CHAPTER 2

Record-Keeping Tips and Tools That Help Maximize Deductions

ARE YOU SERIOUS ABOUT paying less in taxes? I mean, really serious? Believe it or not, you are in control of how much you pay to Uncle Sam, your state, your property tax assessor, city taxes, sales taxes, and all taxes. Look at it this way: you have three choices when it comes to taxes.

You can be a Tax Pushover, coasting along and paying out everything that’s demanded of you without another thought. You can be a Tax Vigilante, fighting passionately to eliminate or reduce taxes wherever you can. Or you can be Tax Aware, doing the fundamental, logical things needed to keep your taxes legally low without becoming obsessed. This book will provide you with the information you need to fulfill any of those options. You’ll get some routine ideas, but you will find special gems not found anywhere else. They are legal, but most people have never thought about using these strategies and tips.

Tip #1:

The foundation for all tax reporting is good record keeping. The concept is the same whether you’re in business or simply dealing with your personal tax situation. In this book, we will focus on your personal records. It’s not as hard to do as you think—especially with all the nifty apps available to you. We will talk more about apps in a few minutes.

We won’t go into detail on the various apps—that would require a whole other book. The tips that follow provide you with the names and URLs of the top apps that 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:

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:

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):

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 are often shocked when the IRS or state pops up saying a tax return has never been filed for a given year, five or ten years ago. Without a copy of that tax return, it’s nearly impossible to prove that you did file. They don’t take up much space. You can even scan them (preferably as PDF files), as long as you are certain that the copies are clean, readable, and retrievable a decade from now. Do you need all the backup records that went with the tax return? Not necessarily. But keep those for at least six to seven years.

Tip #7:

The IRS is generally only permitted to audit for up to three years after you file a tax return. However, if you have underreported gross income, overreported expenses, or have overstated the basis of assets by 25 percent or more, the IRS has the right to audit for up to six years. If there are criminal omissions or overstatements, the IRS may audit forever. But that should not apply to you. Add one to two years for state deadlines.

What about other records?

Tip #8:

Keep the following records until at least six years after the contracts or terms expire or assets are sold:

Tip #9:

Keep tax preparation records for at least six years. That means all the cancelled checks, receipts, and records that were directly used in the preparation of your tax return. This should include copies of all your notes, work papers, and correspondence with your tax professional or tax software company. Keep them with a copy of the tax return, so if you’re ever audited, everything is right there, right at hand.

TaxMama’s Recordkeeping Law of the Universe:

You won’t need to look at most of your records for years. But as soon as you throw something out—you will need it desperately.

Tip #10:

The benefits of mobile applications:

Tip #11:

The drawbacks of mobile applications:

Tip #12:

These are some of the top applications available to you for recordkeeping and mileage (listed in alphabetical order, not by preference):

Tip #13:

These are some of the top personal recordkeeping systems that provide full bookkeeping (listed in alphabetical order, not by preference). Many apps are designed to integrate with these systems:

Note: Of course you can use Excel if you know how. But if you don’t already know how to use Excel, an app might be a better choice.

Tip #14:

Not everyone lives in the Cloud. Some people still like the feel, texture, and smell of good, old fashioned paper. Here are some paper alternatives for folks who still like the tangible feel of paper records: