The IRS generally requires taxpayers to shoulder recordkeeping burdens. If you have not kept the necessary tax records in the past— or if your methods have been inadequate— make it a New Year’s resolution to improve in 2019.
The process will undoubtedly go smoother if you organize your records in a logical fashion. Also, using electronic methods may simplify matters.
Best approach: Start the New Year off on the right foot. The longer you wait, the harder it will be. In the worst case scenario, you won’t have the records needed to support your claims when your tax return is filed, especially with the changes under the Tax Cuts and Jobs Act (TCJA).
Following are several ways you may be able to relieve some of the stress.
- Keep a diary or ledger to record those expenses that may be claimed as itemized deductions. Despite crackdowns by the TCJA, you still may be able to deduct mortgage interest expenses, charitable contributions, state and local income taxes, medical and dental expenses and disaster-area casualty losses, within certain limits. Maintain a separate diary for each category of expenses.
- Set up a filing system for expenses and income. You might keep infrequent items together in a separate folder. However, travel and meal expenses should be handled separately due to extensive substantiation requirements. In general, you must document the date, amount of the expense, the business purpose and other details (depending on the nature of the expenditure). Keep receipts for items of $75 or more.
- Review your expenses on a regular basis. It is much easier to utilize tax planning during the year if you know where you stand. For instance, you might total up the expenses recorded in your diary at the end of each quarter. If you wait until the year is over, it may be too late to take action.
- Store your records in a safe place. Even the best recordkeeping system does you no good if you cannot retrieve the records. Consider storing valuable documents in a fire-resistant strongbox or some other locker. You might keep check registers, credit card statements and the like in a safe deposit box.
- Adjust your system over time as needed. No matter what kind of recordkeeping system you adopt, try to remain flexible. A change in circumstances— for example, the purchase of a home—may require changes in your setup. Reminder: The system is for your benefit, not your detriment.
Normally, the statute of limitations on IRS adjustments is three years. But the limit is doubled to six years for a return that omits 25% or more of an individual’s income. And there is no time limit whatsoever if fraud is involved. To be on the safe side, it is often recommended that you hold onto your records for at least ten years.
Final words: Your professional tax adviser can provide valuable assistance. In addition, you can discuss tax-saving opportunities that may be available on your 2018 return.