A GUIDE TO YOUR PERSONAL INCOME TAX: PAPERS
Documentation is the most significant part of taxation. If you do not properly account your income and expenses, chances are you will likely miss opportunities to maximize tax credits available. And the only way to claim such deductions is to account those in black and white. Hence, a well-documented tax return goes a long way in ensuring everything is itemized.
Also, all expenses cannot be supported if these are not audited. Ask every IRS auditor and he will tell you a particular expense does not occur at all if it is not documented. Failure to keep tabs of records can lead to substantial back-taxes.
Improper or insufficient documentation can increase the amount of time, effort, money, and stress which goes into preparing a tax return. Most accountants do not prepare returns with undocumented expenses as they will look for supporting receipts. And if you are preparing the return yourself, this process can be harder than you think.
Speaking of receipts, you may want to classify them according to the following categories:
- Car Log - You can have a small notebook with a pen and store it in your glove compartment. Jot down the different places you drove, the mileage for each, and the purpose for visiting the area before the day ends.
- Charitable - When you help, the Internal Revenue Service helps you too. But you need to prove you really are lending a hand by keeping all appraisals for huge non-cash gifts, canceled checks, donation receipts, and list of in-kind items donated. All the mileage, as well as food or other goods donated are deductible.
- Dependent Care - Collate all receipts pertaining to care for a child or an elderly parent.
- Education - The IRS offers considerable relief for parents and students dealing with highest tuition fees through numerous credits and deductions.
- Home / Mortgage - If you own a house, you may store all mortgage statements and Form 1098, as well as any paperwork related to home equity lines of credit, home improvement, or remodeling in an envelope. If you are renting a property, you may want to include rental receipts or canceled checks on your tax return.
- Income - All payslips, different 1099s, and statements for your business (if applicable) are included here.
- Medical - Every receipt counts here, with medical costs escalating year over year. Collect all receipts for alternative medical treatments, co-pays, dental work, mental health counseling, prescription costs, and over-the-counter medications and remedies.
- Unaccounted Business Expenditures - If you are working for another person or entity, you may want to account all expenses that are not reimbursed in your line of work. Keep the stubs from any reimbursement checks you receive.
- Uncategorized Costs - These are dedicated for all other receipts, even if you do not think such items will be deductible. And tax laws change from time to time, allowing a new type of deduction that is not accounted before.
Make sure to keep all important papers and receipts in a safe and secure place. Place it in an envelope or folder and xerox each document. All papers and receipts older than seven years can be shredded.