can help make your lives easier. Some are free. Some charge a fee.
Tip #2:
One of the big secrets to getting the best tax benefits is having complete records of all your financial transactions. That way, even if you didn’t know about a tax break in your favor, you can take advantage of it at tax time because you have the records to prove you spend the money, drove the miles, or took the appropriate action.
Tip #3:
Everyone should know at least a little bit about the household records. I often find that when it comes to married couples, only one person seems to handle all the household finances. It’s important for both to be involved and to know where all the files and records are located. After all, heaven forbid, if you should become divorced or widowed, it’s important to know how to take over and manage the household finances, pay bills, get organized for taxes, and so on. These events generally happen suddenly—with no warning at all. I have seen too many people in these situations become paralyzed and unable to manage. As a result, they stop filing tax returns and get into financial and credit trouble for five years or more. Please avoid that, OK? To learn a little bit about bookkeeping, painlessly—and perhaps for free—see the following:
The Bean Counter: http://www.dwmbeancounter.com
The Bookkeeping Master: https://www.youtube.com/watch?v=IhYJbCAcCKE
Tip #4:
Income requirements. Here’s the information you must store in your records in order to satisfy the dreaded IRS when it comes to income (as it applies to your particular financial situation). We’ll discuss many of these in the chapters to come:
• Paystubs—especially the final, year-to-date paystub at the end of the year (just in case you don’t end up getting a W-2) or at the end of a job if you leave during the year.
• W-2s, 1099s, 1098s, K-1s, and all other third-party notifications.
• Bank and brokerage statements. Keep a paper or electronic copy of each statement for each and every bank account. That includes PayPal, Itex, Bitcoin, and all other online accounts—including investment accounts.
• Securities trades—sales, purchases, short sales, straddles, and so on. You are the best source of information about the basis of your securities.
• Business income. Do not rely on 1099-MISCs. It’s is your responsibility to keep your own books when you have a business. Just make sure the total of the 1099s you receive is less than or equal to the business income you report.
• Distributions from partnerships.
• Alimony, unemployment, state refunds, disability, and other miscellaneous sources—often forgotten, but generally taxable.
• Rental income—on your commercial or residential real estate, or your own home, or rooms in your home via private or commercial sources or places like AirBnB.
• Retirement income—Social Security, IRA and retirement account withdrawals.
• Sales of assets. Not all sales are taxable, but all must be reported.
• Awards, prizes, scholarships—surprise, surprise, surprise. Not only are these things often taxable, but when children receive them, they might be subject to kiddie tax (tax at the parents’ highest tax bracket).
• Gambling income. Even if you lost the W-2G the casino or gambling establishment gave you, the IRS has a copy of it.
• Barter income—whether through formal clubs or informal barter. Some of the transactions might be taxable. And some of the reported transactions might have deductible offsets.
• Inheritances and gifts. Often there is no taxable income until the assets you receive are sold or cashed out, but there may be some reporting required.
• Hobby income. Sources could be eBay, ePage, Etsy, or other hobby income sites. There are special rules for reporting hobby income and deductions. You’re going to hate these particular rules.
• Cancelled debt—on credit cards, real estate, and personal debt. I hate to tell you, but this invisible income is taxable.
• Jury pay. It’s not much. And you often return it to your employer, but . . . remember to enter it because the IRS knows.
Tip #5:
Expense requirements. Here’s the information you must store in your records in order to satisfy the dreaded IRS when it comes to expenses (as it applies to your particular financial situation):
• Keep copies of all your cancelled checks—even if it’s only a PDF copy.
• If you pay cash for something major, get a receipt and scan it into your online filing system or file it into your paper file.
• If you pay cash for something minor like parking, valet, tips, and so on, keep a small pad of paper handy (or 1" × 1" Post-it). Write the date, time, location, and amount on a separate page for each instance. File it or scan it by the end of each day.
• When it comes to charity, never pay cash. Always use a check, credit card, or online payment (like PayPal). Get a formal receipt for all donations of $250 or more. (More detail later in Chapter 10: Charity Deductions Begin at Home.)
• Credit card statements are not enough to prove what you bought if you want to deduct it. You need the receipt as well. For big-ticket items, be sure to keep the receipts. (Besides, it helps for returns and warranties.)
• Save your property tax and vehicle registration bills with all the details they show. It doesn’t hurt to copy the check or electronic payment and keep it with those receipts.
• Make a copy of every estimated tax payment you make for the IRS, state, or local taxes. Be sure to show the form number, year (or quarter), and type of tax you have just paid.
• Keep mileage logs for all driving so you can later deduct medical, charity, volunteer, moving, and/or business miles.
• When it comes to home improvements, always keep copies of all the invoices and proofs of payment. The details may come in handy for tax credits, warranties, or reducing profits when you sell the property.
• If you get tips on your job, keep the details about the tips you get and those you share with other workers at your job.
• For more details on how to keep records, read chapter 1 of IRS Publication 17—Your Federal Income Tax (https://www.irs.gov/publications/p17/pt01.html).
How long should you keep records? This is one of the most common questions people ask TaxMama.
Tip #6:
You don’t need to keep everything forever . . . but do keep tax returns forever. People
