Paying taxes is inevitable, but keeping good records can insure that we only pay what is required and not more than our fair share. Accurate records are needed to determine the various types of income, expenses, gains, losses and other items that affect our income tax liability.
A frequently asked question is, "How long must I keep my business and financial records?" - Generally, you will need to keep all records that support items on your tax return for at least four years, since the IRS may challenge your return for up to three years after its due date.
Records for things such as, real estate, business equipment, and investments, should be maintained for four years after you dispose of the asset.
Also, be sure to keep copies of your income tax returns and all worksheets, itemized lists and supplementary records. It is very important that you keep copies of your own tax returns indefinitely, and preferably forever.
It is necessary to retain records showing the sources of all income - W-2 forms, W-2P, 1098 and 1099 forms, and statements from your investment companies.
For deductions, you should retain documents proving the expense - a receipt, bill, or invoice - and proof that it was paid - cancelled check, credit card slip, or bank statement.
Charitable contributions of $250.00 (cash or goods)or more, given at one time to the same charity, require a receipt. You must have the receipt in your hands before you file your taxes. Your cancelled check is not enough.
If you claim a Child Care Credit, you must have the name, address and Federal ID Number or Social Security Number of the child care provider.
If you pay or receive Alimony, you should keep a copy of the separation agreement or divorce decree.
Gambling winnings can be offset by gambling losses. Keeping a diary of your winnings and losses is helpful but it must contain the date, type of activity, name of the establishment and the amount you won or lost. Most casinos, if you use their rating card, will provide a statement of your gambling activity, upon request.
Business Expense records for employees (especially outside salespersons) and self employed taxpayers are important not only for income tax purposes, but also as management tools in financial analysis. The records are a way of monitoring which expenses are too high, and areas where adjustments are needed to increase profitability.
It is important to keep diaries and/or books on a frequent periodic basis. It is too easy lose a receipt or to forget the purpose and cost of a business lunch.
Automobile records also need to be retained. Short trips to the bank and office supply store are easily forgotten when not recorded on a daily or weekly basis. Receipts should be kept for gas, maintenance, insurance, tolls and parking. At the end of the year you will need to compute the total number of miles you drove during the year, and the total number of business miles.