Health care spending accounts let you designate the amount to be
deducted from your salary each payday, starting at the
begin�ning of the year. For now, your employer sets the
maximum amount you can contribute (in 2013, the maximum for all
plans will be $2,500); your contributions avoid federal, state and
local income tax as well as Social Se�curity and
Medicare taxes. The money can be withdrawn as
re�imbursement for qualified health
ex�penses, such as co-payments, eyeglasses and contact
lenses, and the cost of prescription drugs. (As of 2011, you can no
longer use money in the account for nonprescription drugs.) If you
don't use the money by the end of the plan year or, with some
em�ployers, by March 15 of the following year, you lose
what�ever's left in the account.
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Dependent care accounts let you set aside up to $5,000 a year in
pretax dollars to cover child care expenses for children under age
13, or day care for a disabled spouse or dependent. To qualify for
this benefit, you must be employed, looking for work or a full-time
student. As with the health spending account, if you don't use all
the money by the end of the plan year, you lose the remaining
Transportation spending accounts allow you to set aside pretax
contributions for commuting expenses, such as bus fare, train fare
or parking. In 2012, the monthly maximum you can contribute for
parking is $240; for other commuting expenses, the max is $125.
These plans typically let you adjust your contribution amount
during the plan year, and they don't have the "use it or lose it"
Turn your investment losers into winners by using them to cut
your tax bill. You'll have to sell your investment to do so, and
the assets must not have been held in a tax-deferred account, such
as an IRA.
If you've got losses that qualify, you can use them to offset
any capital gains you pocketed that year. You'll need to match up
your long-term capital gains -- on investments held for more than
one year -- with long-term losses, and match up short-term gains
(held for one year or less) with short-term losses.
Do your losses exceed your gains? Use the excess to write off up
to $3,000 of ordinary income. If you still have leftover losses,
you can carry them forward to offset capital gains and up to $3,000
of ordinary income in future years.
Karen Baca Ostrom has been running a business from her Los
Angeles�area home for years, but she never claimed
home-office deductions because they appeared to be more trouble
than they were worth.
Now that Ostrom, a court reporter, is living in a rental
following her 2011 divorce, she is having second thoughts.
Home-office write-offs are simpler and far more compelling for
renters than for homeowners. "It seems like it's at least worth
considering," says Ostrom.
People who operate a business from home have access to a number
of potentially lucrative tax breaks, but the home-office deduction
can be a mixed bag. That's because homeowners who itemize
deductions can already write off their biggest expenses: home
mortgage interest and property taxes. Home-office deductions simply
allow you to claim a portion of your utility and repair bills, as
well as depreciation on the presumably small portion of the house
that's used exclusively as an office.
That can add up to a relatively small tax break -- and it comes
with strings. The depreciation may need to be "recaptured" when the
home is sold -- meaning Uncle Sam wants you to give back some of
the depreciation benefits you claimed. Taking a home-office
deduction is widely believed to be a red flag that triggers an IRS
But for a renter, a home-office deduction is far simpler, says
Philip J. Holthouse, partner at the Los Angeles tax-accounting firm
Holthouse, Carlin & Van Trigt. You simply figure out what
portion of the apartment or house is used solely as office space
and multiply that by the rent.
Establishing your home as your office can also allow for higher
mileage deductions, says Jennifer MacMillan, a Santa
Barbara�based tax specialist. For Ostrom, it would mean
that every time she drives to court or meets a client, her
round-trip from home is deductible at 55.5 cents per mile. "Log
your mileage," MacMillan advises, because small-business owners are
more likely to be audited than wage earners. But honest taxpayers
who are organized should not have a problem supporting their
Other tax breaks for business owners:
--100% of health insurance premiums for the business owner and
his or her family
--Expenses for office equipment and supplies
--Business meals and travel
--Small-business retirement plan contributions up to 25% of income,
or $50,000 in 2012
Set up a 529 savings plan and name your child as the
beneficiary. These accounts let your contributions grow tax-free.
If you use the money for qualified education expenses, such as
tuition, fees, and room and board, the earnings on withdrawals
escape taxes as well.
You can set up a 529 plan anywhere, but look to your own state
first. Two-thirds of the states give residents a tax break for
contributions to their state plan; Arizona, Kansas, Maine, Missouri
and Pennsylvania give a tax break to residents for contributing to
any state's plan. If your kid doesn't go to college, you can name
another beneficiary or cash out the account, in which case you'll
owe income tax and a 10% penalty on earnings.
Once you start paying for college, take advantage of the
American Opportunity Credit, which returns up to $2,500 for each
qualifying student. You must have a modified adjusted gross income
of $90,000 or less (single filers) or $180,000 or less (married
The American Opportunity Credit applies to the first four years
of undergraduate education. Beyond that, go with the Lifetime
Learning Credit, which lets you claim up to $2,000 in qualified
expenses per family each year. This credit disappears at a modified
adjusted gross income of $61,000 (single filers) and $122,000
(couples filing jointly).
About 30% of U.S. properties are assessed at higher values than
their actual worth, according to the National Taxpayers Union. If
you suspect that your tax assessment is too high, you can file an
Before you can determine if the assessed value of your home is
accurate, you need to know how your local government assesses
properties. Commonly, an appraiser will compare a home with similar
recently sold properties to settle on a market value. That figure
may be multiplied by a set fraction, known as an assessment ratio,
to determine the taxable value.
Next, get your property's record card from your local tax
assessor's office and check for errors, such as incorrect figures
for square footage or number of rooms. If you can prove that any of
the information is incorrect, you may be able to get a reduction in
your assessment on the spot, bypassing the appeal process.
You can search Zillow.com to see estimated values and sale
prices of similar homes to get an idea of whether your assessment
is accurate. Then pull the record cards of those homes at the
assessor's office or on its site, if it has an online database. The
homes should be of about the same age and style, have the same
number of bedrooms and bathrooms, and preferably be in your
neighborhood. If you can find five or more properties at
considerably lower values, you may have a good case.
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