End of Year Tax Tips for Families

Get Cracking on Flex-Plan Spending

It’s time to review your employee benefits and decide how much money to earmark for your flexible spending account in 2011. Flex plans let you set aside a portion of your salary before taxes to pay for dependent-care costs and medical expenses not covered by insurance, lowering next year’s tax bill in the process.

Salary that goes into a flex account dodges federal income and Social Security taxes; in most states, it skips state income taxes, too. And flex-account distributions are tax-free. Despite the valuable tax breaks, only about one-third of eligible workers take advantage of these set-aside accounts. Learn more: Trim Health-Care Costs with Tax-Free Savings.

Last Chance for a Tax-Free Computer

Is your college student nagging you for a new computer? If you’d like to oblige but think you can’t afford to, you might be surprised to learn that you may have a ready stash of savings you can use to buy that gift -- if you have a 529 college-savings plan.

Normally, you must spend your 529 funds on college tuition and other qualified expenses. The earnings portion of distributions not used for qualified college expenses is taxed and slapped with a 10% penalty.

But an expiring tax break allows you to use money in your 529 college-savings plan tax-free and penalty-free to purchase a computer for students enrolled in college or another post-high school institution. The tax break, which is available through the end of 2010, also applies to computer software and Internet service. To qualify for the tax break, the software must be primarily educational. Sports or gaming software doesn’t qualify.

This is also your last chance to use funds in a Coverdell Education Savings account to pay for private elementary and high school tuition. Starting next year, only college-related costs will qualify for tax-free distributions. So if you want to pay next spring’s tuition bill from your Coverdell funds, write the check by December 31. Learn more: Cash In on Expiring Tax Breaks for Education Savings.