Rev. Rul. 70-341

Advice has been requested as to the Federal income tax treatment of so-called "medicare" benefits received by or on behalf of an individual pursuant to title XVIII of the Social Security Act, as amended (42 U.S.C. 1395), with particular reference to his gross income, his status as a dependent, and his retirement income credit.

Title XVIII of the Social Security Act, as amended, provides medicare benefits of two kinds: part A of that title provides a program officially called "Hospital Insurance Benefits for the Aged," which is referred to herein as "basic medicare;" and part B of that title provides a program officially called "Supplementary Medical Insurance Benefits for the Aged," which is referred to herein as "supplementary medicare."

Basic medicare, which is largely financed through the hospital insurance taxes imposed on employers, employees, and the self-employed by sections 1401(b) and 3101(b) of the Internal Revenue Code of 1954, provides basic protection against the cost of hospital and related care for all individuals who are 65 years of age or older who receive monthly social security or railroad retirement payments, and for other eligible individuals who are 65 years of age or older and who apply for basic medicare protection. Basic medicare benefits are generally paid directly to the hospital, extended care facility, or home health agency that provides services to the covered individual; and the covered individual is then notified of the amount of the basic medicare benefit paid on his behalf.

Supplementary medicare, which is largely financed through monthly premiums paid only by those who are enrolled in this program, and matching contributions from the Federal government, covers the costs of doctors' services and a number of other items and services not covered under the basic medicare program, for only those eligible individuals who are 65 years of age or older and who voluntarily enroll in this program. Supplementary medicare benefits are in some instances paid directly to the covered individual, and in other instances are paid to the provider of the services on behalf of the covered individual.

The questions presented with respect to the benefits received by (or on behalf of) an individual under the basic medicare program or the supplementary medicare program are (1) whether such benefits are includible in the gross income of the individual for whom they are paid; (2) whether such benefits are includible in his "total support" in determining for dependency exemption purposes, whether he or another taxpayer supplied over half of his support; and (3) whether such benefits are includible in the computation of his retirement income credit.

The provisions for both basic medicare and supplementary medicare were initially enacted by the Social Security Amendments of 1965, Public Law 89-97, C.B. 1965-2, 601. Revenue Ruling 66-216, C.B. 1966-2, 100, holds that amounts paid as self-employment tax under section 1401(b) of the Code and as employee tax under section 3101(b) of the Code (two of the taxes used to finance the basic medicare program) do not qualify as amounts paid for insurance for purposes of the medical expense deduction provided by section 213 of the Code. However, Revenue Ruling 66-216 also holds that amounts paid as premiums under part B of title XVIII of the Social Security Act (that is, premiums paid by the individual for supplementary medicare) qualify as amounts paid for insurance covering medical care and are deductible as medical expenses to the extent provided by section 213(a) of the Code.

With respect to the treatment of these amounts for purposes of gross income, the basic medicare benefits paid to (or on behalf of) an individual are in the nature of disbursements made in furtherance of the social welfare objectives of the Federal government. Revenue Ruling 70-217, C.B. 1970-1, 12, holds that payments under section 202 of title II of the Social Security Act, as amended (42 U.S.C. 402) (with respect to old-age insurance benefits, and insurance benefits for wives, husbands, children, widows, widowers, mothers, and parents, as well as the lump-sum death payment) are not includible in the gross income of the recipients.

For purposes of determining an individual's gross income under section 61 of the Code, basic medicare benefits are not legally distinguishable from the monthly payments to an individual under title II of the Social Security Act. Accordingly, basic medicare benefits received by (or on behalf of) an individual under part A of title XVIII of the Social Security Act are not includible in the gross income of the individual for whom they are paid.

However, supplementary medicare benefits are not comparable to the monthly payments to an individual under section 202 of title II of the Social Security Act. As stated in Revenue Ruling 66-216, the premiums paid for supplementary medicare qualify as amounts paid for insurance covering medical care, and the benefits received under the supplementary medicare program are in the nature of medical insurance proceeds received by him. Section 104(a) of the Code provides, in pertinent part, that gross income does not include amounts received through accident and health insurance for personal injuries or sickness except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 of the Code (relating to medical, etc., expenses) for any prior taxable year. Accordingly, supplementary medicare benefits received by (or on behalf of) an individual under part B of title XVIII of the Social Security Act are not includible in the gross income of the individual recipients in accordance with the provisions of section 104(a) of the Code.

With respect to the personal or dependency exemption aspect of this matter, a taxpayer is generally permitted, pursuant to section 151 and section 152 of the Code, to claim a qualified individual as a dependent provided that he furnishes over half of the support of such individual for the year involved. In computing the amount that is contributed to the support of the individual, there must be included any amount that is contributed by such individual for his own support, including amounts that are ordinarily excludable from gross income such as social security payments. For example, Revenue Ruling 57-344, C.B. 1957-2, 112, holds that child insurance benefits under title II of the Social Security Act received and used for the support of a child are considered the child's contribution to his support in determining who furnished more than one-half of the child's support. Likewise, it is held that basic medicare benefits received by (or on behalf of) an individual are includible as the individual's own contribution to his support in determining who provided more than one-half of his support.

Conversely, supplementary medicare benefits, being in the nature of medical insurance proceeds, are not includible in the support computation of the individual by whom (or on whose behalf) they were received. However, the premiums paid for supplementary medicare coverage are includible in the support computation and are attributable to the person who furnishes the premiums. Revenue Ruling 64-223, C.B. 1964-2, 50.

With respect to the retirement income credit computation, section 37 of the Code provides that a taxpayer may receive an income tax credit on qualified retirement income received by him. The retirement income on which this credit is allowed is limited, by section 37(d)(1) of the Code, to $1,524, less "any amount received by the individual as a pension or annuity" from several named sources, one of which is title II of the Social Security Act. Neither the basic medicare benefits nor the supplementary medicare benefits qualify as a "pension or annuity." Accordingly, it is held that benefits received by (or on behalf of) an individual under either basic medicare or supplementary medicare, are not includible in the computation of the limitation, provided by section 37(d)(1) of the Code, on the amount of retirement income on which the credit is allowed.