I hear there probably won't be a cost-of-living increase to Social Security in 2010, but I know that health-care costs are rising. Could my Social Security payments decrease next year because of increasing Medicare premiums?
--Edwina Beard, Hattiesburg, Miss.
Yes, there is a chance that Social Security payments could shrink for some people next year. That's a result of a double whammy: First, the Congressional Budget Office projects that because of the recent decline in consumer prices and expected low inflation in the next few years, there may not be another cost-of-living increase in Social Security benefits until 2013.
Second, health-care costs continue to rise, and Medicare Part B premiums are expected to go up. Because those premiums are usually deducted from Social Security payments, some people will see their checks decrease next year.
The cut will affect about one-fourth of retirees: newly signed-up Medicare beneficiaries and higher-income beneficiaries. Most retirees, however, are protected by the "hold harmless" provision, which prohibits Part B premiums from rising in any one year by more than that year's cost-of-living increase in benefits. With no bump up in benefits, Part B premiums are frozen.
People who are covered by the hold-harmless provision will continue to pay Part B premiums of $96.40 per month in 2010. If the Social Security cost-of-living adjustment does not rise until 2013, as predicted, the CBO estimates that people who pay the full Part B premium will owe $119 per month in 2010, $123 in 2011 and $128 in 2012.
The hold-harmless provision does not apply to Medicare beneficiaries who pay an income-related premium surcharge. In 2009, the surcharge applied to individuals who had a modified adjusted gross income of more than $85,000 and to married couples with a modified AGI of $170,000 or more. Those high-income individuals -- about 5% of Medicare beneficiaries -- will have to pay the income-based surcharge next year, in addition to the increased base premium.
If your income has fallen since 2008 (the 2010 surcharge will be based on income reported on your 2008 tax return), contesting the premium surcharge could pay off. You're allowed to contest the premium increase if you've had a life-changing event, which includes marriage, divorce, job loss, reduced work hours, loss of income from income-producing property or cuts in pension benefits. (For example, recent retirees have a good shot at lowering their premiums.) For more information, see the Medicare Part B pre-miums fact sheet in the Medicare section of www.socialsecurity.gov.
Incentives for car buyers
We have a son starting college this fall, and he needs a vehicle. Are there any tax (or other) incentives we can benefit from?
--Rick Lay, San Antonio
In addition to loads of manufacturers' incentives plus fire-sale prices at many car dealers, you can take advantage of a temporary tax break for new-car buyers who purchase a vehicle between February 17 and December 31, 2009. You can write off state and local sales taxes and excise taxes paid on up to $49,500 of the cost of a new car, light truck, motor home or motorcycle.
The deduction, part of the economic-stimulus legislation passed in February, does not apply to used-car purchases or to leases. And it phases out for high earners -- single taxpayers with an adjusted gross income between $125,000 and $135,000, and married couples filing a joint return with an AGI between $250,000 and $260,000. If your AGI is halfway through the phase-out range, for example, your deduction would be cut in half.
You can claim the deduction on your 2009 tax return regardless of whether you itemize or claim the standard deduction. However, if you itemize and deduct state sales taxes rather than state income taxes (because you live in a state that doesn't have an income tax, for example), this break has no value for you. You already get to deduct the sales tax on cars (even if you buy a used one).
Car buyers who live in a state that doesn't have a sales tax -- such as Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon -- but who pay a flat fee on the purchase of a vehicle or a fee based on the price paid, can deduct the fee, subject to the same income and purchase-date restrictions that apply to the sales-tax write-off.
If you're trading in a vehicle, you could be eligible for a voucher to help you buy a more fuel-efficient car through the "cash for clunkers" program. For more information, see Don't Count on Cash for Clunkers.
Avoid a wash sale
A few years ago, with Dodge & Cox Stock fund (symbol DODGX) closed to new investors, I opened an account with Dodge & Cox Balanced (DODBX). Now I'm under-water with Balanced, and Stock has reopened. Can I sell Balanced and use the proceeds to open separate accounts with Stock and Dodge & Cox Income fund (DODIX) without running afoul of the IRS's wash-sale rule?
--Mike Jaixen, Omaha
Go for it. The wash-sale rule comes into play if you sell a security and, within 30 days before or after the sale, buy a "substantially identical" security. If you violate that rule, you can't deduct the loss on the first sale.
The IRS has never defined "substantially identical," so there is a bit of guesswork involved. But in our judgment, replacing Dodge & Cox Balanced with a combination of Stock and Income will not put you at odds with the wash-sale rule, even if the end product comes awfully close to replicating the original fund.
My thanks to Manny Schiffres for his help this month.
Got a question? Ask Kim at kiplinger.com/askkim, or write Ask Kim, 1729 H Street, N.W., Washington, DC 20006. Kimberly Lankford is the author of Ask Kim for Money Smart Solutions (Kaplan, $18.95).