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2012 year-end tax tips: 4 benefit changes

(MoneyWatch) While "fiscal cliff" negotiations are throwing a wrench into tax planning, don't throw up your hands and do nothing! There's plenty of actions to take before year-end, starting with changes to tax law that are set to expire at the end of the year, which affect everything from mortgage rules to education funding to employee benefits. Four of the big ones include:

1. Mortgage relief: Homeowners, who have restructured their mortgage debt since the housing crash, have enjoyed a big tax benefit: No tax on the amount of debt that was reduced or forgiven. Before the Great Recession, if a lender agreed to reduce principal or release a mortgagee from an obligation, it was considered income. Starting Jan. 1, 2013, any debt discharged will be considered income and taxes will be owed on the amount forgiven. Year-end tip: If you are working on a loan modification or a short sale, try to get it done in 2012.

2. Medical expenses: Currently, unreimbursed medical expenses, including amounts paid as health insurance premiums, are deductible to the extent that they exceed 7.5 percent of adjusted gross income. However, the Affordable Care Act (aka "Obamacare"), increased the threshold for deducting medical expenses will rise. In 2013, medical expenses will be deductible only to the extent they exceed 10 percent of AGI, except for taxpayers age 65 and older. Year-end tip: Try to accelerate medical expenses into 2012, especially if your adjusted gross income will be lower this year.

3. Flexible spending account limits: Flexible spending accounts (FSAs) allow employees to direct pre-tax dollars into separate accounts to pay for out-of-pocket healthcare expenses like co-payments, deductibles, orthodontia and eye care. Previously, employees' contributions were only limited by their specific plan's rules. However, the Affordable Care Act will impose a cap of $2,500, as of Jan. 1, 2013. Year end tax tip: If both spouses work, each could elect up to $2,500 under his or her employer's FSA plan, if the family's needs warrant that amount.

4. Coverdell Education Savings Account (ESA) contributions: Previously known as Education IRAs, Coverdell accounts can be opened at most financial institution (banks, mutual fund companies, brokerage firms). Contributions grow tax free until distributed, if the funds are used for qualified education expenses. For 2012, the aggregate annual contribution limit to a Coverdell ESA is $2,000 per designated beneficiary of the account. In 2013, the amount is scheduled to decrease to $500.The $2,000 limit is phased out for individual contributors with modified AGI between $95,000 and $110,000 and joint filers with modified AGI between $190,000 and $220,000. For 2013, the AGI limits are scheduled to be reduced to $150,000 and $160,000 for joint filers, although the AGI limits for other filers remain the same. Year-end tip: Maximize ESA contributions for 2012.

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