Eight Organizational Tax Tips
Making Your Tax Return a Year-round Commitment
By CHRIS MARINI
Tax season can often be a stressful time of year for just about everyone. The key to reducing this stress is keeping records organized and accessible.This will make the preparation process run as smoothly as possible and create a system of backup for the numbers on a return, which is referred to as an audit trail. If your audit trail is accurate and easy to follow, it will help you potentially avoid additional taxes in the event that you are selected for an audit.
By following the eight tips below, your next tax return will be quicker and more accurate than ever before.
1. Keep All Documents Together
By ensuring that all tax-related documents are kept in the same spot, you can eliminate questions such as ‘where did I put that?’ or ‘did I ever receive that?’ This could potentially save hours spent searching a home or, even worse, weeks spent waiting for an additional copy to be mailed to you. Documents received throughout the year may include real-estate and excise-tax bills, medical bills, co-pays, and prescriptions. In addition to those documents, and your own records maintained throughout the year, here is a brief list of the most common forms people receive after year end:
• W2 (wages)
• 1099-MISC (independent contracting)
• 1099-DIV (dividend income)
• 1099-SSA (Social Security proceeds)
• 1098 (home mortgage taxes/interest)
• K1 (partnership income)
• 1099-INT (interest income)
• 1099-B (capital gains)
• 1099-R (retirement distributions)
• 1098-T (higher-education tuition)
2. Stay on Top of Withholdings
If you had a large amount of taxes due in past years, you may find yourself in a similar situation this year. There are several methods available to ensure you withhold enough taxes throughout the year to avoid the burden of having to make a single large payment and incurring any related penalties.
One potential way is to change how much you are withholding from your W2. Your company’s HR department can help you change this on your Form W4. Lower numbers mean more tax is withheld, so if you are claiming a 2 and owe taxes, consider changing to a 1 or 0. Another possible method to help withhold enough is by using estimated tax payments. Estimates are quarterly prepayments of taxes, which are often used by business owners or individuals with a high level of income. Also, remember to inform your tax preparer of any life changes, such as marriage, divorce, birth of a child, or death of a spouse, which can affect how much withholdings are needed.
3. Regularly Update Mileage Logs (Form 4562/2106)
If you own a small business or have unreimbursed mileage expenses from a job, you are able to claim this as a deduction on your return. You can claim this deduction using the standard mileage rate or actual expenses. The key to either method is having supporting documentation to help keep your audit trail accurate.
In order to calculate your deduction properly, it is important to keep detailed records of your mileage. One quick and easy strategy you might try is purchasing a small pocket notebook and keeping it in your center console. Whenever you use your vehicle for a business trip, simply set your odometer and jot down the miles (excluding commuting mileage).
If you forget to set the odometer, Google Maps is always a useful tool. At the end of the year, add up all the trips in the notebook to arrive at your total business mileage. Additionally, remember to keep your receipts for parking and tolls, and add them up at year end as well.
4. Summarize Higher-education Costs (Form 8863)
Each higher-education institution you or your child attends is required to issue a 1099-T; however, there is often additional information to consider that is not included on a 1099-T. This includes amounts paid for books, a well as scholarships and grants received that were not paid directly to the school.
Because it is important to capture all activity, consider making a summary sheet of all education costs and assistance received. Costs should include all amounts from the college bill in addition to textbooks. Remember to keep copies of all book receipts as backup documentation.
5. Keep Track of Fair Rental Days (Schedule E)
If you rent out a vacation home, it is necessary to know how many days it was rented at fair rental value. Your tax preparer will also need to know how many days the home was used by either yourself or any family member.
To do this, try keeping a miniature monthly calendar at home, exclusively for the purpose of keeping track of usage. For any day that it is used personally or by a family member, put a ‘P’on the day for ‘personal.’ For any day that it is rented to someone at fair rental value, put an ‘R’ on that day for ‘rented.’ At the end of the year, go through your calendar and determine the amount of days used personally and rented out.
6. Substantiate Business Revenue and Expenses
For small business owners who file a Schedule C, E, or F, it is important to keep detailed and supported records. Purchasing a computer program, such as QuickBooks, will help you keep better track of business data. To maintain a proper audit trail for your business, be sure to maintain supporting documentation for each transaction you enter into your software.
For the very small businesses, it may not be cost-effective to purchase financial software. If you fall into this category, try keeping a bin at your desk to store copies of each check for revenue and receipts for expenses. Then, on a monthly basis, use a blank spreadsheet or notebook to record all data from the bin. This will be much easier than trying to summarize all 12 months at once. Keep in mind that charge-card statements cannot be used to substantiate deductions; rather, detailed receipts are needed.
7. Keep a Log of Childcare Expenses (Form 2441)
Parents who both have earnings can deduct expenses paid to a childcare provider, which includes day cares, independent sitters, and summer camps. For each expense, keep records of which child the expense relates to. Additionally, you will need to request the EIN or SSN for each provider.
Keep a log of these expenses at home, and update it each time you write a childcare check. To create an even more effective audit trail, include copies of checks paid to each childcare provider or ask them to provide you with a statement of annual amounts paid. At year end, use the log to create a summary sheet, totaling by child and then provider.
8. Maintain Records of Charitable Contributions (Schedule A)
Make your donations with checks or online. The IRS will not allow a deduction for unsupported cash donations. Additionally, remember to take copies of each check or online payment as proof of each payee and amount. At the end of the year, create your summary sheet, breaking down the amounts paid to each organization, with the supporting copies attached behind as additional backup documentation. There are more stringent rules for larger donations, so be sure to consult your tax preparer.
Also, if any benefit is received as a direct result of the contribution, it must be subtracted from the contribution amount. For example, if you donated $1,000 to the Jimmy Fund and received two Red Sox tickets valued at $50 each, you could deduct only $900.
By following whichever of these eight tips apply to you, you will make your next tax return quicker and easier to prepare, and more accurate. Additionally, in the event you are ever audited, you can feel confident in the ability of your backup documentation to uphold the figures presented on your return.
So, this year, challenge yourself to get organized, and make your tax return a year-round commitment.
Chris Marini is an audit and accounting associate with the Holyoke-based public accounting firm Meyers Brothers Kalicka, P.C.; (413) 322-3549; [email protected]