Saving receipts, records will aid in filing
IF YOU’RE FEELING stressed yet again this year about tax season, it means there’s a lot of room for improvement in how you prepare your returns.
It’s time to develop a simple system for doing your taxes so that the process will be a surprisingly easy task for you next year — take a couple of hours every week to organize and update your records so that the next tax season will be significantly easier and worry free. This is especially true for taxpayers who take a lot of deductions or write off business expenses. Here’s how to save yourself the pain and worry by handling your taxes bit by bit all year long. Maintain good records. Having the requisite documents in place to support and validate your transactions is very important, especially if you are taking deductions on your income — the IRS might want to check if the deductions you claim are genuine.
The agency does not mandate any specific method of maintaining records. You can hold handwritten papers and hard copies or soft copies of all the necessary documents.
You may want to scan handwritten receipts and invoices, name them sequentially and store them on your computer. But if you are maintaining records electronically, discarding the physical documents is still not a wise thing to do. Balance your checking account. Having an up-to-date checking account to receive and make payments is a great way to account for every dollar that comes in and out of your business or household. Keep auto and entertainment logs. If you use a car for business purposes, you should maintain a daily log of how many miles you travel. Keep a small binder in the car’s glove box and get into the habit of jotting down the details — date, mileage and business purpose — in the log before you step out of the car.
This goes for entertainment, too. Expenses incurred when entertaining clients in the course of your business, including meals, are deductible. Keep old tax returns. The IRS does not mandate the number of years for which you should maintain copies of tax returns. It can conduct audits and go as far back in time as it wants if it suspects fraud.
But it is recommended you retain copies of tax returns and supporting documents for six years. It will help you prove that your deductions are justifiable and taxes are correctly paid should you receive an audit notice from the IRS. Save home-related records and receipts. You should have a copy of the settlement sheet when you buy a new home since it is the proof of the price you paid for it. If you sell your home, the gains you made are subject to tax.
If you have spent on home improvement, keeping a log of the expenses will help you avoid tax bites.
Also keep records of any casualty losses that your house suffers. You can deduct them as well unless they are reimbursed by the insurance company.