Use flexible spending accounts to escape taxes on essential expenses. By The Kiplinger Washington Editors March 5, 2012 Health care spending accounts Health care spending accounts let you designate the amount to be deducted from your salary each payday, starting at the beginning 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 Security and Medicare taxes. The money can be withdrawn as reimbursement for qualified health expenses, such as co-payments, eyeglasses and contact lenses, and the cost of prescription drugs.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 employers, by March 15 of the following year, you lose whatever’s left in the account.DOWNLOAD: The Kip Tips iPad App Dependent care accounts 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 amount. Transportation spending accounts 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” rule. Advertisement Sell losing investments to cut taxes 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. Take home-office tax breaks 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. Advertisement 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 audit. 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. Advertisement 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 deductions. 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 Use tax breaks to subsidize college 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. Advertisement 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 couples). 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). Fight an unfair property assessment 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 appeal. 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. Get all 100 of our top money-saving tips by downloading the new iPad app or purchasing the PDF version.