Spring Cleaning and Taxes

Daylight savings time has started! That means Spring is here, right? Well, the weather may not quite be there yet, but that doesn’t mean you can’t start getting ready. Spring cleaning is the perfect time to clean out in the cabinets and drawers, and it’s also a good time to take a fresh look at your filing system, specifically, your tax paperwork. Here are some tips on keeping tax-related documents filed effectively, as well as which files to keep.

How Long You Should Keep Your Records
You should keep records as long as they are relevant for your tax situation. For example, if you take a deduction for property you use in your business, including standard mileage for a vehicle, you should keep records for that property for at least three years after you dispose of the property. Although it is important to keep your tax returns and records for at least three years, if the IRS suspects fraud, it may request information beyond that time span.

Types of Records to Keep
You should keep copies of your tax return information with all the supporting documents, including documents that identify sources of income and expenses. You should also keep documents to back up claims for credits as well as for adjustments and deductions. Items that can be used as records for income and investments include Forms W-2, Forms 1099, and bank statements.

Items that can be used as records for expenses include canceled checks, receipts, sales slips, invoices, and account statements. If you own your home keep records such as closing statements (when purchased and when sold), mortgage statements, purchase and sales invoices, proof of payment, insurance records, receipts showing costs of improvements, and Form 2119,
Sale of Your Home (if you sold a home before 1998).

Keep Records all Year Long to Claim Expenses Come Tax Time
Income tax regulations place the burden of proof on the taxpayer. So, if you claim that you drove 50 miles to the doctor, or spent $2,000 on a new computer for your business, you need to be able to prove it come tax time. Because of this, you need to keep accurate records all year long in order to prepare your tax return. These records must support the income, expenses, and credits you report.

In most instances, the IRS has considered a cash receipt or canceled check as adequate proof of payment. However, because some banks no longer return canceled checks, the IRS will accept certain other information from a bank account statement as proof of payment. The statement must show the check number, amount, the date the bank posted the check to the account, and the name of the payee.

If you pay for expenses by credit card or electronic funds transfer, you also may be able to use an account statement to prove expenses. For electronic funds transfer, the statement must show the amount transferred, the date the transfer was posted to the account, and the name of the payee. For credit cards, the statement must show the amount charged, the transaction date, and the name of the payee. If the expenses are withheld from your paycheck, you can use your pay statements to prove payment.

Once proof of payment has been established, it is still necessary to determine the tax treatment of that payment. It is important to keep other documents, such as detailed receipts listing the items purchased, to show the relationship between those expenses and the deduction claimed.

It may sound like a lot, but basically, if you want to claim it on your tax return, you need to be able to prove it on paper. If you have any questions on what to keep, or for that matter, get rid of, give your neighborhood
Jackson Hewitt Tax Service office a call.