social Security alone and owing the IRS and offers in compromise for retirees.

Mixed-age households

Because the out-of-pocket standard is set per person by age, a household with one spouse under 65 and one 65 or older gets one allowance at each rate. Under the figures the IRS lists as effective June 29, 2026, that is $90 for the younger spouse and $163 for the older one. The IRS updates the standards periodically, and a financial statement is evaluated using the tables in effect when the IRS reviews it. If you submitted a statement months ago and the standards have since changed, ask that the current figures be applied.

The regulation that governs levy releases for hardship, Treas. Reg. 301.6343-1(b)(4)(ii)(B), lists medical expenses including health insurance among the amounts reasonably necessary for basic living expenses. Health care is not a discretionary line in the IRS's own rules.

If your health costs change during the review, for example because of a new diagnosis or a move to assisted living, send updated documents right away rather than waiting for the IRS to ask. The determination is based on your circumstances, and the regulation lists a medical catastrophe as an extraordinary circumstance the IRS must consider.

Couples and shared expenses

If only one spouse owes the IRS, the financial statement still asks about household income and expenses, because the IRS needs to know who pays what. The out-of-pocket health care standard is per person, so a couple both over 65 gets two allowances. Each spouse's Medicare premiums are separate expenses. When a non-liable spouse pays a share of household costs, the IRS will generally allow only the liable spouse's share. Get the allocation right, and be consistent across every form you submit.

When medical costs justify more than a payment plan

Sometimes health care costs are so large that no payment plan works. That is where hardship status and, in the right case, an effective tax administration offer come in. Treas. Reg. 301.7122-1(c)(3) lists a long-term illness or medical condition that will exhaust your resources as a factor supporting compromise. If that describes your situation, read currently not collectible in Pinellas County along with the guides linked above.

Documentation checklist

• SSA benefit letter showing gross benefit and Part B deduction.
• Part D, Medigap, or Medicare Advantage premium statements.
• Any IRMAA notice from SSA.
• Pharmacy printouts showing three to six months of prescription costs.
• Explanations of benefits or bills showing copays and deductibles.
• Contracts and invoices for home care or assisted living.
• A physician's letter if you claim unusual ongoing costs.

Clean documents shorten the review. Messy ones invite the IRS to allow only the standard.

Other retiree expenses people forget

While you are building the budget, do not forget current federal tax payments, including withholding on IRA distributions. The standards allow current taxes. Life insurance premiums on term policies may be allowed. Payments on a vehicle you need for medical appointments fall under the transportation standard. Housing and utilities are capped by the Pinellas County local standard, so if your actual costs exceed it, be ready to explain why.

Next step

Pull together the premium notices and pharmacy records before you call the IRS. A financial statement that reflects your real health care costs is often the difference between a payment you can live with and one you cannot. If you want help preparing it, call (813) 229-7100. For a broader view of payment options, see the firm's page on IRS installment agreements.