Deduction opportunities abound for
people who know the importance of saving their receipts and keeping proper
documentation. Make sure you're taking the right steps to make qualified
deductions during filing season.
When it comes to taking qualified deductions on your
federal tax return, three things must happen:
- Recognize
that an expense might be deductible on your tax return.
- Keep a record
of the expense in an organized fashion.
- Obtain the proper (and timely) documentation to support your deduction.
This might be obvious to most people, but here are some typical
areas where taxpayers often fall short. In the long run, these items could end
up costing you plenty during tax filing season, and trigger IRS audits.
- Cash donations to charity. To deduct and support your deduction to a qualified charity you must have valid support. Donations of cash are no longer deductible if they are not supported by a canceled check or written acknowledgement from the charity.
A donation deduction of $250 or more needs to be supported by documentation
created at the time of the donation. A canceled check and bank statement are
not sufficient. If you get audited, having the charity issue documentation
after the fact may not be enough.
- Non-cash contributions. You need documentation for these
donations as well. This includes a detailed list of items donated, the
condition of the items and their estimated fair market values. While this
level of detail is not required for small donations, keeping good records
and taking photos is a good practice.
- Investment purchases and sales. If you bought or sold an investment you
will need to know your cost basis. Today's regulations require brokers to
report to the IRS the cost basis of investment sales. Review your broker
accounts and correct any errors. It's very difficult to defend yourself in
an audit when records reported to the IRS are in error.
- Copies of divorce decrees, alimony and child
support agreements. There
are often conflicts between two taxpayers taking the same child as a
deduction. Do you have the necessary proof to defend your position? The
same is true with alimony and child support. Keep these documents in a
safe place and be ready to use them if necessary.
- Copies of financial transactions. Keep copies of documents from any major
financial transaction. This includes real estate settlement statements,
refinancing documents and any records of major purchases. These documents
are necessary to ensure your cost basis in the property is properly
recorded. The documents will also help identify any tax-related items like
mortgage insurance, property taxes and possible sales tax paid.
- Mileage logs. Lack of tracking deductible miles is
probably one of the most commonly overlooked documentation requirements.
Properly recording charitable, medical and business miles can really add
up to a large deduction. If the record is not available, the IRS is quick
to disallow your deduction.
If you are not sure whether a document is
needed, retain it. Then you can always retrieve it if needed.
