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Year-End Moves to Avoid the Medicare High-Income Surcharge

Take these steps to lower your income so you won't have to pay higher Part B and D premiums than other beneficiaries.

It looks like my income may be higher than usual this year. Is there anything I can do to avoid a high-income surcharge on my Medicare premiums in the future?

Maybe. Your 2011 income will determine whether you pay a surcharge on Medicare premiums in 2013. Medicare charges a high-income surcharge for Part B, which covers doctor visits and outpatient services, and Part D, which covers prescription drug costs, when your adjusted gross income (plus tax-exempt interest) is more than $85,000 if you are single or $170,000 if your are married filing jointly.

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There are some year-end moves you can make to reduce your adjusted gross income for 2011. Whether those actions will be sufficient to hold your income below the high-income threshold depends on your gross income and how aggressively you attempt to reduce it. Here are a few situations that could lift your income above the threshold when the Medicare surcharge kicks in and some possible remedies to offset them.

Be careful with IRA conversions. Converting a traditional IRA to a Roth increases your adjusted gross income in the year of the conversion, and that temporary increase could subject you to the high-income surcharge for a year, even if your income is normally much lower. Before converting, do some quick calculations to see if you’ll end up near the threshold. If you do, you may want to spread your conversion over more than one year.

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Consider donating part of your mandatory IRA distribution to charity. Withdrawals from traditional IRAs boost your adjusted gross income, which could push you over the threshold for the high-income surcharge. But taxpayers who are 70½ or older can transfer up to $100,000 of their required minimum distributions from their IRAs or other retirement plans to a charity in 2011. The donated amount will be excluded from your income (but note that you can’t double dip on tax deductions by also claiming a deduction for your charitable contribution). See Donating IRA Distributions to Charity for more information.

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Boost your pretax retirement contributions. If you or your spouse is still working, you may be able to lower your adjusted gross income by contributing to a 401(k) or other retirement plan at work. People who are 50 or older can take advantage of catch-up contributions, too, boosting their maximum contribution to $22,000 in 2011.

Make tax-deductible IRA contributions. If you don’t participate in a workplace retirement savings plan and you are younger than 70½, you can deduct your full IRA contribution, regardless of income, which could lower your adjusted gross income by $6,000 for 2011 (the $5,000 limit plus $1,000 in catch-up contributions for people age 50 and older). In order to contribute to an IRA, you or your spouse must have earned income.

Sell losing stocks or mutual funds. Capital losses from sales of money-losing stocks or mutual funds first offset any capital gains, and then up to $3,000 of net loss can be deducted against your ordinary income, such as your salary or IRA distributions. Don’t forget to add reinvested dividends to your basis when calculating your loss or gain. You’ve already been taxed on these dividends in the year when they were first paid out, and you don’t have to pay taxes on them twice.

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Trim home-sale profits. Most people don’t have to pay taxes on home-sale profits. If you’ve lived in the house for at least two of the past five years, you can exclude $250,000 in home-sale profits from income taxes if you’re single, or $500,000 if married filing jointly. But if you have bigger profits than that -- or if you haven’t lived in the house long enough to qualify for the full exclusion -- then it can pay to tally up the cost of home-improvement expenses over the years to increase your basis, lowering any taxable gain on the sale of your home. See IRS Publication 523 Selling Your Home for more information.

Reduce business profits. If you’re self-employed or have some freelance income on the side, consider buying equipment or stocking up on office supplies in December, which can offset some of your income for this year. You can also delay sending your December invoices until January. Making tax-deductible contributions to a self-employed retirement account, such as a SEP IRA, Simplified Employee Pension (SEP) or solo 401(k) plan can substantially reduce your self-employment income. As long as you set the plans up in time for the current year, you have until October 15, 2012, to fund them if you file for an automatic extension of your tax return. See Best Retirement Plans for the Self-Employed for more information. Also see Tax Toolkit for the Self-Employed for more information about tax-deductible expenses.

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