Keeping up with your record-keeping throughout the year will make things a lot easier come tax time. Taking a little extra time to make notes on receipts while you still remember what they were for, keeping them together, maintaining logs of deductible expenses, and filing away those important documents will not only facilitate the preparation of your tax return. Having those records just might put some of that money back in your pocket, in terms of tax deductions and credits. And, knowing that you have the necessary records will give you a much-welcomed peace of mind.
Record-Keeping for Federal Income Tax Purposes
Record-keeping serves a variety of purposes in managing our day-to-day personal financial affairs. And, since income taxes go hand-in-hand, they should be taken into consideration in deciding what records to keep.
First of all, why keep records?
From an income tax perspective, there are some good reasons for keeping proper records:
Keeping good records will make it a lot easier to prepare your income tax return
Good record-keeping practices will help you identify your sources of income, and avoid overlooking any items that need to be reported on your tax return
If you keep track of your expenses, you will be able to take advantage of tax deductions and credits.
You will need records to keep track of the basis of your property, such as your home or other assets, in order to accurately calculate any gain or loss on an eventual sale.
Having the proper documentation to support the items you report on your tax return will give you peace of mind, knowing that if you are ever audited, you will be able to confidently present your case.
What records to keep
Throughout the year, you will have receipts, statements, and other documents that you will need to keep for income tax purposes. Often, these will serve more than one purpose. For example, if you purchase a home, the closing statement may contain tax-deductible expenses, but this document serves various other purposes as well, such as for insurance, property taxes, home equity loans, and others, and should be kept in your permanent personal files. The medical bills you receive will show how much you were reimbursed by the insurance company, and will also determine whether you can claim an itemized deduction for income tax purposes.
Some records that you will need for income tax purposes are records you have to maintain yourself, such as a tip diary, or a log or diary of business-related travel expenses and mileage.
Other records will be the standard forms you receive at year-end, such as your W-2, 1098 and 1099 forms. You may also receive year-end summary statements for your investments.
There may be other receipts that you keep specifically for income tax deductions, for example, charitable donations, job-hunting expenses, moving expenses, and for purposes of the tax deduction for state sales tax. How you decide to accumulate and file these documents will depend on your personal preferences, organizational habits, and filing system. But the important thing is to keep them. Without the proper documentation, it will be difficult to reconstruct your expenses, and to substantiate them as tax deductions.
Of course, keeping absolutely every bill and receipt you receive during the year may be unnecessary and in the end may just generate more work to sort everything out when it comes time to do your tax return. So, as you go about your business during the year, trying to decide whether something should be kept, it is helpful to be aware of some general guidelines regarding what you will need to prepare your income tax return.