May 22, 2013

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Plan for Tax Day with Proper Record Keeping

May 13, 2013 By

Most taxpayers heave a sigh of relief moments after filing their taxes, stash away related documents, look forward to their tax refunds, and wait for next year’s tax day. Though taxpayers have more than ten months to prepare for next year’s tax filing season, the majority suffer from procrastination; only remembering about tax filing a few weeks or days before the tax day. This poses the danger of missing out on important tax deductions, possible errors that could beckon an IRS audit, or even missing the tax filing deadline, which might attract hefty fines and interests.

The secret to successful tax filing lies in proper record keeping, which can best be achieved through the following three main ways:

1. What Are Your Possible Tax Deductions And Credits?

Tax payment and filing can be hectic, but they pay off if you claim tax deductions and credits you are eligible to. You must therefore, project any possible credits and deductions you are likely to be entitled for during the year. Assuming that you enroll your children to a daycare, you might qualify for a Child tax credit. Just keep an eye on your expenditures and ensure that you have the tax ID number of the childcare provider. The same applies to eligible deductions as a result of making donations to charities, use of business cars (where you have to keep track of the mileage by using a log), amongst others. You have to be informed about what will happen during the year to successfully keep necessary tax documents for easy tax filing.

2. Design a Filing System

A properly organized filing system is the gateway to stress-free tax filing. You must ensure that everything is organized by carefully labeling your files like “tax receipts” or related items. Similar documents must be filed in appropriate files, which have to be kept at an easy-to-access place like your desk or convenient drawer. In the beginning, it might appear a bit tricky and tedious, but with time, you might even start doing it without having to think about it. The same applies to tax documents like W-2s, which should be safely stored as soon as you retrieve them from your mailbox. When you finally start filing, it will be a breeze.

3. Go Digital in Record Keeping

The best way to safely keep your tax records for a very long time and for speedy future access is to store them in paperless form. This is very convenient and easy; just create a file on your computer or even in the cloud where scanned tax documents can be saved. There are some apps like the Shoeboxed that are helpful in storing digital versions of your receipts. You can even use your smartphone to capture the image of the documents and digitally file them away.

Since tax documents contain very sensitive information, taxpayers are encouraged to use passwords or encryptions. Regular back ups are also important so that you don’t lose the information. For simplified tax filing, plan in advance and keep the necessary tax documents.

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Personal Filing System: Make Your Tax Filing Simpler

May 8, 2013 By

Filing taxes is a tremendous task, especially when it comes to maintaining a proper personal filing system. The dates of purchases, the receipts of expenses, and other documents are very important for record keeping. To file a tax return that is complete in all aspects, you need all necessary documents and other proofs as they show the amount of investments and expenses you incurred within a tax period.

Also, these proofs are mandatory requirements when you have to apply for loans; failure to produce may prolong the loan processing period. Personal filing systems therefore, require a lot of preparation and organization from the individual. You may choose to keep a paperless system or simply manage all the hard copies as a file.

Proper Labeling: Before you start, ensure that you have a one letter sized pocket file expandable up to 3 inches, files, folders and the labels for the same. It is always prudent to label the primary folder and the remaining file folders appropriately as personal expenses, medical or dental bills, expenses on renovation, large purchases, utility bills, bank statements, credit card statements and receipts, investments, and tax records.

Categorize the Documents: With all documents and files labelled, organize them for the filing system. The documents may be placed in the respective folders and packed into the primary folders and safely placed in a drawer. As the days go by, you may add more receipts, pay slips and other bills into different categories. You may also include the expenses related to education, travel, and pet relocation. But ensure that you never miss a bill by chance. As soon as you make a purchase or pay a bill, file those slips right into the folders immediately.

An additional folder that draws your attention on unpaid bills can be labelled as “bills to pay” that ensures you pay your outstanding bills on time. Similarly, a folder with a label as “Needs attention” will help you sort out any abnormal or suspicious bills, as in case of credit card, for example.

File Daily: Daily filing is a smart choice as it helps you to keep all the folders up to date without missing any receipts or bills scattered here and there. Make it a habit to check mail regularly and place the bills in the “bills to pay” folder and receipts in a proper folder as labelled. Any bills that are overcharged or misappropriated may be placed in the “Needs attention” file and sorted out quickly.

Time Factor: When you have documented properly the next question that arises is the duration in which the document will be preserved. The IRS requires that you keep the records for at least 3 years. In other cases, IRS may ask you to keep them for additional 3 years. So, preserve the files for about six years.

Some of the documents that have to be stored for 6 years are; documents for tax deduction, brokerage statements for tax returns, records of selling a house or property and records of expenses and incomes reported for small business as reported on tax returns.

Some other documents may be kept for a life time, such as tax returns, property deeds, closing statements, life insurance policies, property deeds, life insurance policies, estate related documents etc. You may discard the less important bills such as cable bill receipts, ATM receipts, bank deposit slips, pay check stubs etc.

Keeping all the documents in an organized fashion, you can make use of a clutter-free personal filing system that will at the end of the year, help you pay taxes and reap other benefits. In case any of the tax documents is lost or misplaced, make an effort to obtain a copy.

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Proper Tax Record Keeping Tips

December 28, 2012 By

The New Year is only a few days away and this is the time to set your New Year’s resolutions for 2013. Many will resolve to be more organized starting with the new year, and this applies to taxes as well! Taxes don’t end with the tax day, in fact, it a continuous process that you have to deal with as long as Uncle Sam still considers you a potential taxpayer. One of the most crucial aspects of tax filing and payment is record keeping. There are several records that the IRS may need and you have to keep them safely. Consider the following tips for proper tax documentation keeping:
Statute of Limitation: You may have to present some tax records and supporting documents anytime before the expiration of the statute of limitations for either filing returns or even refunds. This usually takes a maximum of three years for most taxpayers after the filing date or tax return due date.
Income Omissions: If you leave out some income from the tax return, especially omissions exceeding 25% of the gross income indicated on the return, the statute of limitation is extended. This means that you may have to keep the records for six years.
Fraudulent Return: Did you file a phony return or failed to file at all? Well, in this case, the statute of limitation may never actually expire. This means that you have to hold onto your records forever; you may find actually filing less tedious.
Supporting Documents: It’s not just the W-2s and 1099s which you have to safely keep. You will need to keep records of your bills, receipts, credit cards, canceled, imaged, or substitute checks, mileage logs, invoices, any proofs of payment, plus many other records. In case you claim amortization, depletion deductions or depreciation, you have to keep necessary records for as long as the underlying property is in your name. The same applies to special deduction and credit claims where you have to keep the records for a while longer, up to 7 years.

Employee Records: You should keep employee records for not less than four years after the payroll due date or payment, any which comes later. These may include W-2 and W-4, as well as related pay information including benefit forms.

Finally, keep the records organized and at a safe place. Consider scanning your documents and saving them electronically. The IRS has been accepting accurate scanned copies from 1997 and encourages taxpayers to save them this way. The same can be reprinted and presented to the IRS whenever need arises, with ease. Ensure that you keep these factors in mind as you properly keep records lest you land in trouble with the IRS at some point in future.

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A Plethora of Paperwork – How to be More Organized for Tax Season

October 29, 2012 By

For most taxpayers, preparing taxes is a hustle. However, the main reasons as to why most taxpayers find the tax season a tough time is because of the paperwork. Individuals who manage their tax paperwork well will always have an easier tax preparation time. Therefore, if you want to enjoy filing taxes more, ensure that you manage your tax documentation well throughout the year. Below are some tips that can help you with this:
Have a Tax Document Filing Box or Portfolio
Many taxpayers do not have a file and will usually skim through a chunk of paper dump to recollect the documentation that is needed to prepare taxes. If you are one of these taxpayers, then having a filing box should be your starting point. Get a file with pockets to slip in the documentation needed to prepare taxes. You can label each pocket or partition to make it easier to file the documentation. The different labels should include income section where you put your pay stubs, W2 forms, and other income related documents, such as statements from your stockbroker or winning receipts from gambling. You should then, have a deductions section that includes any receipts that you are seeking to claim a deduction. This includes acknowledgements for charity donations, medical expense receipts, work related mileage log, and local and state tax payments. You can have a section for insurance payments, student loan statements, and other documentation required to prepare taxes.

File Relevant Documents
When filing documents, it is important to know what documents are important and what are not necessary. Having such knowledge will help you know intuitively what document is irrelevant and what is important. This will make the filing process much easier.
Tax Planning

Another important step towards easier paperwork handling is tax planning. By knowing beforehand your financial transactions and how these transactions will affect your taxes can really help much in the paper work. If you plan to sell a house, donate to charity or save for retirement, then you will know which documents to look out for beforehand and this will make it easy to file and prepare for tax return season.
Use Accounting Software

You can also better manage your taxes by using quality personal finance management software. With some of the software in the market, you can scan various support documents and attach the documents to various tax transactions. Some of these applications will also connect to financial institutions and get documentation automatically from source. This can really work towards making you more organized for tax season.
Seek Assistance from Professional
Finally, it is advisable to seek the assistance of a qualified tax professional to plan your taxes and to assist in knowing what is important for filing. You can seek an interview with a tax professional preferably, after the tax season so as to have him/her better available and attentive to your case in managing your taxes. This will able you to save you taxes in the long run.

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Safeguard Your Tax Records against Natural Disasters

October 1, 2012 By

Disasters don’t come with fair warning, they strike suddenly; in most cases, catching many people by surprise. The losses are usually enormous. Other than the loss or damage of material property like houses, business investments, and other assets, some of which are insured, your tax records are very important and need to be protected at all times. Life must continue after a hurricane and the IRS is not going anywhere. This is the reason why your tax records have to be safe always.

Proper record keeping is the number one remedy against the effects of disasters. Taxpayers are encouraged to keep backup copies of their records in a secure place; usually away from where the original set is kept. It is unwise to prepare backup record of your tax records then keep them alongside the originals. In case of a disaster, both copies can be destroyed. It is therefore, advised that you keep the backup with a close friend or relative who resides in a different area from yours.

It is easy to find backup of some of the most important records like bank statements, tax returns, and insurance policies. This is because many financial institutions prepare and provide electronic statements and documents. Also, most of this information is available online. If you cannot have the soft copies, then you can still scan and save them in electronic formats in CDs, DVDs, or external hard disks.

One major hardship and challenge that many taxpayers experience lies in calculating losses after a disaster. You can partly solve this by photographing or videotaping your home’s content especially items of higher monetary value. You can use the IRS publication 584 to come up with a room-to-room list of items. Such records are very essential during insurance and casualty loss claims.

It is also highly recommended that every taxpayer, especially business owners, prepares and annually reviews and updates emergency plans. Any changes in the company like firing and hiring of new employees should be followed with updating of the plan. If you are an employer that uses a payroll service, then you are encouraged to find out from your provider whether there is a fiduciary bond in place. In the event that the payroll service provider defaults, then the bond will have you covered.

Finally, there is a special IRS line that handles disaster-related inquiries. Call 1-866-562-5227 to speak to an IRS disaster specialist. Form 4506- Request for Copy of Tax Return can be used to ask for for back copies of previously-filled tax returns plus their attachments, plus Forms W-2. Alternatively, order transcripts that show most line items on the returns online by either calling 1-800-908-9946 or use Form 4506T-EZ-Short Form Request for Individual Tax Return Transcript or Form 4506-T, Request for Transcript of Tax Return. It’s better to be safe than sorry; disasters may come and go, but IRS is here to stay.

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Going Digital with Your Tax Records

September 17, 2012 By

Environmental conservation has been a recent hot topic, and green is the color that is associated with this trend. The IRS has not been left behind in the “going green” campaign. One might wonder what taxes have to do with green. Well, by going green with your tax receipts means turning paper documents to digital formats (such as  PDF files) and storing them safely for future reference purpose. This procedure is not only about going green with your tax receipts, but also serves to have all your tax documents easily accessible in one location in some digital format (either on your computer or some other digital gadgets).

The IRS has for years, from 1997 to be precise, been accepting scanned bills, receipts, and tax-deduction documents as proof for tax claims. It was in 1997, that the IRS issued Revenue Procedure 97-22 as a guide to taxpayers on how to preserve electronic records and books. The following year, a follow up announcement was made; Revenue Procedure 98-25 has additional information on this.

The IRS has never had issues with digital receipts and tax documents. Its main concern has always been the quality of the digital versions. It is expected that the digital copy of your documents be highly legible and readable both on computer screens or other video display mechanisms, even when reproduced into hard copies. Any sloppy documentation in whatever form, digital or hard-copy, will basically be rejected by the IRS.

The most recent version of these instructions are contained on the IRS Publication 552-Recordkeeping for Individuals. The IRS will have no issue with electronic tax recordkeeping so long as the rules applicable to paper records are adhered to. It is therefore, crucial that the digital copies show similar information as the paper document. You must be able to produce either version whenever the IRS asks, for one reason or the other.

To ensure that taxpayers don’t miss out on anything regarding electronic recordkeeping, the IRS went ahead and produced a video outlining its expectation from electronic records (available on the IRS website). It is best to get rid of the paper clutter and move your tax documents to an electronic format that is not only safe, but also durable.

Smartphone application developers have come up with a number of apps that enable copying of receipts and business cards related to tax claims. Finally, going green with your tax records might save you the agony after some natural disaster in your home that may destroy your documents.

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Safeguard Tax Records from Hurricanes and Disasters

August 30, 2012 By

 

With all the hurricanes and earthquakes currently occuring throughout the nation, one should consider safeguarding one’s tax records. How tax-ready and guarded are you against hurricanes and disasters that sweep through the country each year? Businesses and individuals are always encouraged by the IRS to guard themselves against natural catastrophes by adhering to a few safety precautions.

Back Up Your Records Electronically: Every taxpayer is advised to create some form of backup of his or her records that should then be kept away from the original ones. Electronic backing up of records like bank statements, insurance policies, etc. is much easier today in that most institutions provide online electronic copies. If you only have the paper copies, then scan and store them in electronic formats, then download them to a storage device like an external hard drive or burn them onto DVDs or CDS.

Document Valuables: Taxpayers are also advised to take photos or videos of their home’s contents. Most important items to document should be those of higher monetary value. Using the IRS’s disaster loss workbook-Publication 584, you can easily gather a room-by-room list of your belongings. The photographic record put together can be used as evidence in determining the market value of items for insurance and claims of casualty loss. If possible, keep these photos with a friend or family member residing in a different location from yours.

Keep Emergency Plans Updated: Just like other plans individuals make, emergency plans must be reviewed annually. This is because business and individual environment keep changing over time and so should the needs to prepare for disasters. Employers acquire new employees, companies alters functions, among others. In the same line, proper updating of emergency plans and appropriate communication to all affected parties is highly encouraged.

Review Fiduciary Bonds: Employers who rely in payroll providers must ask if the provider put in place, a fiduciary bond. This is important because when the payroll provider defaults, the employer is covered by the bond.

Get IRS Help: The IRS has put in place, measures to ensure that all taxpayers affected by disasters get prompt help. Affected taxpayers should call 1-866-562-5227 to get help from an IRS specialist that is specifically trained to handle disaster-related issues. You can request back copies of tax returns plus their attachments of previous tax filing by filling Form 4506-Request Copy of Tax Return.

Don’t wait till you are hit by a catastrophe; always stay ahead of a disaster by preparing beforehand.

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Help Your Tax Pro to Help You

July 17, 2012 By

Many taxpayers seek help from professional taxpayers. There are many tax pros out there that have the capacity to help you out and getting one is not a problem since there is a lot of information on how you can find one who meets your specific needs. As much as it is the duty of the tax expert you hire to help you out with your tax woes, the completion and quality of the work depends on you by a wide margin. You therefore, have to understand how you can assist the tax expert to help you.

Stay Professional: Just because you hired a friend to help you out with your taxes doesn’t mean that you extend the friendship to your tax preparation. Filing of taxes is a business transaction like any other and has to be managed that way, professionally. It is unprofessional to call your tax preparer at home or during odd hours unless a situation warrants the same. Play your part as a taxpayer and accord the pro all the help needed to have your taxes in the desired order.

Be Responsible: A taxpayer takes full responsibility for his or her taxes. It is an obvious fact that all your income must be reported to the IRS. Bearing this in mind, it is baseless to complain about the unfairness of the tax laws. There is nothing the tax preparer can do about that, simply supply the pro with the help needed by making what is legally required available and don’t complain about the small stuff.

Be Comprehensive: Tax preparation can be a bit tricky, that is why the tax pro is hired in the first place. However, don’t sit back and expect the expert to magically conjure up your tax information. Ensure that you present a comprehensive and well arranged list of information to the tax pro. If you conceal any vital information that might later haunt you when discovered, you bear the blunt of the consequences.

To make the tax preparation easier for both of you, a tax professional will prepare and present a checklist to you. Simply fill in as much detail as possible and provide any supporting documentation you are asked.

Honesty Pays: Don’t you ever give false information about your real tax position. As much as you are responsible for the information contained on the 1040, since it is you who signs, the reputation of the tax preparer too can be soiled. What of the wasted time preparing a tax return that will come back to haunt both of you?

To have your federal tax returns prepared well and professionally, you must understand how to relate with your preparer. Issues discussed above are not conclusive enough, but can go a long way in helping you get your taxes impeccably prepared.

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Tax Filing Preparation Checklist

May 17, 2012 By

Though the 2012 filing season has passed, it’s never too early to start preparing for next year’s season. Pre-filing preparation is important in tax filing, whether you are using Free File, or using tax software on your own, or seeking professional filing help. The following is a guide on how to prepare tax files.

Start by rounding up all your tax documents like:

  • The federal return from the previous year(s)
  • The Personal Identification Number (PIN) you used in the previous year. The PIN or the Adjusted Gross Income (AGI) to verify your identity and submit your return electronically
  • 1098s for mortgage interest paid. If you bought your house last year, get the closing statement
  • W-2s for wages, salaries, tips, and pensions
  • 1099s for interest, dividends, retirement plan distributions, unemployment and other payments, and state tax refunds
  • Retirement plan contribution statements
  • K-1s form partnerships, S corporations, estates, and trusts
  • Your Social Security numbers and that of your spouse and all dependents

Next, have all receipts and records of deductions for the following:

  • Taxes paid during that year. These include state and local income or sales taxes, real estate taxes, and property taxes
  • Medical and dental expenses that includes doctor checkup charges, drugs, hospital bills, medical insurance premiums that are not paid at work via pre-tax dollars, dental care costs, and mileage to and from physicians’ offices.
  • Mortgage interest and points on the Form 1098 or any other substitute form
  • Casualty and robbery losses
  • Investment expenses
  • Charitable contributions that maybe cash, credit card, or assets and clothing
  • Gambling losses
  • Work related costs

For small business owners, receipts and documentation about your company are necessary. These include:

  • Income statements
  • Home size and office space size
  • Keogh, SIMPLE, SEP and other self-employed pension plan contributions
  • Self-employed health insurance payments
  • Details on use of your vehicle

If you are doing the filing yourself or a tax expert is assisting, you need to consider some details to assist you in filing:

  • Did your marital status change in the previous year and if divorced, did you pay out or receive any alimony?
  • Do you have dependents not living with you?
  • Have you received any correspondence from the internal Revenue Service or state/local tax agencies?
  • Have you bought a new home in the previous year?
  • Are there any major home improvements made in your home in the previous year?
  • Are you incurring any childcare or dependents care expenses?
  • Do you own a second residence or any other real estate?
  • Did you relocate because of a job?
  • Did you have a cancelled non-residential debt?
  • Did you make a large purchase, like an automobile?
  • Did you serve in the military and if so, did you receive combat pay?

These questions could have answers that add to your tax bill and save you money later.

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Important Tips to Remember when Preparing For Tax Filing

April 30, 2012 By

E-filing has been around for some time now, and though it has made work easier, it does not do it all. Whether you use Free File, tax software or choose to seek professional help in tax filing, you definitely have some pre-filling preparation to do. The first step is to collect all your tax documents, which include the following:

  1. The previous year’s Federal tax return
  2. Social Security numbers for yourself and all your dependents, including your spouse’s.
  3. W-2 statements for salaries, tips, wages and even pensions, collectible at the end of January from all employers.
  4. The PIN (personal identification number) you used for e-filing the previous year or your AGI (adjusted gross income) for identity verification.
  5. 1099s for state tax refunds, dividends, interests, retirement plan distributions and other payments. Unfortunately, the 1099 issuers also have till the end of January to give them out.
  6. 1098s for the interest paid on mortgage, though just like the W-2s, they come late and may require you to wait. But you can use your closing statement if you bought your house the year before.
  7. K-1s from estates, trusts, partnerships, and S corporations.

In case you itemize deductions, you will certainly need receipts and records for the following in order to fill Schedule A:

  1. All taxes you paid, like real estate taxes, state taxes, local income taxes, and personal property taxes.
  2. General medical and dental expenses, including everything from drugs, hospital bills, to dental care costs, plus the medical insurance premiums, so long as they are not covered by your employer in pre-tax payments.
  3. All charity contributions, be it as cash, other assets or credit cards.
  4. Work-related costs, inclusive of money spent looking for a new job.
  5. Theft and possible casualty losses.
  6. Investment-related expenses and even gambling losses.

For small business owners, these are the documentation and receipts needed to fill Schedule C:

  1. Income statements
  2. Health insurance payments (self-employed of course)
  3. Size of home and the size of space occupied by a home office (if it’s a home business)
  4. Clear details on the business usage of your car.
  5. Self-employed pension plan contributions.

Additionally, you need to give answers for certain questions whether you choose to hire a tax professional or if you do the filing alone. For instance, did your marital status change in the last year? Or, are you supporting anyone else who is not living with you? These are some of the pertinent questions one needs to know.

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