Paying Taxes as a Freelancer

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Paying taxes as a freelancer can be a bit more involved—and expensive—than paying taxes as a W-2 employee. When you’re a freelancer, you’re the boss. That’s great if you want some flexibility, but it also means you’re self-employed, so you are responsible for both the employer and employee parts of employment taxes.

When you work for someone else, your paycheck amount is your pay minus all appropriate deductions. That includes deductions for federal and state income taxes as well as Medicare and Social Security contributions.

But what you might not realize is that your employer covers part of the Medicare and Social Security amounts. As a self-employed individual, you have to pay the total amount yourself. That’s 12.4 percent for Social Security and 2.9 percent for Medicare—a total of 15.3 percent of your taxable earnings, not including federal and other income taxes.

When Do I Have to Start Paying Taxes as a Freelancer?

According to the Internal Revenue Service, if you earn $400 or more in a year via self-employment or contract work, you must claim the income and pay taxes on it. The threshold is even lower if you earn the money for church work. If you earn more than $108.28 as a church employee and the church employer doesn’t withhold and pay employment taxes, you must do so.

What Tax Forms Should I Know About?

Freelancers report their income to the IRS using a Form 1040, but they may need to include a variety of Schedule attachments, including:

  • Schedule A, which lists itemized deductions
  • Schedule C, which reports profits or losses from their freelancer business
  • Schedule SE, which calculates self-employment tax

These are only some of the forms that might be relevant to a freelancer filing federal taxes. Freelancers must also file a tax form for the state in which they live as well as with any local governments that require income tax payments.

If you’re planning to do your taxes on your own as a freelancer, it might be helpful to invest in DIY tax software. Look for options that cater specifically to home and business or self-employment situations. These software programs typically walk you through a series of questions designed to determine which forms you need to file and help you complete those forms correctly.

Six Tips for Doing Your Taxes as a Freelancer

As a freelancer, chances are you spend a lot of your time attending to clients and getting production work done. You may not have a lot of time for business organization tasks such as accounting. But a proactive approach to paying taxes as a freelancer can help you prepare to do your taxes and pay what can be a surprisingly big bill each year.

Here are six tips for handling taxes as a freelancer.

1. Keep Track of Your Income

Track your income so you know how much you may need to pay in taxes every year. Keeping track of your numbers also helps you understand whether your business is profitable and how you’re doing with income compared to past years.

You can track your income in a number of ways. Apps and software programs such as QuickBooks and Wave let you manage your freelance invoices and track income and expenses. Some also help you generate financial reports that might be helpful come tax time.

Alternatively, you can track your income in an Excel spreadsheet or even a notebook, as long as you’re consistent with writing everything down.

2. Set Money Aside in Advance

It’s tempting to count every dollar that comes in as money you can use. But it’s wiser to set money aside for taxes in advance. Depending on how much you earn as a freelancer, you could owe thousands in federal and state taxes by the end of the year, and if you didn’t plan ahead, you might not have the money to cover the tax bill.

That can lead to tax debt that comes with pretty stiff penalties and interest—and the potential for a tax lien if you can’t pay the bill.

3. Determine Your Business Structure

Make sure you know what your business structure is. Many freelancers operate as sole proprietorships. But you might be able to get a tax break if you operate as an LLC or a corporation. Talk to legal and tax professionals as you set up your business to find out about the pros and cons of each type of organization.

4. Know About Relevant Deductions

As a freelancer, you may be able to take certain federal tax deductions to save yourself some money. Tax deductions reduce how much of your income is considered taxable, which, in turn, reduces how much you owe in taxes. Here are a few common deductions that might be relevant to you as a freelancer.

Home Office

You can take the home office deduction if you’ve set aside a certain area of your home for use by the business. The IRS does have a couple of stipulations.

First, you have to regularly use the space for your business, and it can’t be something you use regularly for other purposes. For example, you can’t claim your dining room as a home office just because you sometimes work from that location.

Second, the home has to be your principal place of business, which means it’s where you do most business activity. You can’t claim the deduction if you normally work outside the home but sometimes answer work emails while you’re in the living room.

Equipment and Supplies

You can also deduct the cost of equipment and supplies that you buy for your business. That includes software purchases and relevant subscriptions, such as if you pay monthly for Microsoft 365 or annually for a domain name.

Make sure you have backup documentation for any business expenses you deduct. That means keeping receipts that show what you purchased so you can prove that the expenses were for business. You also have to be careful to keep business and personal expenses separate—art supplies for your child’s school project, for example, wouldn’t typically be considered valid business expenses.

Travel and Meals

Meals and travel expenses that are related to your business may be tax deductible. If you stay in a hotel, book a flight or incur other travel expenses that are necessary for the running of your business, you can claim them as a deduction. The same is true for 50 percent of the value of meals and beverages that you pay for as a necessity when doing business.

The IRS does set an “ordinary and necessary” rule here. For example, if you’re traveling to meet with a client and you need to eat lunch, that is likely to be considered necessary. But if you opt for a very lavish meal for no other purpose than to do so, it might not be allowed under the “ordinary” part of the rule.

Business Insurance

If you carry liability or similar insurance for your business, you can deduct it as a cost of doing business. You may also be able to deduct the cost of other insurance policies if they are necessary for your trade.

5. Estimate Your Taxes Quarterly

The IRS offers provisions for estimating your employment taxes on a quarterly basis. Self-employed individuals, including freelancers, can make these estimated tax payments, too. Paying as you go means you won’t owe a large sum every April, and if you overestimate, you may get a tax refund.

Quarterly payments are due in April, June, September and January. They can be mailed or made online. Depending on how much you earn, you may need to make quarterly estimated tax payments to avoid a penalty at the end of the year.

6. Consult a Tax Professional

As you can see just from the basic information and tips above, paying taxes as a freelancer can get complicated quickly. Consider talking to a tax professional to understand what all your obligations are and how best to reduce your tax burden using legal deductions. You might be missing a major deduction every year that could save you a lot of money.

And remember that as a freelancer, you’re running your own small business. That means paying attention to all your finances, including your credit report. If you ever want to take out a business loan or seek other funding to grow your business, you might need to rely on your good credit score.

Check your credit score, and if you find inaccurate negative information making an impact on your score, contact Lexington Law to find out how to get help disputing it.


Reviewed by Cynthia Thaxton, Lexington Law Firm Attorney. Written by Lexington Law.

Cynthia Thaxton has been with Lexington Law Firm since 2014. She attended The College of William and Mary in Williamsburg, Virginia where she graduated summa cum laude with a degree in International Relations and a minor in Arabic. Cynthia then attended law school at George Mason University School of Law, where she served as Senior Articles Editor of the George Mason Law Review and graduated cum laude. Cynthia is licensed to practice law in Utah and North Carolina.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Source: lexingtonlaw.com

The New Must-haves of Homebuying: What Buyers are Looking for

At the start of COVID-19, homebuyers felt uncertain about applying for a mortgage during a time filled with so much uncertainty. Now, as the pandemic and restrictions become more “normal,” we’re seeing demand grow and housing inventories shrink. But, what new homebuyers this year are likely to find are larger houses with smaller kitchens, master baths and garages. They’ll also find fewer models with open floor plans, too, as builders rework their square footage to accommodate home offices, gyms and other specialty rooms. And, buyers will likely have to venture further out from major metros to find what they’re looking for.

Read: The Future of Homebuying: Questions to Ask in a Post-pandemic World

Larger Homes for Post-pandemic Buyers

For the last four years, the size of new, single-family houses has been trending downward as builders added entry-level houses to their mix in an effort to boost supply. But, the National Association of Home Builders says its members might reverse course as buyers seek more space as a result of the pandemic, perhaps to accommodate extended families or those aforementioned extra rooms.

Spring has arrived in a residential neighborhood of ChicagoSpring has arrived in a residential neighborhood of Chicago

Actually, there already are signs of the shift. In this year’s first quarter, the Census Bureau found that the median of single-family floor area ticked up to 2,291 square feet; up from 2,252 in last year’s fourth quarter. But, while a June survey by John Burns Real Estate Consulting found that some recent buyers moved because they disliked the layout of their previous homes, many wanted more space.

Even before the pandemic struck, size was important to many buyers, according to a poll of nearly 1,800 people in late February and early March by Michigan-based builder Lombardo Homes. Price was paramount, of course, but size was more important than the house’s layout, schools or even property taxes.

Moving to the Suburbs is on the Radar

Buyers are likely to find houses with more space in the suburbs, exurbs and distant outposts. Already, the NAHB is seeing construction expand at a more rapid rate in smaller cities and rural areas. Before the pandemic hit full throttle in March, the builder group found activity increasing at a higher rate in inner and outer suburbs than in high-density places. And while the pace of construction was increasing everywhere prior to the lockdown, the outlying suburbs registered the strong growth.

The Rise of the Home Office

What is the extra space likely to look like? With the movement to work from home, count on more square footage for a home office, whether it be a room dedicated as such or a converted extra bedroom. “For years, people were scared of working from home,” said one Urban Land Institute member during a recent digital happy hour. “Now they are seeing it can and does work.”

Comfortable workplace with computer near wooden wall in stylish room interior. Home office designComfortable workplace with computer near wooden wall in stylish room interior. Home office design

Read: Working from Home? Create a Home Office from Any Small Space

The same goes for employers, who have since discovered their workers can be just as productive working from home, if not more so. More and more companies are joining the likes of Twitter, American Express and Morgan Stanley, all of which have told their employees they can work from home, either through the end of the year or forever. “Some companies,” offers Tim Sullivan of Meyers Research, “may never go back to office space.” Families also need space for children or college students who are learning for home. Only 17% of parents feel prepared for the upcoming school year, so a home office is important for those families to best feel ready for fall semesters.

Studies by the NAHB have shown that many buyers have always wanted an home office. In a 2018 survey, for example, 65% said it was a key feature on their shopping lists, and the builder group says that percentage is likely to grow.

The Forgotten About Home Gym

Another strong possibility: An in-house gym, or certainly at least a dead-end hallway that has been dubbed the “Peloton® room” where an exercise bike can be parked. Of course, there’s “only a finite amount of space” with which builders can work before the cost of their products becomes prohibitive, Dan DiClerico of HomeAdvisor points out. Consequently, he and others believe there will be a major “redistribution of space” in newer models.

The End of the Open Floor Plan?

Younger buyers, in particular, “displayed a clear preference for flexible spaces in their next home” in the latest national survey by Atlanta-based home builder Ashton Woods.

“Instead of rooms dedicated to just one purpose, home buyers now want a living, breathing floor plan that can flex as their lives change,” says Jay Kallos, the firm’s senior vice president for architecture. “They want it to adapt easily for when they’re newlyweds, starting a family, becoming empty nesters and even inviting family back into the home later in life with aging parents or boomerang kids.”

Spacious kitchens going forward could be less so. “Fewer people are going to want the great big open rooms that include the kitchen, with more now wanting the kitchen to return to having some separation to hide the smells, mess and noise,” suggests Bill Ramsey of the Denver architectural firm, KTGY.

Big master bathrooms also could become smaller, too. And builders may be taking space from large garages. Even though most people don’t park their vehicles in their garages, two-car pads are the norm nowadays. Nearly two out of three new houses sold in 2019 had two-car garages, and 19% had three bays or more.

While things continue to change in the world of homebuying and building, one thing remains the same. Homes.com is your go-to resource for everything buying, selling, renting, or financing. From our popular search tools that let you find a home you love in an instant to an optimized mobile app to take homebuying on the go, there’s not much you can’t find. For more resources, visit Homes.com’s Blog or our How-to Section if you’re looking for tips, advice, and guidance on all things home-related.


Lew Sichelman

Syndicated newspaper columnist, Lew Sichelman has been covering the housing market and all it entails for more than 50 years. He is an award-winning journalist who worked at two major Washington, D.C. newspapers and is a past president of the National Association of Real Estate Editors.

Source: homes.com

Tax Breaks and Benefits

Ready for April 15th? Here are some tips to get all the deductions you deserve.

It’s tax season and April 15th is fast approaching, which usually means you’re thinking a lot about your tax return. Preparing your taxes isn’t easy, but half the fun is figuring out what deductions you need to itemize to maximize the money you get back. We want you to get the most out of your tax return, so in case you missed these deductions, here are some tax write-offs that may apply to you.

Tax Breaks and BenefitsDownload the Tax Breaks & Benefits PDF.

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Source: discover.com

Acronyms of Real Estate: What Homebuyers Need to Know

Real estate is a regular smorgasbord of acronyms – everything from APR to REO. Here’s a list of the ones you’re likely to run into and what they mean when you’re buying or selling a house:

Acronyms You’ll Hear Associated with Real Estate Professionals

Real estate agents, builders and most other realty-related professions have numerous professional designations, all designed to set them apart from those who haven’t taken advanced courses in their fields. These designations don’t mean that professionals without letters after their names are not as experienced or skilled, but rather only that they haven’t taken the time to further their educations.

Read: How to Build Your Real Estate Team

Let’s start with the letter “R,” which stands for Realtor. A Realtor is a member of the National Association of Realtors, the nation’s largest trade group. NAR says it speaks for homeowners, and it usually does. But in that rare occasion when the interests of its members and owners don’t align, it sides with those who pay their dues.

Read: A Timeline of the History of Real Estate

NAR embraces a strict code of ethics. There are about 2 million active and licensed real estate agents nationwide, and 1.34 million can call themselves Realtors.

NAR members sometimes have the letters GRI or CRS after their names. The Graduate, REALTOR® Institute (GRI) designation signifies the successful completion of 90 hours of classroom instruction beyond the continuing education courses required by many states for agents to maintain their licenses. After the GRI, an agent may become a Certified Residential Specialist (CRS) by advancing his or her education even further.

black family touring a house to buy racial homeownership gap discriminationblack family touring a house to buy racial homeownership gap discrimination

Builders can obtain the GBI – Graduate Builder Institute – designation by completing nine one-day classes sponsored by the educational arm of the National Association of Home Builders. Those who pass more advanced courses become Graduate Master Builders, or GMBs. Remodeling specialists with at least five years of experience can be Certified Graduate Remodelers, or CGRs. And, salespeople can be CSPs, or Certified New Home Sales Professionals.

In the mortgage profession, the Mortgage Bankers Association awards the Certified Mortgage Banker (CMB) and Accredited Residential Originator (ARO) designations, but only after completing a training program that may take up to five years to finish. To start the process, CMB and ARO candidates must have at least three years’ experience and be recommended by a senior officer in their companies.

Acronyms Associated with Mortgage Lending

When obtaining a mortgage, you will be quoted an interest rate; however, perhaps the more important rate is the annual percentage rate, or APR, which is the total cost of the loan per year over the loan’s term. It measures the interest rate plus other fees and charges.

An FRM is a fixed-rate mortgage, the terms of which never change. Conversely, an Adjustable Rate Mortgage (ARM) allows rates to increase or decrease at certain intervals over the life of the loan, depending on rates at the time of the adjustment.

Female client consulting with a agent in the officeFemale client consulting with a agent in the office

A conventional loan is one with an amount at or less than the conforming loan limit set by federal regulators on Fannie Mae and Freddie Mac, the two major suppliers of funds for home loans. These two quasi-government outfits replenish the coffers of main street lenders by buying their loans and packing them into securities for sale to investors worldwide.

Other key agencies you should be familiar with are the FHA and the VA. The Federal Housing Administration (FHA) insures mortgages up to an amount which changes annually, as does the conforming loan ceiling. The Veterans Administration (VA) guarantees loans made to veterans and active duty servicemen and women.

LTV stands for loan-to-value. This important ratio measures what your are borrowing against the value of the home. Some lenders want as much as 20% down, meaning the LTV would be 80%. But in many cases, the LTV can be as great as 97%.

Private mortgage insurance (PMI), is a fee you’ll have to pay if you make less than a 20% down payment. PMI covers the lender should you default, but you have to pay the freight. Fortunately, you can cancel coverage once your LTV dips below 80%.

Your monthly payment likely will include more than just principal and interest. Many lenders also want borrowers to include one-twelfth of their property tax and insurance bills every month, as well. That way, lenders will have enough money on hand to pay these annual bills when they come due. Thus, the acronym PITI (principle, interest, taxes, and insurance).

Real-estate owned (REO) properties are foreclosed upon by lenders when borrowers fail to make their payments. When you buy a foreclosure, you buy REO. Short sales are not REO because, while they are in danger of being repossessed, they are still owned by the borrower.

houses real estate market selling buyinghouses real estate market selling buying

Acronyms You’ll Hear During an Appraisal

There is no acronym for an appraisal, which is an opinion of value prepared by a certified or licensed appraiser (though sometimes other types of valuation methods are used in the buying and selling process).

A Certified Market Analysis (CMA) is prepared by a real estate agent or broker to help determine a home’s listing price. A Broker Price Opinion (BPO) is a more advanced estimate of the probable future selling price of a property, and an automated valuation model (AVM) is a software program that provides valuations based on mathematical modeling.

AVMs are currently used by some lenders and investors to confirm an appraiser’s valuation, but they are becoming increasingly popular as replacements of appraisals, especially in lower price ranges.

Other Terms to Know

If you hear the term MLS, you should know it stands for multiple listing service. An MLS is a database that allows real estate brokers to share data on properties for sale, making the buying and selling process more efficient. There are many benefits to both homebuyers and sellers utilizing an MLS, for more information on how to get your home available through an MLS, work with a real estate professional when selling.

Read: What Buyers and Sellers Need to Know About Multiple Listing Services

Did you know? Homes.com has some serious MLS partnerships, no joke! When you start your home search on Homes.com, you’ll see accurate property information quickly so you’ll never have to wonder if a home is actually available.

House tourHouse tour

However, not all properties for sale are listed on the MLS. A home may be a for-sale-by-owner (FSBO), if the owner is selling his or her property without an agent and bypassing an MLS listing. In addition, some agents fail to enter their listings in the MLS for days or weeks at a time in hopes of selling to a list of preferred clients.

Read: Advantages of Buying With or Without an Agent

Finally, you may find yourself buying into a homeowners association (HOA) when you purchase a house or condominium apartment. HOAs are legal governing bodies that establish requirements everyone must adhere to in order to keep the community it oversees running smoothly and ensure property values are maintained.


Lew Sichelman

Syndicated newspaper columnist, Lew Sichelman has been covering the housing market and all it entails for more than 50 years. He is an award-winning journalist who worked at two major Washington, D.C. newspapers and is a past president of the National Association of Real Estate Editors.

Source: homes.com

Public Records on Credit Reports

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

If you’ve ever looked at your credit report, you’ve probably noticed a section called “public records.” These are entries that are also on file with local, county, state or federal courts. Keep reading to learn more about which public records appear on credit reports.

What Are Public Records?

Public records are documents or pieces of information that are not considered confidential. Some examples include arrest records, marriage certificates and some court records. These are records that other people or entities could look up about you, as the information isn’t private or protected.

In the context of your credit report, historically, only three types of entries were public records: tax liens, civil judgments and bankruptcies. Now, only bankruptcies should show up as a public record on an individual’s credit report.

The Public Record Entries

First, it’s essential to understand the three types of public record entries that can impact your credit report.

A tax lien is a law-imposed lien upon property for the payment of taxes. Typically, a tax lien occurs when a person fails to pay taxes owed on property (personal and other), income taxes or other forms of taxes.

A civil judgment is a legal ruling against a defendant in a court of law. It refers to a judgment on a noncriminal legal matter and often requires the defendant to pay monetary damages.

Bankruptcy is a legal process in which people or other entities who cannot repay debts to creditors try to seek relief from some or all of their debts. In most jurisdictions, bankruptcy is usually imposed by a court and is often initiated by the debtor.

Understanding the Updated Public Record Policy

In 2017, the National Consumer Assistance Plan (NCAP) went into effect and changed how data is collected for civil judgments and tax liens before these entries appear as public records on credit reports. The act was initially launched in 2015 by the three major credit bureaus to modify credit reporting rules and set stricter standards. These new standards would ensure that the data found on credit reports are more accurate and up to date.

There are two primary ways this act affects how credit bureaus obtain and report tax lien and court judgment data on consumer credit reports. First, for either of these types of entries to appear on a credit report, the public record must contain a person’s:

  • Name
  • Address
  • Social Security number or date of birth

This standard applies to both new and existing records that are already on credit reports.

Secondly, public records reported on credit reports must be checked by the credit bureaus for updates every 90 days to ensure their accuracy. If the records are not checked, they should be removed from the credit report.

Bankruptcy records already hold these strict requirements, which is why the changes don’t impact this type of public record. However, many tax liens and civil judgments do not uphold these standards, in large part due to different standards of record-keeping at various courthouses.

This higher standard for public records is estimated to have positively impacted millions of US consumers. As this change applies to public records that were already on credit reports before the NCAP, it’s essential to review your personal credit reports to see if any public records are still being shown. Generally, tax liens and civil judgments shouldn’t be on your credit reports anymore.

By 2017, almost half of all tax liens and civil judgments were removed from consumer credit reports, and by April 2018, the three credit bureaus had removed all tax liens from credit reports. Currently, the only type of public record that should be present on your credit report is a bankruptcy.

Not a Permanent Change

It’s crucial to note that tax liens and civil judgments might not stay off credit reports forever. This is because reporting on them isn’t illegal and the credit bureaus only promised to remove them for a time. This could change sometime in the future, so you still want to avoid incurring these types of public records if possible.

How Do Public Records Affect Your Credit?

Typically, when a public record is added to your report, it’s considered a negative item. That’s because most public records on credit reports stem from a debt or financial delinquency. Therefore, it will usually lower your credit score.

Bankruptcy

A bankruptcy can remain on your credit report for seven to 10 years.

If you go through a Chapter 13 bankruptcy, you must repay a portion of the money you borrowed. This type of bankruptcy has a shorter impact on your credit report (seven years) because you paid some of the money back.

Under a Chapter 7 bankruptcy, the individual doesn’t pay any of their debts back. This type of bankruptcy will remain on your credit report for up to 10 years.

Bankruptcy will have a devastating impact on your credit, lowering it by anywhere from 130 to 200 points.

It is difficult to rebuild credit after a bankruptcy filing, but not impossible. For example, while you may not be approved for a regular credit card, you can start with a secured credit card. You will still have financial options available to you.

Tax Liens and Judgments

The Consumer Data Industry Association revealed that the changes showed “only modest credit scoring impacts” on consumer reports. Still, millions of Americans had public records wiped from their reports, which was beneficial overall.

While these two types of entries may not be on reports anymore, they can still affect your finances and life in general. For example, a judgment can impact your ability to qualify for a loan or credit. Lenders may check to see if you have outstanding judgments and reject your application. Similarly, the presence of a tax lien may cause a lender to reconsider your application.

What Can You Do About Public Records on Your Credit Report?

If bankruptcy is on your credit report, and all the information is accurate, you can’t do very much to remove it from the account. However, if the bankruptcy data is incorrect, you can file a dispute.

For tax liens and civil judgments, file a dispute to remove these public records from your credit report. You can contact each of the three major credit bureaus by phone or email and ask them to remove the public records from your file.

For more detailed information on how to remove a tax lien, check out this blog post. And for step-by-step instructions on removing a civil judgment from your credit report, refer to this resource.

It’s essential you check your credit report regularly so you can note when new data appears on your report. If a negative item appears and it’s inaccurate, you should dispute it quickly, before it can significantly impact your credit score.

Your Credit Can Recover From Derogatory Marks

Having derogatory marks on your credit report is not a life sentence. With sound financial behaviors, your credit score can recover. You’ll need to make payments on time, get rid of debts and maintain a good credit utilization ratio. If you don’t know where to start, consider credit repair services.

Lexington Law knows how to spot incorrect data on your credit reports and give you helpful credit tips. Credit repair takes time, so it’s essential you start today.


Reviewed by John Heath, Directing Attorney of Lexington Law Firm. Written by Lexington Law.

Born and raised in Salt Lake City, John Heath earned his BA from the University of Utah and his Juris Doctor from Ohio Northern University. John has been the Directing Attorney of Lexington Law Firm since 2004. The firm focuses primarily on consumer credit report repair, but also practices family law, criminal law, general consumer litigation and collection defense on behalf of consumer debtors. John is admitted to practice law in Utah, Colorado, Washington D. C., Georgia, Texas and New York.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Source: lexingtonlaw.com

How Much Does Medicare Cost? – Parts A, B, D, Advantage & Medigap

Americans are used to paying high costs for health care. Even for those who have health insurance — and as of 2019, there are still millions who don’t — it doesn’t cover everything. However, many people assume that once they reach age 65 and start receiving Medicare benefits, it will cover all their costs. After all, we’ve already paid into the program through payroll taxes, so we should have no costs beyond that, right?

Wrong. In fact, the Medicare taxes you pay during your working years only cover the premium costs for Medicare Part A, or hospital insurance. However, you still have to pay a part of the costs for hospital stays and other inpatient care out of your own pocket. And on top of that, several other parts of Medicare have their own costs.

How Much Does Medicare Cost?

There are two primary forms of Medicare coverage. Original Medicare includes Medicare Part A and Medicare Part B, or medical insurance, which covers doctor visits and other outpatient care. You can also add Medicare Part D to cover prescription drug costs. Alternatively, you can choose a Medicare Advantage plan from a private insurer, which includes Medicare Parts A and B and usually adds coverage for drugs and some other types of care.

Put it all together, and your Medicare costs can add up to thousands of dollars. A 2020 analysis by AARP found that in 2017, people on Original Medicare spent an average of $5,801 on health care and that about 1 in 10 people spent $10,268 or more. (The analysis did not include people on Medicare Advantage plans because there was no reliable data available about their expenses.) These expenses fall into three primary categories: premiums, cost sharing, and expenses Medicare doesn’t cover.

Premiums

Most health insurance comes with a monthly premium — an amount you pay to the insurer each month for coverage. According to AARP, the average Medicare beneficiary paid $2,728 in premiums in 2017. However, this cost varied widely by age. People under 65 paid an average of $1,810, while those over 65 paid an average of $2,810.

How Much Does Medicare Part A Cost?

Most people don’t pay a premium for Medicare Part A because they have already paid for it through payroll taxes. However, if you have paid Medicare taxes for fewer than 10 full years (40 quarters), you must pay a fee to buy into Part A.

For the year 2021, the monthly premium is $458 if you’ve paid Medicare taxes for fewer than 30 quarters. If you have paid them for 30 to 39 quarters, the premium is $259. That adds up to either $3,108 or $5,496 per year.

Additionally, if you don’t sign up for Medicare Part A when you first become eligible for it, you must pay a late enrollment penalty. That causes your premiums to go up by 10%. You continue to pay the higher premium for twice the number of years you delayed signing up for Part A.

How Much Does Medicare Part B Cost?

All Medicare recipients pay a premium for Part B coverage. The standard premium for 2021 is $148.50 per month, or $1,782 per year.

If you have already started collecting Social Security benefits or retirement benefits from the Railroad Retirement Board, this premium is automatically deducted from your benefits check. Otherwise, you receive a bill for your coverage.

If you neglect to sign up for Medicare Part B when you first become eligible, you pay a late enrollment penalty for this as well. This penalty is even steeper than the one for Part A. It increases your monthly premium by 10% for each 12-month period you delayed enrollment — so if you sign up three years late, your premiums go up by 30%. Moreover, this higher rate lasts for the rest of your life.

How Much Does Medicare Part D Cost?

If you choose to add Medicare Part D to your coverage, you must pay an additional premium for it. The cost per month varies based on the plan you choose. However, the Centers for Medicare & Medicaid Services (CMS) estimates the average premium for basic Part D coverage at $30.50 per month ($366 per year) for 2021.

On top of that, there’s a late enrollment penalty for Medicare Part D. You pay this penalty if you go at least 63 days without having either a Medicare prescription drug plan or a Medicare Advantage plan that provides drug coverage. The penalty is equal to 1% of the “national base beneficiary premium” ($33.06 for 2021) times the full number of months you went without coverage, rounded up to the nearest $0.10.

This amount gets added to your Part D premium for life once you sign up. For instance, if you went 30 months without drug coverage, you would pay an extra $10 per month. Additionally, this penalty rises whenever the national base beneficiary premium increases.

Medicare also tacks on a monthly income adjustment for all beneficiaries whose income is above a certain level. For 2021, this adjustment ranges from $12.30 per month if your income is over $87,000 to $77.10 per month if it’s over $500,000.

How Much Do Medicare Advantage Programs Cost?

Medicare Advantage plans are sometimes called Medicare Part C, but they’re actually not part of the federal Medicare program. Instead, private insurance companies offer them. However, they must provide all the same coverage as Original Medicare, and many plans provide more.

When you join a Medicare Advantage plan, you continue to pay your Part B premium to the federal government. The government then pays a fixed amount each month to the insurer to help cover your care costs.

Some Medicare Advantage plans charge an additional monthly premium on top of your regular Part B premium. According to CMS, the average expected premium for the year 2021 is $21 per month. Since that’s less than the average cost for a separate Part D plan, Medicare Advantage is a cheaper way to get prescription drug coverage for the average Medicare user. However, specific prices and coverages vary from plan to plan.

According to the Kaiser Family Foundation (KFF), Medicare Advantage premiums are typically lowest for health maintenance organizations (HMOs), which require you to get your care from doctors within a specific network. They’re somewhat more expensive for preferred provider organizations (PPOs), which allow you to see an out-of-network doctor for an additional cost. The KFF does not evaluate old-fashioned fee-for-service plans, which let you see any doctor you choose, but in general, these plans are expensive.

How Much Does Medigap Cost?

Original Medicare has relatively low premiums, but there are also many costs it doesn’t cover. Many people buy Medicare supplement insurance, commonly known as Medigap, to fill the “gaps” in their Medicare coverage. These plans, sold by private insurers, cover your deductibles and coinsurance. Some of them also cover costs Original Medicare doesn’t, such as care received when traveling outside the United States.

If you buy a Medigap policy as an add-on to Original Medicare, you pay an additional monthly premium to the insurer. How much it costs depends on the specific plan you choose. Under state laws, Medigap plans are sorted into several standard categories, which most states identify by the letters A through N. A chart on Medicare.gov outlines each plan’s benefits. (Three states — Massachusetts, Minnesota, and Wisconsin — use different standard categories for Medigap policies. See each state’s specific rules.)

Insurance companies aren’t required to offer every type of Medigap policy. However, any insurer that sells Medigap policies is required to offer Plans A, C, and F.

According to eHealth Medicare, the monthly premium for a Medigap policy ranges from around $70 to $270 per month, depending on the plan type and where you live. According to Business Insider, Plan F — the most popular type of Medigap plan —  cost an average of $1,712 per year, or about $143 per month, in 2018. However, this cost varied by state, ranging from $1,310 per year in Hawaii to $1,947 per year in Massachusetts. You can find cost estimates for Medigap policies in your area by entering your zip code on the eHealth Medicare site.


Cost Sharing

On top of your Medicare premiums, you must pay a portion of the cost for all the health care services you receive. The AARP study found that Medicare recipients paid an average of $1,522 for their share of covered care in 2017. This cost came to $1,441 for beneficiaries under age 65 and $1,536 for those 65 and older.

How Much Are Medicare Deductibles?

Medicare requires you to pay a certain amount of your medical bills out of your own pocket before your Medicare coverage kicks in. This portion is called your deductible.

As of 2021, Medicare Part A charges a deductible of $1,484 for each benefit period. A benefit period starts when you enter a hospital or skilled nursing facility as an inpatient. It ends once you haven’t received any inpatient hospital care for 60 days in a row. That means you may have to pay your Medicare Part A deductible more than once in a single year.

For instance, suppose you go to the hospital for a knee operation in January, and they discharge you later that month. During that time, you pay all your care costs up to the $1,484 deductible. Then, in June — more than 60 days later — they admit you again after a fall. That starts a new benefit period, so you must once again pay all your care costs up to the deductible. There’s no limit to the number of benefit periods you can have in a single year.

Medicare Part B also has a deductible, but you only have to pay it once per year. For 2021, the Part B deductible is $203.

Medicare Part D plans usually have a deductible as well. The cost varies from plan to plan, but Medicare sets limits on how high it can be. As of 2021, your Part D deductible cannot exceed $445. According to eHealth, the average Part D deductible was $308 in 2019.

As for Medicare Advantage plans, some have deductibles and some don’t. According to eHealth, the average deductible for a Part C plan that includes prescription drug coverage was $292 in 2019. A plan can charge one deductible for all your care or have separate deductibles for medical care and prescription drugs. You have to look at the details of a specific plan to find out how much the deductible is and how often you need to pay it.

How Much Is Part A Coinsurance?

Even after you meet your deductible for Medicare, you must continue to pay a portion of your medical bills out of pocket. This amount is called coinsurance.

For Medicare Part A, the cost of coinsurance varies based on how long you spend in the hospital. You pay $0 for the first 60 days and $352 per day for the next 30. These numbers reset at the beginning of each benefit period. In other words, if you stay in the hospital for 60 days, then leave and return three months later, you’re back to Day 1 and your cost is $0.

If you stay in the hospital for more than 90 days at a stretch, you start using up your lifetime reserve days. You pay $704 per day, and Medicare pays the rest — but only for a maximum of 60 days over your entire lifetime. If you spend any more time in the hospital than that, you must pay the full cost.

That doesn’t mean you have to pay all your hospital bills in full for the rest of your life. Once you leave the hospital, your benefit period resets after 60 days. If you go back in, you start over again at Day 1, with 60 days for free and another 30 days at $352. But if you’re still in the hospital on Day 91 and you have no lifetime reserve days left, you’re responsible for the full cost.

How Much Is Part B Coinsurance?

Coinsurance costs for Part B are more straightforward than for Part A. After meeting your deductible, you pay 20% of the Medicare-approved amount for all covered medical expenses. The Medicare-approved amount is the standard amount Medicare agrees to pay all doctors and other health care providers.

You pay this 20% coinsurance for all services covered by Part B, including doctor visits, outpatient therapy, and durable medical equipment. However, if your doctor or provider charges more than the Medicare-approved amount, you must pay all the additional cost on top of your coinsurance.

How Much Are Prescription Drug Costs?

Costs for Medicare Part D vary. Some Part D plans require you to pay coinsurance — a percentage of the cost of each prescription. Others charge copayments — a flat fee for each prescription.

Many Medicare prescription drug plans sort covered drugs into different tiers. For instance, some drugs are “preferred” and have a lower copayment. According to the KFF, average costs for different tiers in 2020 were:

  • Preferred generic drugs: $0
  • Other generic drugs: $3
  • Preferred brand-name drugs: $42
  • Other brand-name drugs: 38% coinsurance
  • Specialty drugs: 25% coinsurance

Under Medicare rules, once your total prescription drug costs for the year — including the amounts paid by you and your insurer — have reached a certain amount, your coverage changes. This limit, which includes your deductible, is $4,130 for the year 2021. Once you hit this limit, you pay up to 25% of your medications’ total cost. The manufacturer of the drug pays 70% of the cost, and your insurer pays the rest.

However, that doesn’t necessarily mean you have to keep paying 25% for the rest of the year. Once your out-of-pocket costs for prescriptions hit a second limit — $6,550 in 2021 — your share of your prescription costs drops to only 5%.

To help you get out of this coverage gap (called the “doughnut hole”) faster, Medicare allows you to count the discount received from the drug manufacturer as part of your out-of-pocket costs. For instance, if you have a drug that costs $100, your insurer pays $5 for it, you pay $25, and the manufacturer pays $70. However, you can count a full $95 — your share and the manufacturer’s — toward your out-of-pocket costs. That pushes you closer to the $6,550 upper limit at which your payment falls.

How Much Are Medicare Advantage Costs?

Most Medicare Advantage plans charge you a copayment for doctor visits and other services rather than the 20% coinsurance you pay with Original Medicare Part B. However, the exact cost varies by plan. Factors that affect your copay costs include where you live, the type of plan you buy, and the company that issues it.


Costs Not Covered by Medicare

There are certain services Original Medicare simply doesn’t cover. In general, you must pay all your own costs for:

  • Dental care, including checkups, fillings, root canals, and dentures
  • Vision care, including eye exams, eyeglasses, and contact lenses
  • Hearing exams or hearing aids
  • Routine foot care, such as callus removal (according to AARP, Medicare does cover costs for foot injuries and ailments, such as heel spurs and problems related to nerve damage caused by diabetes)
  • Cosmetic surgery
  • Acupuncture
  • Long-term care in a nursing home or assisted living facility
  • Any medical care received outside the U.S.

You can get some of these expenses, such as dental and vision care, covered under a Medicare Advantage plan. However, it depends on the plan you choose. Neither Original Medicare nor Medicare Advantage ever covers costs for care received outside the country. However, some Medigap policies provide this coverage.

According to the 2020 AARP analysis, the average Medicare recipient in 2017 spent $1,551 on health care costs not covered by Medicare. This amount was $932 for beneficiaries under 65 and $1,662 for those 65 and up.


Limits on Total Costs

The $5,801 AARP says the average person on Medicare spends each year is a significant chunk of money. However, some Medicare beneficiaries have much higher costs. The 2020 study found that people at the 90th percentile for spending — those who had health care costs higher than all but 10% of the population — spent a total of $10,268 on their care in 2017. That includes $5,218 for premiums, $3,740 for cost sharing, and $2,537 for expenses not covered under Medicare.

In fact, under Original Medicare, there’s no limit on how much you can pay each year for health care. Although the program covers a large share of your costs, it doesn’t protect you from the kinds of sky-high medical bills that can drive people into bankruptcy. A 2010 paper from the University of Michigan found that more than 1 in 3 seniors who file for bankruptcy cite medical expenses as a reason.

There are two ways to put a cap on your out-of-pocket costs under Medicare. One is to choose Medicare Advantage. According to CMS, all Medicare Advantage policies are required to limit out-of-pocket spending for in-network care, which can be no higher than $7,550 in 2021. However, this out-of-pocket limit does not include the amount you spend on premiums.

If you prefer Original Medicare, you can cap your costs by adding a Medigap policy that comes with an out-of-pocket limit. Medigap Plan K policies limit your out-of-pocket costs to $6,220 for 2021, and Plan L caps them at $3,110.

You can estimate how much your total out-of-pocket costs are likely to be under different Medicare plans using the out-of-pocket cost calculator on Medicare.gov. It lets you compare Original Medicare, with or without Part D and Medigap, with a Medicare Advantage plan that includes drug coverage. The calculator factors in all your costs, including premiums, deductibles, and coinsurance. You can look at typical costs for plans with high, medium, or low premiums.


Final Word

If you’ve been thinking of Medicare as a permanent fix for high health care bills, it can come as a shock to learn how much the average beneficiary pays. However, the average cost cited in the AARP report is just that — an average. You can reduce your costs for Medicare the same way you would with any other significant expense: by shopping around.

Medicare makes it easy to comparison-shop for plans. On the Plan Compare page at Medicare.gov, you can review your Medicare coverage options and compare specific Part D and Medicare Advantage plans available in your area.

The site asks you for details about where you live and what type of plan you want, then lists available plans with their premiums, deductibles, copays, and out-of-pocket limits. With a little more information, it can also show you how much you’ll pay out of pocket for prescription drug costs on each plan. The site even includes star ratings for each plan just like you might use to find the best products when shopping online.

To learn more about comparing Medicare plans and signing up, check out our Medicare enrollment guide.

Source: moneycrashers.com