Whether gathering information for last year’s taxes or planning for the current year’s taxes, it’s time to think about the records you need to keep. Fortunately, the IRS does not require you to keep your records in a particular way. However, there are many documents in addition to your tax return that you should save.
Basic Records
These are records that everybody should keep to prove their income and the deductions claimed on their tax return.
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For Items Concerning:
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Keep the Following Records:
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Income |
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Expenses
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Home
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Investments
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In addition, records for a home and other investments should be saved to determine the basis (original costs plus adjustments) at the time the asset is sold.
Home
Records for your home should enable you to determine the cost basis of your home. You will need the basis to determine if you have a gain or loss when you sell your home, or to figure depreciation if you use part of your home for business purposes or rental property. The records should show the purchase price, closing costs, cost of improvements and may show information for casualty losses deducted.
Investments
Records for your investments should enable you to determine your basis in an investment and your gain or loss at the time of sale or redemption (for mutual funds). The records should include the purchase price, purchase date, sales price and commissions. Records may also include reinvested dividends, stock splits and dividends, load charges, and original issue discount.
The purchase date is important because it determines whether the gain or loss from the sale of the investment is treated as a long-term or short-term capital gain. Remember, long-term gains are taxed at a maximum of 15% (except for depreciation recapture and collectibles); short-term gains are taxed as ordinary income.
Stock split information is important because it changes your basis in the investment. For example, you buy 100 shares of ABC stock for $50 per share. Your total basis is $5,000. Say there is a 2-for-1 split of the stock. Your basis is still $5,000; however, you now own 200 shares with a basis of $25 each ($5,000/200 shares) versus the original purchase price of $50 each.
Specific Records
Specific records are required for many items in addition to your basic records.
Business Use of Your Home
If you use a portion of your home to conduct your principal business, you may be able to deduct certain expenses. Your records should show that part of your home is used for business and the related expenses. For more information, see IRS Publication 587 at www.irs.gov.
Charitable Contributions
The record keeping requirements vary with the type of contribution made.
Cash contributions
For each contribution, you should keep one of the following:
- A canceled check or financial account statement;
- A receipt from the organization showing the organization’s name, the amount and date of the contribution, or
- Other reliable written records.
Contributions of $250 or more
You must have written acknowledgment from the organization.
Non-Cash Contributions
- A dated, written acknowledgement, including a detailed description of donations and a fair estimated value of donated items.
- It is a good idea to take a group picture of the items you donate. It is always better to have more documentation than not enough when the IRS questions your donations.
- Please remember that any donated items must be in good used or new condition.
Below are links to some tools you can use to help assign fair market value to frequently donated items:
Employee Business Expenses
You generally must have documentary evidence, such as, receipts, canceled checks or bills to support your expenses. Documentary evidence is not needed if any of the following apply:
- You have meals or lodging expenses while traveling away from home that you account to your employer under an accountable plan;
- Your expense, other than lodging, is less than $75, or
- You have a transportation expense for which a receipt is not readily available.
Adequate evidence should include the amount, date, place and essential character of the expense. A canceled check with a bill or invoice ordinarily establishes the cost; however, a canceled check by itself does not prove a business expense without other evidence to show the business purpose of the expense.
Mortgage Interest
If you paid mortgage interest of $600 or more, you should receive Form 1098. Keep this form with your mortgage statement and loan information in your records.
Individual Retirement Arrangements
The following records should be kept until all distributions are made from your IRA(s).
- Form 5498 or similar statement(s) for each year showing contributions, distributions and the value of your IRA;
- Form 1099-R received each year you received a distribution, and
- Form 8606 for each year you made a nondeductible contribution to your IRA.
For additional information on specific records you should keep, see IRS Publication 552 at www.irs.gov.
How Long to Keep Your Records
The general rule is you should keep your records for the period of limitations or the period of time the IRS can assess additional tax. Henssler Financial recommends you retain your returns and records for a minimum of seven years. However, if a taxpayer files a fraudulent return or does not file, the period of limitations is unlimited.
Computerized Records
There are many software packages available to assist you with record keeping. These packages are relatively simple to use. Henssler Financial can assist you with the initial set-up and provide future support for individuals or businesses. We have certified QuickBooks experts that can assist you with customizing reports that suit your needs. For additional information, contact our experts at 770-429-9166 or experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
