How to treat $250 rebate check from Medicare

It is a equivalent to a refund of your Rx drug expenses. As such, it is not income. You subtract the $250 from your total Rx drug expenses for the year to arrive at the tax deductible amount.

According to Medicare at

Quote "Will I have to pay taxes on this rebate check?

No. You don?t have to pay taxes on your $250 rebate check. It is tax free." Unquote

It is NOT tax fee. You just don't see the tax you effectively have to pay because of it. .It is a taxable benefit bcause it reduces your medical tax deduction that reduced your taxable income. Because it ireduces a tax deductible expense it increases taxable income. Hence it is taxable income (if you deduct Medical Expenses). Noticably the link does not mention that since it "helps you with you Medicare Drug costs" you will most likely be required to reduce other Drug costs on Schedule A by the amount of the rebate.

ed

Normally, the above would be correct - the rebate would be taxable to the extent of a tax benefit from the deduction.

However, this one IS tax free (HR 4872 [aka PL 111-443], Section 1101) - because the U.S. Government itself has said that it is. It does NOT offset [prescription drug] medical expenses for tax purposes. It is neither [recovered] income (per IRC 111) nor a reduction of an expense. I do admit that I couldn't find the precise statement in the law that declared it as tax free, but if the government says it is in its publication (the URL above in the original post), I'm not going to argue.

snip

The $250 rebate is in PL 111-152 (111-443 is the House Report) Section

1101. The House Report does not contain a 2010 benefit for elimination of the coverage gap. The Patient Protection and Affordable Care Act PL 111-148 did not have it. The 2010 $250 rebate (Section 1101(a)) was added to the final bill (HR 4872) voted upon by the House and agreed to by the Senate.

The Medicare Pub 11464 tells you it is a rebate and not taxable income. There is no mention that the $250 does not reduce your medical expenses eligible for tax deduction. I can not find anything in the law or any literature that says that this rebate is not an offset to your medical expenses. As such, it should be handled like any other rebate. Your total out of pocket Rx drug expenses should be reduced by the $250 rebate to obtain the amount to deduct as a medical expense.

Anyone know if states will tax it?

It is a rebate of the amount one paid for Rx drugs. As such, any state should treat it in the same manner it treats any rebate of the price paid. It is not income but a reduction in the cost of the item(s) purchased.

If it were to offset medical expenses claimable for income tax purposes, the publication would have directed people to do so in its tax section, instead of saying "it's tax free."

I disagree with your assessment completely. First off, we are dealing with a medicare pub... not tax law. The use of the term "tax free" is almost always construed to mean it is not income. This has nothing to do with whether or not a deduction or lack of a deduction is allowed. The payment is pure and simply a rebate to the cost of Rx drugs. It is not social security income. As such, the payment is excluded from gross income and is "tax free." As the law is mute on the issue you address (whether to reduce your out of pocket expenses), then one must treat it as any other rebate is treated. If Congress meant to treat it any differently from other rebates, then the law should have said so.

It would be nice to know if the 2010 Form SSA-1099 will show the Medicare D premium reduced by the $250? or not?

elimination

Considering that the rebate is paid only when a medicare recipient's drug expenses actually enters a specific financial window, and without regard to Medicare's declaration of tax free status, the amount would always be included into income as a recovery (subject to the normal recovery rules). Therefore, the declaration that it is tax free tells us that this recovery is to be specifically IGNORED as if it were exempt (when otherwise not).

Should this go to court, although in the Tax Court the respondent is named as the Commissioner, as in the other federal courts, the true respondent is the United States Government, NOT an individual agency or department. Collaterial estoppel prevents the government from taking conflicting positions (even across different departments) and if HHS (i.e. "Medicare") has taken the position that it's tax free regardless of circumstance, the IRS is bound by it. Simply put, there is no way that the government can prevail to tax it.

To include the recovery as income (or to lower the deduction) means that the amount is in fact NOT "tax free" - a direct contradiction of the government's determination. It doesn't matter if the determination is wrong or improper. Once made, it is the official position and the IRS cannot argue otherwise.

Yet showing that the IRS itself advised you a certain way is meaningless; the IRS has specifically stated that it is not bound by the advice it provides (unless it's at the level of Private Letter Ruling), and has acted against such advice numerous times.

Seth

True, but they can't charge you interest and penalty on the unpaid tax if it is based on their erroneous advice.