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To the best of my understanding, my parents took money out of their 401(k) or another retirement account (they are both near 80) to purchase their condo. Dad reported that as income, thereby artificially inflating their income since that money was never used for living expenses. He then told me he will oay nearly $500 per month additional for his Medicare premium for the next 5 years as a result. I think he did something wrong. PLease advise.

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I suggest that he go to a tax accountant and get this straightened out. Paying the accountant (or an estate planner or an elder law attorney) will be less expensive than paying excess Medicare costs for years.
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