When it comes to taking qualified deductions on your Federal Tax return three things must happen.
- First, you must recognize that an expense might be deductible on your tax return.
- Second, you must keep a record of the expense in an organized fashion.
- Third, you must have the proper (and timely) documentation to support your deduction.
While this may seem evident to most, here are some typical areas that taxpayers often fall short, costing them plenty during tax filing season and during 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. Donations of $250 or more MUST have a written acknowledgement at the time of the donation. A canceled check and bank statement are not sufficient. In addition, if you are audited at a later date you may not then have the charity issue you acknowledgement.
- Non-cash contributions. You need acknowledgement of these donations as well. This includes creating a detailed list of items donated, their condition, and estimated fair market value. While this level of detail in not required for small donations, it is always a good practice to take photos and create a detailed listing of items donated.
- Investment purchases and sales. If you bought or sold an investment you will need to know the cost. Today’s regulations require brokers to report the cost of sales to the IRS. Many of these historic costs are wrong. Please review your broker accounts and correct any errors. It is 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, points 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, please retain it. If filed in an organized fashion, you can always retrieve it.
Our team is here to help if you need assistance with tax filing, deductions and audits. Reach out today to schedule a meeting and we can help answer any questions you may have: https://www.bas-pc.com/appointment-center/