Every year on April 15th there is a TV news reporter down at the post office showing a rush of taxpayers trying to beat the tax filing deadline. Any experienced tax preparer looks at that scene and just knows that most of these last-minute tax filers are paying more taxes than they should.
The key to keeping more of your hard-earned money away from the IRS is to 1) understand that just about all of your income is directly reported to the IRS, so it will be taxed, and 2) expenses are only allowed if you can show the IRS documentation proving the deductions.
Lower your taxes and avoid penalties
Every year I prepare tax returns without all the possible deductions simply because the taxpayer can’t find a receipt, doesn’t know how many miles they drove for business, or forgot about an item that they could have deducted.
Then, every September, we start to get panicked taxpayers dropping off IRS letters that notify them that they owe more. About half of these IRS letters are related to income items that the taxpayer forgot to give us. The most commonly forgotten income items are 1099s from gambling winnings, interest income from savings accounts, and W-2s from jobs they only had for a week or two and forgot about. The end result of forgetting to report income is the payment of additional taxes plus penalties and interest.
What to keep
When it comes to throwing records away, it’s best to err on the side of caution. But you don’t have to keep records that are not related to nondeductible expenses, such as your personal cell phone bill.
What you should keep is all the documents related to your current year’s income and deductible expenses. For federal tax purposes you should hold on to your tax records for at least three years (the length of time the IRS usually has to audit your return). But if in doubt, keep it and ask your tax preparer.
Simple checklist for the unorganized taxpayer
The following are simple steps that will reduce your stress and cut your taxes:
- Open all your mail in January and February and file all tax documents in a folder.
- Put copies of all deductible receipts in the folder throughout the year. Consider scanning them into your computer.
- Check the odometer on your car and write your mileage down. You should do this at year-end, but write it down now. Keep a copy of any car maintenance receipt that has an odometer reading (such as an oil change).
- Review last year’s tax return and make a list of the items that were on the return last year. If your tax preparer sends you an organizer, review it. This will show you what was on the prior return and what things have changed since last year.
- Keep your business accounting up to date monthly. Don’t try to do it all at the end of the year. It is simply impossible to remember all deductible expenses a year later.
- Make a summary of your income and expenses for your tax preparer. Keep a copy for yourself and compare it to the completed return before you sign it and mail it in.
- Make a list of questions that you have for your tax preparer. Update this as you think of more throughout the year.
As you can see, the trick to being organized is just creating a simple system that you will follow. Since your tax information is similar from year to year, the system will work for you far into the future. Use the system outlined above or create one that works for you, and you can rest assured that you will pay the lowest taxes allowed without worries of penalties and interest on unreported income. Then you can stay home on April 15th and laugh smugly at those procrastinators mailing their tax returns right before the deadline!